I’ve said our ‘Big Four’ banks will no longer be with us once the $800 billion in the Australian bubble disappears with a ‘zap’.  One must hope this is permitted to happen without taxpayers being shanghaied into forlorn attempts to bail them out for their incredible crime of lending like drunken sailors into the world’s greatest real estate binge.

Indian banks are much more circumspect. They know about risk management.

A ripple of concern shot through me for Ken Henry when I learnt he’d accepted a position on the board at the NAB.

There are obviously still bubble deniers.  The Daily Reckoning Australia endeavours to wake them from their reveries today:-

The Bigger Banks Are, The Harder They Fall
By Callum Newman, Editor, The Daily Reckoning Australia

“Australia is a house of cards. We are confident the bubble will burst and that it will be spectacular…” – John Mauldin and Jonathan Tepper, Endgame

Keep the quote above in mind, dear reader, if you can forget it in the first place. It’s an important point. But first! “Five Reasons Aussies Should Feel Smug“, headlined Nicole Pederson-McKinnon in The Age this week. One of those reasons – the first no less – was Australia’s current low debt to GDP ratio.

It is a commonly cited observation when someone frames any discussion of the Australian economy. Very few, to your editor’s observation, qualify it by adding that two notable countries recently enjoyed the same condition: Spain and Ireland. They both had relatively low government debt, until they didn’t.

The reason these two countries no longer enjoy this advantage is they were both required to bail out their sovereign banking systems, both of whom had balance sheets full of quality assets, until they didn’t.

That this might happen to Australia seems an important point. Australia’s risk is concentrated into four big banks, who have in turn concentrated their lending to one sector: residential housing.

The fact that there are four big banks and not twenty little ones is where the fault lies, or first appears. A financial system is a lot healthier with smaller institutions. That, at least, is one of the conclusions of James Rickards in his book, Currency Wars.

Or as he puts it:

“The solution is a mixture of descaling, compartmentalization and simplification. This is why a ship whose hold is broken up by bulkheads is less likely to sink than a vessel with a single large hold. This why forest rangers break up large tracts of timber with barren firebreaks.“

To him Australia, with its “Big Four”, must look like a forest of parched trees and dry pine needles doused with kerosene: a fire hazard, and probably a moral one, too. It certainly looks that way to John Mauldin, as the quote above makes clear.

“As a consolation to mortgage holders, the RBA has a loaded gun if it needs to shoot its way out of another crisis,” wrote Nicole Pederson-McKinnon: high interest rates being the third reason Aussies can feel smug. The fact that Aussie banks did not follow the RBA’s last interest rate cut did not get a mention.

It’s well worth making the point now, because Australian banks look rock solid to most people. Until the day they don’t.

Once you’ve clicked on “No! Impossible!”, you might want to understand their main pea and thimble trick.

The Labor Party and Treasurer Wayne Swan are no favourites of mine.  However, I have to agree with Wayne Swan’s attack on those Australia’s miners who don’t want to pay their fair share.

The miners clearly don’t accept they have a partnership with the Australian people, and that an understanding of economic rent shows we are entitled (yes, entitled!) to 50% of their after-tax profits; that’s what economic rent is.

But no, it’s all theirs because they create employment.  [Cringe!]

Predictably, the shock jocks–ever proponents for the 0.1%–don’t accept Australians claim to the economic rent of their natural resources either. They’re out there defending the miners against Wayne Swan.

“This is class warfare” exclaimed Neil Mitchell on 3AW this morning. This claim is very interesting because it’s also what the 0.1% has been saying about higher taxes proposed for the wealthy in the USA. Coincidental?  I doubt it.  The 0.1% is nothing if not slogan-prepared.

So, higher taxation of the poor and middle class which has seen the real incomes of labour and capital decline is OK; it’s NOT class warfare, guys?  C’mon!

One irate listener angrily rang in to claim Neil Mitchell and 3AW are “rich Liberal sycophants”.

I suppose you’d expect Bill Shorten, Minister for Employment and Workplace Relations (and for Financial Services and Superannuation) to have defended Wayne Swan’s attack as he did on Mitchell’s program, and Shadow Treasurer Joe Hockey to fall in with the miners.  But I trust Hockey’s contribution was a matter political expediency rather than the Liberal Party taking permanent sides with the 0.1% – because it is the latter who have undeniably created this world financial collapse with their extraordinary capture of land and natural resource rents at the people’s expense.

I recommend doing what Karl Fitzgerald, presenter of 3CR’s The Renegade Economists, suggests at the outset of the program on 20 February 2012: “Put your listening ears on” to hear Dr Adrian Wrigley background how Germany’s land-based currency, the Rentenmark, fixed Germany’s 1920s hyperinflation overnight.

Could the principle be employed to repair Europe’s current financial collapse?

It’s a fact-filled interview.

There’s more information on Adrian Wrigley’s Systemic Fiscal Reform Group here.

I’ve mentioned the Danny Johnson phenomenon, wherein he brought a crowd of protestors to the streets of Melbourne in 1991.

Seems 21 years on Danny Johnson and his followers still haven’t got to the bottom of government failure.

Hard economic times aren’t caused by governments, Danny; they’re caused by us.  We permit land price bubbles to generate, and then they burst – and it’s happened again. Then, we will kick the government of the day out on its arse – but WE are responsible.

The Land Values Research Group (LVRG) was able to forecast both the 1991 recession and this current economic depression.  This predictability shows the LVRG has a scientific explanation for hard times.

We still need to cut taxes on doers, Danny, and to capture more of the economic rent of our land, as recommended by the Henry Review.

The Chinese authorities may be at odds with The Epoch Times, but any reading of the following article underlines China’s need to capture back her land values from billionaire ‘entrepreneurs’.

Instead of the benefits of China’s incredible construction boom flowing to all her people, a coterie of private rent-seekers has had its way with her.

Is this communist China, or the rent-seeker’s paradise?

From Jian Tianlun in The Epoch Times

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

LATEST NEWS ON THE LOCAL CHALLENGE:

The narrative of The Depression blog is that the growth (or decline) in real estate price turnover actually leads and directs the economy.

I argued the case in a report “Unlocking the Riches of Oz: A case study of the social and economic costs of real estate bubbles 1972 to 2006” which was released in 2007, just before the US residential real estate bubble burst.

Although the facts are quite clear, economists sidestep this analysis, claiming that real estate bubbles are a factor of the undersupply of land. Inadequate suitably zoned land explains these bubbles, they say, but they have no explanation for what caused land price bubbles before town planning and zoning came into existence, not all that long ago.

Could it be that economists are ignorant of the Theory of Real Estate Valuation? i.e. that the phenomenon of land price is simply the capitalisation of its net annual rent? And, therefore, greater public capture of land rent via municipal rates and state land tax would keep the lid on recurrent land price bubbles?

These two charts complement the Kavanagh-Putland Index. In the first it can be seen growth or decline in GDP does respond to the direction of real estate turnover. So, although GDP growth was up in 2011 in accordance with the growth in 2010 real estate turnover, we may expect GDP to fall sharply in response to the 2011 dive in real estate turnover.  Watch this space.

The second chart states the obvious: if real estate is doing better than the economy, guess in which direction the economy is headed?

The utter economic stupidity, hidden not only by neo-classical economists but also by the crass diversions in Australian political life, could of course be rectified by putting into place the recommendations of Ken Henry’s inquiry into the Australian tax system.

Fat chance when economists don’t understand the Theory of Real Estate Valuation, and when politicians have become as useless as tits on a bull.

Prosper Australia sees property prices falling 15% to 20% this year.