The Housing Bust: not a question of 'if' but 'when?' and 'how bad?'

However, there was no housing boom - no asset-price inflation in housing of the kind that has afflicted the Australian society and economy in more recent years.

That was partly because our labour force was fully employed; but then and later it was also due to the way in which the banking system, under the Banking Act of 1944, was managed to meet the balanced needs of the economy and the society.

Here we cannot examine all the elements of the Banking Act of 1944 and the White Paper on Full Employment but some elements were crucial. They were -

1. Full employment should be the government's top priority;
2. Interest rates should be kept low;
3. The government, through the central bank, should direct credit so that it should be available in a balanced way - neither too much nor too little - to all areas of the economy and society.

The Commonwealth Bank and later the Reserve Bank, acting as Australia's central bank, could and did use its power to discipline and its influence to guide the commercial banks in their lending and their behaviour generally. It could withdraw funds into Special Accounts or, in the ultimate, it could de-licence. More regularly and effectively, it issued "guidance" to the banks on increasing their lending to factories or farmers; or reducing their lending for stockmarket investment or real estate.

It may fairly be claimed that, in a free economy, banks should be allowed to operate freely, with a minimum of regulation. However, that minimum of regulation is vital. Without it, the banks' tendency is to indulge in more and more licentious behaviour in the pursuit of profit and market share, and to neglect the broader welfare of the economy and society from which they derive their resources, their privileges and their power - and which, in the end, they are or should be duty-bound to serve.

The experience of the last quarter century in Australia has again demonstrated this powerful tendency to indulge in licentious behaviour and emphasised the need to regulate that behaviour by the community they are privileged - and duty-bound - to serve.

The financial system is now more complex than it was in 1970. Funds available to the banks, either directly or through subsidiaries, are massive compared with a generation ago. Pension funds are both enormous and place the destiny of millions of Australians more completely in the hands of the banks and associated financial institutions than ever before.

Effectively, therefore, we have a choice between responsible regulation of the banking system or increasing instability and possible catastrophic collapse of our financial system, with consequent damage to our whole society and political system. Without responsible regulation of the banking system, we risk another Great Depression - but one that could be deeper and more devastating than the one which only the most elderly among us now remember.

That brings us back to the present housing boom and the way in which it might be managed. In the past 30 years or so, "management" has simply been to raise interest rates and so kill the boom and much in the whole economy besides. Whole armies of jobless have been created, factories have been closed, farms lost, bankruptcies precipitated, fixed-capital private and public investment severely cut. That is the worst way to deal with a housing or any other boom - a boom whose inevitable collapse can be foreseen with the clarity indicated above and against which any responsible managers of our financial and economic system must institute safeguards.

What we must do is move away from the excessive free-market approach of the last 30 years - especially the period since the deregulation of the banks in the 1980s - and back to the essence of the regulation of the banking system that we had in the period from 1944 to 1970, a period that was also marked, as we have noted, by a dedicated commitment to policies of full employment.

In the more complex financial world of today, regulation will now differ in some and probably much of the detail from that of the earlier period but its core character should remain the same. In the matter of housing, legislation should permit the government, either directly or through the central bank, to issue guidance as soon as danger of overheating of the market threatens and signs of asset-price inflation occur. Under such management, the flow of mortgage credit would be restrained, the price of housing for the younger and poorer sectors of the population would be kept down and finance for other sectors of the economy would be more readily available and, we might assume, the guidance from the government would encourage the flow of funds into these other productive sectors.

These are fundamental issues and our current problems with housing - and real estate more generally - especially in the last twenty years, illustrate how wrong and how damaging our financial and economic policies have been. (Although it is a subject for more detailed analysis, I must note here that homelessness in Australia is, at present, a national disgrace. If we are to regard ourselves as a fair and compassionate society, we must revise our economic, financial and social policies to ensure that every man, woman and child in this country has a decent place to live.)

Consequently, our approach to resolving the boom-and-bust housing syndrome should be - and indeed must be - part of a broadranging re-appraisal of our financial and economic policies and the institution of measures which will give us more stable growth and more secure and equitable living levels for all our people, rich and poor, young and old - for traditional families and single parents alike and especially for our children. We should not tolerate thousands of homeless children while bank boards hand out obscene salary packages of millions of dollars to their CEOs or tens of millions to their crony bankers as "Golden Handshakes" when they retire.
Sadly, there are few signs at the moment that our policymakers are about to make this reappraisal or adopt the more enlightened approaches that will pilot us into safer waters.