AUSTRALIAN ELECTION WATCH - THREE

Leadership Matters: So, early days for campaign positioning, but the debate about Goldilocks economy...is it too hot, too cold, or just right.....got an "external" comment with the central bank dropping interest rates to 2.5%, a drop of 0.25% for the day. Widely anticipated, which doesn't make it right, just widely anticipated. INTERESTING, but for a whole series of reasons which raise their own questions. Australia has largely been seen as well served by its central bank, and I have observed too many people at the RBA over the years to have anything but respect for them. That, of course, does not mean that they do not become captive to policy perspectives subsequently. BUT....I can remember being at a function with the then Deputy Governor, now head honcho, Glenn Stevens, who at that stage had believed that the nominal value of house prices was too high, the householders were too indebted, that there was too much systemic risk flowing from housing, both to the population, and to the banks. In the meantime, banks have generally become more reliant on householder deposits ( by dropping the proportion of offshore wholesale deposits ) , and Basle which encourages mortgage debt for its ( Australian ) low risk of default. The "captive" also extends to the government guarantee to low level deposits, which is not for social stability, but for bank stability [ shame the banks do not reply to their saviours by recognising their social obligations not to reward themselves inordinately, and arrogantly...yes Mike Smith, you are a douche ]. The moral here is that Glenn's observations were in 2007. And house prices are now higher. One thing is better....those with existing mortgages have tended to reduce their indebtedness, but that was from a position of general negative equity, and so needed to right their balance sheets quickly. One thing that is not better...existing and new mortgage holders have principal loans at drastically low interest rates. I can remember mortgage rates at 17.5% in the late 1980's/early 1990's. Only low nominal mortgage principal saved that period from being disastrous for home buyers. If Glenn thought the household risk was high at 2007 principal, and 7% mortgage rates. What happens at 2013 principal, and rates move from 5% to 7%. Glenn was a contemporary at Sydney Uni with Tony Abbott. We know Tony doesn't quite cut the mustard yet as a possible leader. Glenn used to. Glenn would also know that the USA's Fed wants to falsely boost asset prices to try to turn the wealth effect positive in the US to break the negative rational expectations that existed there. We didn't need to follow that path...hopefully Glenn you are not responding to political, rather than the doubts you once had, about sustainability of economic behaviours.