If you were one of the many who mistakenly believe that the Coalition handles the economy well, and if you had a premonition that they would win, you might have had a pre-election punt on the stock market.
Had you spread an investment of $100,000 across the market, perhaps in an ASX index fund, your portfolio on Tuesday would have been worth $101,920. That’s a two per cent gain, probably only just covering brokerage. You may have done better and had more fun by studying the racing form guide and going off to Randwick or Morphettville.
The stock exchange’s reaction was limp. There was no general corporate exuberance about a Coalition victory – in fact many business people, hoping that a change in government would finally bring in an economically responsible energy policy, were disappointed.
But if, before placing your bets on the stock market, you studied the Coalition’s track record, with the same care you may have studied a horse’s form, you would have realised that the Coalition is particularly well-disposed to the finance sector. You might have chosen a targeted portfolio — the two listed private health insurers, the big four banks, and a mortgage broking company. That would have given you a capital gain of $13,110.
The contrast between the response of the share market in general (the small red bar in the chart) and that of the financial firms is stark. Those involved in the real value-creating economy — where people grow food, build houses, teach children, construct roads, transport people and goods, develop new technologies — saw nothing in the Coalition win. By contrast, those involved in what used to be called the “paper economy”, which economist Mariana Mazzucato correctly calls the “value-extracting” economy, stand to benefit greatly from the Coalition’s win.
Our bloated finance sector
Every economy needs a finance sector to support the real economy. Beyond the basic intermediary functions of connecting borrowers and lenders, and facilitating transactions, the finance sector produces nothing of value in itself, however. Australia is already carrying the burden of a bloated finance sector, as we were so starkly reminded in the hearings and findings of the royal commission into the sector, and as is confirmed in our national accounts: as a percentage of the economy Australia’s finance sector is one of the world’s largest.
John Menadue, I, and others have written extensively on the waste incurred in the health insurance industry: as a financial intermediary it does at high cost and an annual $11 billion government subsidy what Medicare does much more efficiently and fairly at a lower cost. Health insurers are privileged and protected, however. They escaped the scrutiny of Justice Hayne’s commission: in fact, while almost every other sector of the Australian economy has been reviewed over recent times, it’s 50 years since health insurance has been subject to economic scrutiny (the 1969 Nimmo Report). Labor reasonably intended to subject the industry to a Productivity Commission review, but the Coalition victory has let them off the hook, and they may be expecting a few more handouts from the public purse. No wonder their share prices rose so strongly.
Re-inflating the housing bubble
But the big winners have been the banks and others who stand to profit from housing speculation. We might remember that when Justice Hayne’s report recommended banning mortgage brokers from taking trailing commissions, the Coalition caved in to political pressure. And in the election campaign the Real Estate Institute ran a hysterical and outrageously deceptive campaign warning renters and property owners of the dire consequences of Labor’s plans to phase out negative gearing.
Just as housing prices are starting to become more affordable, it’s now clear that the Coalition doesn’t simply want to slow down the fall in prices (as Labor intended), but it wants to re-inflate the bubble. “Housing primed for rebound” was the euphoric headline in Wednesday’s Australian.
The Coalition’s plan to underwrite low-deposit loans to low-income first-home buyers will not only inflate house prices, but will also load those enticed into the scheme with decades of debt to pay off. It’s as if they have learned nothing from the 2008 US housing crash that triggered the global financial crisis.
It’s now reasonably clear that, in order to compensate for six years of Coalition economic mismanagement, the Reserve Bank will have to reduce interest rates, in a hope to breathe some life into a sick economy. It’s questionable whether it will have any effect on the real economy, however. Corporations are already awash with liquidity: easier credit isn’t going to entice them to invest in an economy where debt-laden and underpaid workers are tightening their belts. Lower interest rates, however, may bring on some new housing supply, and that would be a good thing, for it may help deflate the bubble.
But neither the government or its backers in the real-estate business want a price-lowering increase in housing supply. That was their objection to Labor’s plan. They have no concern for affordability; rather they want high prices and high turnover, both of which contribute to the flow of lucrative commissions, and they want to attract speculators into buying existing housing to keep prices up. “Aspirational” investors, who unwisely bought into a rising and overheated market, must be protected — a strange policy position for a party that claims to believe in individual responsibility.
Asset speculation, be it in tulips, shares or housing, always ends in tears. I cannot predict when the bubble will finally deflate — no one can — but the longer the bubble goes on, the worse are the ultimate consequences. A cut in interest rates and the Coalition’s deposit scheme may have some effect in bolstering prices, but most probably it will be a dead cat bounce.
The wider problem, however, is that distortions in our tax system around capital gains and negative gearing have misdirected people’s savings into fuelling a housing bubble and enriched those who work in or draw dividends from a bloated and parasitic finance sector. With their incentives for quick gains on high turnover they have directed our savings away from the real economy where enduring wealth is created.
Ian McAuley is a retired lecturer in public sector management at the University of Canberra.
