ECONOMIST, ASSOCIATE PROFESSOR STEVEN KEEN: Good morning, Deborah.
DEBORAH KNIGHT: Now, the Treasurer, Wayne Swan, is confident Australia can weather this financial storm but you've been warning for some time that we're heading towards a recession, possibly a depression?
STEVEN KEEN: It was looking at the Australian data first off that made me feel that way. I was involved in doing a court case for NSW Legal Aid over a family that was being evicted and I was the expert witness to make the case that these contracts shouldn't be enforced because of the damage bad lending does to the rest of society - which is part of the Consumer Credit Code. And I made a throwaway line when I was writing my report saying that debt-to-income ratios have been rising exponentially in this country and I realised that since I was the expert, not the barrister, I can't get away with hyperbole, so I had to go away and back it up, and I thought it wouldn't be that bad, I'll have to change what I'm saying, but it would still be an increasing ratio - and my jaw hit the floor when I saw it was almost perfectly an exponential rise in that ratio. Back in 1965, the debt to GDP ratio in this country was 25% - that was back when John Howard's hero, Menzies, was running the country. It's not something to do with any political party. 40 years later, that ratio was 140% and now it's 165%. So we've got our own little time bomb of debt ticking over here. It's almost the same scale as the debt bomb in America in terms of the debt on the household sector and the business sector. It's not as bad, thank God, in terms of the debt on the financial sector itself, its own borrowing, and Government debt. So we're better off on those two fronts. We do have a stronger financial system with the size of our major banks and their deposit base, which gives them insulation against the wholesale market, but we have own home-grown crisis here and I was fairly certain America's would break before ours, which is what's happened.
JESSICA IRVINE: The Reserve Bank has raised issue particularly in western Sydney, with mortgage defaulting here at higher rates, and COAG has agreed that there needs to be a national regulation of payday lenders and mortgage lenders. Do you think that goes far enough to address the root cause of the problem?
STEVEN KEEN: No, it's a start. But a lot of this was driven by the belief that the solution to all economic problems was throw in more competition whatever the issue might be, and what we have by throwing in non-bank lending competition at the lending market was the evolution of all these rapacious lenders who have a strong motivation to pump out as much debt as they can. They get the money out of the fees and particularly when they finance their lending by selling securitised assets to the public, they're free of any danger of those loans defaulting.
JESSICA IRVINE: So the rescue package by the Government is the wrong move? I think it's the wrong move?
STEVEN KEEN: I think it's the wrong move. If you ask an economist why the chicken crossed the road, the answer is supply and demand. They think everything is about competition. That's conventional economics. I come from a non-orthodox school of economic thought that says that's not the ay the system operates.
But this conventional advice says if there's a problem, throw more competition at it and it will fix the problem. It's the economist's vitamin C, this competition.
In fact, this particular disease was caused by too much competition. Because when the wholesale lenders turned up they had a margin below the banks because of the wholesale market being cheaper than the deposit rate margin at the time, and they forced the banks to compete by dropping their own lending standards. If there hadn't been that growth of the non-bank sector, we wouldn't have the level of debt we have today and the level of mortgage defaults we're going to have in the future.
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