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Hello. I'm Bernard Hickey with the daily briefing from interest.co.nz...
Today, we'll look at the latest news of falling house prices and we'll look at the chances of the Fed's massive liquidity injection ending this credit crunch.
Story 1,
But firstly, we look at house prices. The most comprehensive and up to date bunch of figures came out yesterday afternoon from the Real Estate Institution of New Zealand.
And the news isn't good for anyone who bought in the last year or so expecting capital gains and who has perhaps borrowed up to 100% to do it.
You are probably already in negative equity territory.
The median house price fell 0.7% in February and is now down 4.2% from the peak in November last year.
The Reserve Bank's prediction of a 5% fall in prices this year has already almost been achieved...and it's only February.
There were big price falls in Northland, Auckland, Southland, the Manawatu and Taranaki, although prices did rise in Wellington, Christchurch, Nelson and Hamilton.
REINZ president Murray Cleland hasn't quite given up on the idea that prices might not fall in a major way. He pointed out the prices haven't quite fallen from a year ago.
But he is warning that if prices do tip over and fall on an annual basis then there could be political and economic fallout.
This is an interesting development. When real estate agents start screaming then the political pressure to intervene will inevitably follow.
It will be tough for the government to do anything. About the only thing that might work is a significant increase in migration. But that has its own political sensitivities in an election year, unless of course Helen Clark wants to throw Winston Peters some raw meat to chew on.
Story 2
Now for a deeper look at the US Federal Reserve's move this week to pump more than US$200 billion of liquidity into financial markets.
Initially investors were over the moon. They thought that maybe this would be enough to calm down this credit market turmoil that has driven up interest rates around the globe.
Now some are having second thoughts. The word band aid has been used a lot to describe the actions of the Fed and even the word desperate.
They are both good words to use.
The Fed under Ben Bernanke is making the same mistake that Alan Greenspan made after 9/11.
It believes, wrongly, that the best solution to financial market turmoil and an economic slowdown is to throw cash at the problem by easing monetary policy and pumping liquidity at the problem.
Greenspan did it through 2002, 2003 and 2004 when he kept rates at 2% for nearly 2 years. This became known as the Greenspan Put.
Essentially whenever the market got into trouble then Greenspan and the Fed would bail out the market.
It didn't matter how crazy your lending was or how stupid your investment decision because it didn't matter. The Fed would always bail you out.
That is happening all over again the pain will eventually be shared by us all in the form of higher inflation.
We're already seeing it with higher oil prices and higher food prices. Inflation is a monetary phenomenon. It gets worse when central banks throw money into the fire. It simply stokes the flames.
The Reserve Bank here is right to keep rates on hold. A central bank's ultimate job is to contain inflation to let an economy grow without that fear.
The last time central banks and governments thought inflation and budget deficits didn't matter was in the late 1960s and early 1970s. That resulted in a decade of high oil prices, high unemployment and stagflation.
We're all now paying for the profligacy of Alan Greenspan, his successor Ben Bernanke and George Bush's Iraq war spending. We paying for it with inflation and higher interest rates.
I'm Bernard Hickey from interest.co.nz with the Daily Briefing. Catch you on Friday.
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