Chomsky on 2009

Here's a wide-ranging interview transcript with the indefatigable Noam Chomsky. Some highlights:

On the economy:

In fact, if you look today, it's quite striking to see the advice that the Western powers are following, the programs that they're following, and compare them to the instructions given to the third world.

So, say, take Indonesia again. Indonesia had a huge financial crisis about ten years ago, and the instructions were the standard ones: "Here is what you have to do. First, pay off your debts to us. Second, privatize, so that we can then pick up your assets on the cheap. Third, raise interest rates to slow down the economy and force the population to suffer, you know, to pay us back." Those are the regular instructions the IMF is still giving them.

What do we do? Exactly the opposite. We forget about the debt, let it explode. We reduce interest rates to zero to stimulate the economy. We pour money into the economy to get even bigger debts. We don't privatize; we nationalize, except we don't call it nationalization. We give it some other name, like "bailout" or something. It's essentially nationalization without control. So we pour money into the institutions. We lectured the third world that they must accept free trade, though we accept protectionism.

On party politics in the US:

I mean, we basically are a kind of a one-party state. I think C. Wright Mills must have pointed this out fifty years ago. It's a business party, but it has factions—Democrats and Republicans—and they're different. They have somewhat different constituencies and different policies. And if you look over the years, the population has—the majority of the population has tended to make out better under Democrats than Republicans; the very wealthy have tended to make out better under Republicans than Democrats. So they're business parties, but they're somewhat different, and the differences can have an effect. However, fundamentally, they're pretty much along the same lines.

On healthcare in the US:

I mean, for decades, the healthcare issue has been right at the top of domestic concerns, for very good reasons. The US has the most dysfunctional healthcare system in the industrial world, has about twice the per capita costs and some of the worst outcomes. It's also the only privatized system. And if you look closely, those two things are related. And the privatized system is highly inefficient: a huge amount of administration, bureaucracy, supervision, you know, all kinds of things. It's been studied pretty carefully.

On the potential for a rise in fascism:

Now, if you listen to early Nazi propaganda, you know, end of the Weimar Republic and so on, and you listen to talk radio in the United States, which I often do—it's interesting—there's a resemblance. And in both cases, you have a lot of demagogues appealing to people with real grievances.

Grievances aren't invented. I mean, for the American population, the last thirty years have been some of the worst in economic history. It's a rich country, but real wages have stagnated or declined, working hours have shot up, benefits have gone down, and people are in real trouble and now in very real trouble after the bubbles burst. And they're angry. And they want to know, "What happened to me? You know, I'm a hard-working, white, God-fearing American. You know, how come this is happening to me?"

That's pretty much the Nazi appeal. The grievances were real. And one of the possibilities is what Rush Limbaugh tells you: "Well, it's happening to you because of those bad guys out there." OK, in the Nazi case, it was the Jews and the Bolsheviks. Here, it's the rich Democrats who run Wall Street and run the media and give everything away to illegal immigrants, and so on and so forth. It sort of peaked during the Sarah Palin period. And it's kind of interesting. It's been pointed out that of all the candidates, Sarah Palin is the only one who used the phrase "working class." She was talking to the working people. And yeah, they're the ones who are suffering. So, there are models that are not very attractive.

The Bubble

This post is largely unreferenced, though I've been reading a number of sources in recent days, including Business Spectator, and the highly recommended Bubblepedia, and these are my reflections.

Banks, property developers and governments, State and Federal, have been colluding to keep the housing market inflated. This has failed in the top end of the market, where housing prices have already dropped significantly (good news for those who need a bargain house in Toorak), but has kept the lower end of the market (often defined as reaching $400 or $500k!), dominated by first home buyers, in a bubble.

Everybody, from real estate spruikers, to government ministers, has been saying that now is the time for first home buyers to jump into the housing market, as the market has hit its 'bottom', and will only be going up.

The behaviour of these people belies their words. For instance, the government has struck an agreement with banks to guarantee mortgages for 12 months, in the instance of the borrower being unemployed. Banks themselves appear to be tightening their lending criteria. The first home buyers grant has been extended until June 2009, and lobbyists are campaigning for it to be continued, and even extended to other parts of the market.

