Unsustainable debt: Australia’s own subprime crisis

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Australians
are addicted to debt but we can’t afford to keep borrowing at current levels forever.
A new report by a leading economist has found that in just 18 months time we
may be spending as much of the national income on interest payments as we were
in 1990 – when interest rates were at 17 per cent.

The report
also finds that Australian households are now poorer after interest payments
than they were in 2002.

In his report
“Deeper in Debt: Australia’s Addiction to Borrowed Money” released today for
the Centre for Policy Development, Associate Professor of Economic &
Finance at the University of Western Sydney Dr Steve Keen reveals that the ratio
of Australia’s private debt to GDP has grown by 4.2 per cent every year since
1964 and is currently 156 Per cent of GDP – exponential growth which cannot be
sustained indefinitely.

“The sheer
size of national private debt means that our economy currently relies on
increased borrowing, rather than on actual income, for a sixth of its total
activity. This is a big proportion and continues to grow,” Dr Keen said.

Australia’s level of irresponsible lending isn’t as
high as that which brought on the US subprime crisis, but because our
rate of increase in debt is so much higher, the impact of any slowdown will be
more severe here – and the pain will be much more widely spread, Dr Keen found.

“We cannot
afford to reduce our borrowing without economic pain, but we simply have no
other choice if we are to bring debt under control.

And we
can’t rely on higher house prices to balance the ledger – Keen finds that our
houses aren’t worth as much as we think they are, with prices now completely
out of alignment with rental incomes and therefore highly vulnerable to an
economic downturn or a further international credit crunch.

“The
problem is confronting all of us – not just those who have got themselves into
inappropriate debt, but all those who have assets, earn income, or live in
homes. As the US
subprime experience has shown, the repercussions of market failure in this area
reach far beyond the unfortunate overcommitted borrowers and the dodgy lenders.

Dr Keen’s report calls
for a full public inquiry into
Australia’s household debt, taking in the impact of lending standards, housing
affordability, negative gearing and capital gains tax.

Other reforms the report recommends
include:

  • Regulating
    lenders, not just deposit-takers. Regulators must uphold the principle that
    loans should be made based on the capacity to repay, not asset-price
    speculation;
  • Addressing
    the lack of public housing and the tenuous position of renters, to reduce the
    incentives for people to take on loans they can’t afford; and
  • In
    the event of a debt-induced downturn, rethinking current policy approaches to
    inflation and government deficits.

Further
information: Steve Keen –
0425 248
089 or Miriam Lyons – 0432 360 234

Steve Keen
is Associate Professor of Economics & Finance at the University of Western
Sydney and a fellow of the Centre for Policy
Development.

Copies of the paper are available on request from the Centre
for Policy Development – or download it from http://cpd.org.au//paper/deeper-debt

One Response to “Unsustainable debt: Australia’s own subprime crisis”

  1. Craig

    Thank god, someone else can see this. for years i have run a business employing staff etc. only to find every 3 or so years we would have to “UP THE OVERDRAUGHT ” and until sept 2008 no one blinked an eyelid. The banks the lease brokers just kept handing over money. Until of course sept 2008. Then it all came crashing down. Had to sell up family home for heavily reduced price. So i lost the family business then the family home then lost the family. We now live seperatley, renting. Its the pits. It seems the thought is if you want to be in business be prepared to run an overdraught. The whole economic system seems to be geared wrongly. How long can we hold out like this. All my friends are in small business and all are stressed out beyond belief.

    Reply

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