I decided to sign up for Business Spectator's (free) webinar this coming Thursday featuring the housing bear, Post-Keynesian and Minskyite Steve Keen up against the HIA's Chief Economist Harley Dale. I already have an idea of what is going to be said: Harvey Dale will probably agree that the market will be 'soft' in the coming 12 months but will point to the usual arguments such as the 'housing shortage' as to why the doomsday-scenario that Steve Keen will be selling is wrong.
This is a debate that is ongoing and, in my opinion, both sides are likely wrong because their interests and ideologies blind them to the real cause of the present housing situation; and if you are wrong about the real cause, how can you possibly be relied upon for a solution? Steve Keen is wrong because he is bound by his Marxist/Post-Keynesian ideology and Minskyite economics, the latter of which, while potentially useful in certain situations, ignores (or cannot see) critical stages of the business cycle; and Harvey Dale for all the usual reasons (to be fair to Dale, I am not sure what he is going to say; hoever, Keen's writings themselves are a reasonable source for arguments against the 'no bubble' mainstream view).
The reason I am picking on Keen and Minskyite economics is that while its proponents may be able to spot certain bubbles and malinvestment, their policy conclusions following a bust would be disastrous for the economy. Minskyite's believe that bubbles and the eventual financial collapse as a result of them are caused by speculation and the inherent instabilities of a free-market system. They then call for the forces of government to 'stabilise' and 'constrain' these fundamental instabilities of the market system with things such as more regulation and regulatory bodies, federal deficits (employer of last resort), the RBA as a lender of last resort (to ward off 'effective demand deficiencies' and default risk) and finally, the complete socialisation of investment to eliminate 'speculation'.
It is for the reasons above - the policy prescriptions that someone like Steve Keen would give if he had the chance and was proven "right" - that it has to be pointed out that merely spotting a bubble does not mean that your theory is correct. Yes, the Minskyite's spotted the bubble. But the way they got there is fundamentally flawed; indeed, Minskyite theory cannot differentiate between, say, an increase in housing investment due to real effects - i.e. an increase in genuine savings resulting from a lowering of consumer time preferences - and artificial effects - i.e. an injection of hot money (by keeping interest rates artificially below the natural rate) from the central bank that misleads actors into thinking that consumer time preferences have changed.
Contrary to the Minskyites, it is not a vicious, self-perpetuating cycle of over-leveraging triggered by "animal spirits" inherent in the market system that ignites the boom; it is a boom created by the central bank increasing the money supply and interest rates being held artificially below the natural rate that distorts relative signals and encourages unsustainable debt-financed investment in higher-order capital goods such as housing.
Housing bubbles are not caused by instabilities in the free-market system but by flawed monetary institutional structures: global fiat currencies, central banking and crony-capitalism. If Keen "wins," his policy recommendations will likely lead to an even worse institutional structure and thus economic situation than the one we have at present.