So why are first home buyers being asked to sign themselves up for a mortgage now? The answer is greed. With all other home buyers and investors slowing down their purchasing activity, first home buyers are being asked to play the patsy for property developers and banks, perpetuating the housing bubble.

All this would be one thing if we held to the belief that housing prices will rise forever. If they continued to rise at about 8% per year, as they have, until recently, then nobody would have anything to lose. The borrower would have no negative equity, and the banks would not be exposed to any great risk in the event of a default, as the house would have risen in price anyway.

Despite the Pollyanna attitude of some industry spruikers, there are some good reasons to believe that the market will not continue to magically inflate.

For starters, the RBA has already dropped the cash rate to 3.25%, a discount which the banks are not passing on in any case. Whilst in theory, the RBA can go even lower than this, it is difficult to see the use of monetary policy if the RBA is at odds with the banks.

Secondly, the much-mooted housing shortage is, at least in part, a fabrication. Yes, there is a dire shortage of housing for those sleeping rough, or couch-surfing, or living in caravans, or on the years-long government waiting lists. These people, however, are not like to be purchasing a home in the near future, and the shortage of housing for them is not pushing up housing prices for everybody else. A recent stat in the Age's Good Weekend stated that 77$ of Australian homes have a spare bedroom. I'll believe there is a genuine housing shortage when I see shanty towns on the outskirts of Melbourne.

Unemployment rose half a per cent in March 2009, to hit 5.7%. This doesn't take into account under-employment. For years, governments have considered you 'employed' if you didn't receive benefits, or if you worked an hour a fortnight. Unemployment is tipped by many forecasters to hit around 7.5% by the end of the year. Some have said it will double from current levels. All of this will eat into demand.

The first home owner's grant is due to expire, and arguably, has not actually increased demand at all, but rather, brought it forward by placing an end-date on the handouts. Even if this waste of money is extended, it is unlikely to be able to keep house prices afloat indefinitely. Housing in Australia is among the least affordable in the world, when considered in relation to income. Virtually every developed nation has suffered massive drops in housing prices since the GFC. It is difficult to see how Australia can escape the same outcome.

In view of this, first home buyers who purchase now are exposing themselves to enormous risk, and are propping up the housing bubble at their own expense. Many of them will be among the most vulnerable to unemployment in the coming recession.

It is in the interest of banks, therefore, to pretend that the bubble cannot burst, and to keep the housing market inflated. Should you have deflation in the market, coupled with rising unemployment and defaulting borrowers, the housing market will crash even further. Banks will face severe losses, mortgage guarantee or no. This is especially so when we look at the risks some of the big banks have been taking. I read recently that about 20% of all first homeowners have a loan-to-value-ratio (or LVR) of between 95-100%. Anotyher 25% have a LVR of between 90-95%.

In short, Australian banks have been gambling, and have exposed themselves to something akin to the sub-prime fiasco in the US. (Of course, the big banks in Australia have fewer 'toxic assets', as I understand it, because they have been less inclined than their US counterparts to bundle loans into securities). If it were simply a matter of a few banks failing, most people would allow their passing to go unlamented. After all, the deregulation of the Keating era, supposed to bring greater competition, and therefore better prices and service, has failed. The punter on the street knows that if you walk into a bank and blink, you get hit with 17 different kinds of fees.

The problem is that, by now, we know how this tune goes. If banks go bust, the Australian economy will be held to ransom. Government and taxpayers will become a utility of the banks, rather than the reverse. Banks will have gambled, and lost badly, and the taxpayer will be left to foot the bill.

So whatever happens, there are no winners. Either we have the rather unlikely outcome of the housing bubble continuing, in which low-income earners are barred from ever owning a home. Alternatively, we have a crash, and the greed of banks and others will be paid for by ordinary Australians. Naturally, this is an over-simplification, and there are some other complexities, but these are the basic parameters of the current situation. And yes, the speculation on the part of banks, and the greed of develops and investors, acting as parasites on first home buyers by gamlbing on assets is part and parcel of neoliberalism.