Economist's radical plan to cut bubble lending

by Miklos Bolza09 Jan 2017
To stop the ever increasing levels of debt in Australia, one economist believes that there needs to be a hard reset of private debt levels via a “people’s quantitative easing”.
 
In an interview with the Australian Financial Review, author and economist Steve Keen, outlined his two-step plan to reduce household debt from current levels of 120% to between 50 and 100%.
 
The first step involves banks using government cash injections that reduce account holders’ existing debt. Customers with no debt would receive cash.
 
Keen said this instalment would be a bit larger than the $1,000 stimulus Kevin Rudd offered in 2009.
 
“In anything like this, which hasn’t been tried before, I would want to do it in small doses,” he told the AFR.
 
Radical yet simple reform of the banking sector would then be required, he said.
 
“What I want to do is bring in a range of bank rules which would limit the amount of lending you can give against an asset to some multiple of the income-earning capacity of the asset.”
 
For instance, banks could put a loan limit of $500,000 on an estimated annual rental income of $50,000. This ensures that the bidder for the house with the most savings who is more capable of handling the debt comes out as the winner.
 
“I want to cut off the asset bubble lending. When you look at the empirical data, overwhelmingly it’s leverage that determines asset prices. You have this positive feedback loop between lending and asset prices and that’s how you get the bubbles we’ve got. These guys are making money by creating Ponzi schemes.”
 
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COMMENTS

  • by DC 9/01/2017 9:25:47 AM

    Mr Keen is obviously a very well educated man, given the positions he holds in the Academic world. Unfortunately, I think he wears slip on shoes as he has no practical ability to tie his own shoe laces. He makes broad sweeping statements about how banks should lend. The trouble is not in the harshly governed and monitored mortgage area, it is in the unsecured credit area. Time and again, we will have clients cancel or reduce credit card limits to enable them to borrow for a house. A few years later, they are wanting to consolidate new debt into their mortgage. They have been offered credit, quite often by the same bank who made them reduce their limit to qualify for the home loan, from all and sundry, many who I think just figure the person qualifies as they "own" a house. Stop focusing on the secured mortgage lending and start looking into the world of credit cards, "60 month's interest free" lending and the like. Oh, and Mr Keen better get his walking shoes ready (velcro straps?) when his latest predictions prove as accurate as his previous ones.

  • by Joe Siragusa 9/01/2017 12:49:26 PM

    Put a time limit on negative gearing. Negative gearing allowances reduce by say 10% per annum forcing property investors to restructure their investment loans to be positively geared therefore contributing to the National tax income rather than being on the tax deduction teat for ever.