The Economy Tanks

As the economy comes to a screeching halt, the brakes appear to have been applied by the general collapse in the housing market. This is mainly a result of the housing market tanking in the USA because the house of cards around the financing of the housing boom suddenly collapsed exposing the boom for what it was – dodgy people borrowing money they couldn’t repay to fuel a housing boom that allowed other people to borrow yet more money based on the increasing value of their property.

Obviously this simplifies things a bit, there are other factors such as oil prices.

For years now commentators have been predicting the housing boom would fold and despite people having their head in the sand for somewhat self interested reasons, it’s happening here. The ‘liberal’ lending of finance companies to property developers who in turn sold properties to people suddenly rich from their own increase in property equity fueled a vicious circle and finally the party is coming to an end and a big hangover is looming.

Sound familiar? of course, we saw this during the last boom/crash in 1987 with the share market when people borrowed against their increasing share value to buy yet more shares.

Strangely everyone here thought they had it sorted, somehow this was different, mainly because it was housing and NZder’s have a love affair with housing that is verging on irrational. If you bought you house for $200k, and suddenly it was worth $400k, you could borrow $200k to buy another house, which would be worth $400k, and so on, you were actually  rich – you just had a ship load of debt. I’m not suggesting that people haven’t made money, they did before the stock market crash. And the smart ones got out when it became obvious what was going to happen.

The interesting question is this. The economy has been doing well up until now, but this has clearly been driven by two main drivers; the housing market and the warm feelings of wealth this created, and the rise in commodity prices such as dairy products. In many ways neither was sustainable long term (and we’re just very lucky that dairy is still going to hold up for a few years before that corrects).

The entire housing boom had nothing to do with people earning more money, wages haven’t increased much and increases have been below the inflation rate, the debts been ‘financed’ through capital gains in property, not wage increases.

The government has made much of residing over a good economy, but in fact the hard reality is that neither of these things were a result of the government. They have no affect on international commodity markets, nor the loose lending of finance companies and banks. They just took the windfall taxes generated by the debt boom, and threw it into inflationary spending on the burgeoning bureaucracy and social spending (thus driving up inflation).

So, maybe the last five years hasn’t been such a great success after all?

Instead of the government borrowing and spending, we all have. Maybe the government hasn’t really been that prudent after all? They didn’t need to borrow because we did it for them, personal debt has soared and the consumption tax windfall financed government spending without any need for the government to borrow.

It wouldn’t have been wise of the government politically to put the brakes on (and in fact they obliquely bagged the Reserve Bank Governor for trying to slow the debt binge) because then they wouldn’t have had all that dosh to splash out on buying votes.

I don’t think the government has improved the structure of the economy fundimentally and apart from social spending (which doesn’t create wealth) nothing has been done long term to put the economy in a good shape. It’s actually been the usual borrow, tax and spend, with the individual taking the debt on, rather than the government. We are all very slow learners.

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