If only inflation had also measured the price of houses and not just rentals, a lot of problems could have been avoided.

Sir, Jamie Smyth reports on “the end of a five-year expansion, which saw house prices in Australia’s biggest city rise 70 per cent and household debt surge above 120 per cent of gross domestic product — one of the highest levels in the developed world.” “End of Australia housing boom sparks fear of disorderly crash” September 7.

In the housing sector inflation is solely measured based on the rentals, which surely lag house prices. In 2006, in a letter that FT published, I asked: “Who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.”

If inflation had also partly measured house prices, it would not have shown such low figures, and then inflation targeting central banker would have had to tighten monetary conditions, and bank regulators, their credit and capital requirements conditions. 

How central bankers can just turn a blind eye to it could have something to do with that a great majority, or perhaps all of them, are house owners, and therefore only see good in the value of their houses going up. Now when things are getting out of hands, let’s make sure they are not given any preferences, so that they can learn the lesson in ways that helps them to remember it.

The political convenience of helping house buyers with preferential access to credit only results in house prices going up, and thereby having to provide even more preferential credit. Of course Saul Eslake of University of Tasmania is right arguing, “a gradual deflation of property prices, though painful for some, will do more social good than harm.”

Sir, as I have often written to you, much better that helping young buyers with affordable credits to buy houses is helping them to afford houses, c'est pas la même chose.

A house used to be a home; now authorities made these homes and investment assets. The journey back to being solely homes will hurt, many, a lot. The alternative of inflating ourselves out of the mess could be even worse.

PS. And when push comes to shove are not shares just another type of assets to be included in inflation calculations?

@PerKurowski

Joe Hockey, as an impact assessment, just ask bank regulators some easy questions.

Sir, Jamie Smith, Sam Fleming and Gina Chon report that “The B20, a business lobby group has called on… the Basel Committee to investigate further the side effects of financial regulations”, “G20 split over call to assess impact of financial rules” September 18.

About time! I just hope this B20 also includes a god representation of those borrower who because they are perceived as risky are, by means of credit-risk-weighted capital requirements for banks, being denied fair access to bank credit.

I just came back from Toronto where I saw the play “Our Country's Good” advertised with “Thieves, murderers, prostitute, actors…this is what made Australia”. I sure hope Joe Hockey, Australia’s finance minister, now reflects on what would have become of Australia’s economy if its banks had needed to hold much much more capital (equity) when lending to its own “risky” outcasts, than what they needed to hold when lending to the “absolutely safe”, like to Greece. 

Frankly, before requiring any impact assessments I would be great if Joe Hockey, just asked bank regulators to answer some kindergarten level questions, and did not let go until he had an answer that a kindergartener would understand. Like the following:

Q. Why on earth should a lot of money lent at low interest rates to Mr. Safe be safer, or less risky for the bank, than little money lent at high rates to Mr. Risky?

Q. Is the truth not that the risk of banks have nothing to do with the credit risks of Mr. Safe or Mr. Risky, and all to do with how banks lend to Mr. Safe or Mr. Risky which, as they say in French, is pas la meme chose?

Q. Why on earth would bank regulators expect the bank to keep on lending to Mr. Risky if it cannot leverage its equity as much as it is allowed to do when lending to Mr. Safe?

Q. And if banks only lend to the Mr. Safe of this world and avoid all the Mr. Risky, what might become of the real economy… a safer or a riskier place?

The sad truth is that all current bank regulations have been written without first settling the issue of what is the purpose of banks.

Overly risk adverse regulators ignored that risk-taking is the most fundamental element needed for keeping an economy going forward, without stalling, and falling. “A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926

PS. Here a more complete definition of terms

PS. Sometimes when stress testing banks what is on their balance sheets is less important than what is not.