Depressingly accurate…. More prime land and habitat cleared, more houses, more people. less actual production of things of value particularly maintaining food security. Lucky but stupid country…
Mr McCauley, aye.. At last a grown-up calling bollix on our virtual ‘strong’ economy. As the rolling clown show that has been our housing market Ponzi Scheme since 1999 – when Costello’s CGT cut supercharged unlimited negative gearing in a cash-cheap mining resource boom, and made limitless speculative debt-chaining and fast-flipping a spiv no-brainer – tries to flog one last pump of life out of this dead horse carcass …the scrote-tightening reality of where we’ve ended up is becoming impossible to ignore.
Did you read Phil Lowe’s heroic prayer to the demand-side gods on Tuesday? That somehow the Friar from the Shire’s miracle, plus a cash rate cut, plus APRA’s 7% fiddle, plus the lunatic feint of a bit more first-home buyer’s cash…will magically get households spending more, employers paying more, and investors investing more in real growth projects?? That a Qld gov’s panicked decision on Adani will counter coal’s dip below $60/ton?
Adani? It’s all a sovereign risk play. Just another privateer’s raid on the taxpayer backstop. No-one’s ever gunna dig up the Galilee. They just want the taxpayer to notionally underwrite the rail line or the port, or whatevs…so that in a year or two half a dozen miners – including Fat Clive, natch – can sting the taxpayers for a motza in compo. When even the stupid Libs recognise thermal coal for a mug’s punt. (Jobs, Anna? What, four blokes in front of a computer screen in Ipswich, and thirty underpaid 357 blokes from a labour hire firm feeding the perimeter guard dogs…?)
It’s a virtual paper economy alright. No Australian ‘capitalist’ wants to actually make, mine, move or market anything, anymore. Too much like hard capitalist yakka.
Strap in. This truly was a good election to lose.
I hadn’t considered the compo angle Jack. I still reckon the most credible take is Adani keeping the mine project on life support so it counts as a paper asset to prop up their ailing balance sheet.
I was looking looking at Australian coal mining job figures today. About 35000 at most recent count, and notably, about 20% down in the past 6 odd years. From about 0.4% to about 0.3% of total employment.
You have an odd way of looking at shares Ian Mac. It definitely doesn’t cost 2% commission to buy a 100k worth online. Bank and other financials dipped a lot during the RC and are still coming back to regular levels. There were a lot of shenanigans uncovered but the underlying rivers of gold were never under as much threat as the price dips suggested.
Aye : the key value-adder for the banks – of course – is that compulsory super. Yessiree…we are all now legally-bonded fiscal serfs to the ticket-clipping Spiv Overlords…now if they can only bully their Tory poodles into some ruthless Industry Super highlands clearances even that minor surviving pocket of egalitarian fairness will be done with.
Thanks PJK! You useful, useful idiot. As if we were all ever going to be able to retire on our private share portfolio alone, when they’re all based on overpriced spec property and self-referential financial product smoke-and-mirrors.
Re: Adani, m.e.s…there is quite simply no financially plausible scenario in which a single lump of Galilee coal will ever be mined. Every suit in the financial sector (who isn’t batshit bananas) knows this well. Aside from the obvious political and ideological leverage Galilee’s dead dinos have already yielded…only the taxpayer sucker punch n’ milk makes sense going forward. To me anyway.
Our mighty capitalist captains of industry have been staked, underwritten, subsidised, loss-inured, ROI-insured and outright bailed out by the public tit for so long, and in so many splendiferously inventive and creative ways, that they have simply forgotten how to invest capital, create real and enduring economic growth/employment, and extract a sustainable fair profit without leeching the thing to death. Apparently anything less than 15% return is a dog.
What are the only truly growth and job-creating enterprises around? The service industries…and the big publicly funded, public infrastructure works exploding into thrilling reality, under the democratically-mandated, confidently conceived and executed stewardship of…good state governments and bureaucrats. Labor and Liberal alike.
What a fifty year pump-clip-and-dump Thatcherism is turning out to be…
Great article Ian…just a pity more people did not know about/understand what you have written, before last Saturday.
The drongos have been ripped off again…without even knowing they were.
But…no sympathy from me, as they all deserve what is coming to them…especially that lot in Queensland, where it appears they are all touched by too much sun up there!!
A bit off topic perhaps…but I’ve just read in The Guardian that David Speers from Sky News will replace Barrie Cassidy on Insiders. It has not been verified by the ABC, but if true, I will NEVER watch it again.
As if we don’t have enough ‘right wing’ lunatics in the media already…now they are coming to ‘their’ ABC.
Words fail me!!!!!
Speers is OK and the fact that he’s leaving Sky to go to the ABC tells you something.
You can generally pick who the “reasonable” ones are at Sky/News who will be fine when they get out from under that thumb. Speers is one. Samantha Maiden, doing good work at the New Daily, is another.
I much prefer Speers to potential in-house ABC candidates like Michael Rowland and Fran Kelly who come across to me as more Coalition-friendly and anti-Labor (and about as penetrating as wet lettuce) than Speers even while they are at the ABC and he’s at Sky.
Well Arky…what is wrong with Emma Alberici? She would have been my first pick, as she was really good on Lateline.
Agree Michael Rowland, Fran Kelly and even Patricia Karvelas are sometimes attack dogs for the coalition.
I would be extremely interested to see an analysis of two things vs 2PP swing at this election:
1. Percentage of a seat who are renting (city seats only)
2. Estimated number of people in the seat under mortgage stress