Sunday, October 05, 2008

Change of climate an ill wind for carbon tax

THE Wall Street share market crash in October 1929 sparked off the Great Depression in the 1930s.  Will Wall Street's latest financial collapse bring a comparable debacle?

Certainly the origins are similar.  Central banks recklessly reduced interest rates resulting in price booms -- it was shares in 1929, it is houses in 2008.

In 1929, share prices fell 25 per cent in just two days and kept falling.  US house price falls of 20 per cent -- more in California -- triggered the September 2008 meltdown.  British house prices are also falling fast.  In both countries prices will fall further.

Excessive US house prices were due to planning regulations creating land shortages especially in the western states and Florida.  The price-boosting effects of such regulations were amplified by politicians requiring the government controlled mortgage giants, Fanny Mae and Freddie Mac, to lend to uncreditworthy borrowers.

Those two mortgage firms are now bankrupt.

All the major Wall Street investment banks have also gone under or needed government bailouts.  So too did the world's largest insurance firm, AIG, and Britain's largest mortgage supplier.

The policy response to the crash of 2008 confronts the same issue as was faced in 1929.  Both crashes revealed that assets -- shares in 1929, houses in 2008 -- were worth much less than their owners thought.

The US Senate has responded to the September 2008 crash by providing a $US700 billion ($A897 billion) bailout.  This is close to Australia's national income and might prove a waste of money.

Moreover, it is being negotiated by the people who caused the crisis -- the Bush Administration's top bureaucrat and banker, and the same Democratic Party Congressional leaders who insisted on reckless lending by the mortgage giants.

Australia has experienced the same kind of house price inflation as Britain and much of the US.  Restricted land availability has caused prices of existing houses to rise 30 per cent faster than new house prices.  If only for this reason, Australian prices will fall.

Here, as in the US and Britain, the new reality regarding the value of property requires people having to rebuild their savings.  And this means reducing every day consumption.

Last week, Kevin Rudd went to New York to urge action on climate change.  But the global financial meltdown trumped such distant concerns.

The Garnaut climate change report was released on the same day as the US stock market crashed.  Garnaut's starry-eyed technology assumptions allowed him to claim that we could reduce emissions sufficiently with a "mere" 37 per cent energy tax.  This fooled some commentators but the Herald Sun's Terry McCrann immediately recognised the report was "dead, dead, dead, before it hit the table".

The Garnaut carbon tax is not the only policy approach that died this week.  Governments, like ordinary people, will have to cut their spending.  State governments have been spending excessively, using revenues grabbed from the housing boom.  These and other revenue streams are now set to decline.

Governments will now have to re-evaluate the wisdom of dollar sucking policies that offer little value.

Victoria's candidates include a bloated bureaucracy, renewable energy, desalination and, perhaps, public transport.


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