Senator JOYCE—I will be as quick as possible. I want to take you back to the debt crisis. I refer to an article by Eric Janszen in the Financial Review. You probably read it yourself. It was on 15 February 2008. It is quite a substantial article entitled ‘The Next Bubble’. I will just quote and ask for your comments:
The U.S. mortgage crisis has been labelled a “subprime mortgage crisis,” but subprime mortgages were only a sideshow that appeared late, as the housing-bubble credit machine ran out of creditworthy borrowers. The main event was the hyperinflation of home prices. Risks are embedded in price and lurk as defaults. Even after the faith that supported a bubble recedes, false beliefs continue to obscure cause and effect as the crisis unfolds.
Now, surely that could be Australia as well, as we see with the hyperinflation of homes. And if that is the case then we have our own mortgage crisis roaring down the road to us here in Australia.
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Dr Laker—If you had said that to me in the year 2002, I think that was a concern that we had at the time. I should add these are really more questions for macro policy rather than for a prudential regulator, but it would have a bearing on the quality of our banks’ balance sheets. But those concerns about a housing market that was growing at an unacceptably high and unsustainable rate were really prevalent in Australia in 2002. We have had a housing market correction. In late 2002 we all stood at the precipice and feared about how large that drop would be when the housing market did correct. It was a genuine concern. As it turned out, the correction was an orderly one. That head of steam, the valve was released, monetary policy was tightened, and borrowers drew back from the rush of blood to the head in investment housing. For a couple of years, housing prices were flat but they were down overall about 15 per cent from their peaks. The market since then has been rising steadily. It is very hard to look at that period—to take the US commentary now and talk about Australia now. The parallel was three or four years ago. In some respects we have been through that boom and correction earlier than other markets.
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Senator JOYCE—Are you aware of the article by Dr Paul Woolley, his position on market dysfunctionality, and his belief in a lack of transparency in financial markets basically revolving around the $40 trillion market and $500 billion in costs each year—that we are lacking the transparency to really understand these costs and they ultimately end up back with the mortgage holder in financial markets? Do you have any—
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Dr Laker—I am not aware of the particular—
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Senator JOYCE—Would you take that on notice? It is something I am curious about because it is another possible omen of doom. It is something I would really like—
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Dr Laker—Nobody would dispute your comment about transparency. Generally, with a lot of these finance instruments that is one of the areas that central banks and regulatory agencies across the globe are looking at now. Some of the products that had subprime exposures and were being on-sold to investors were very hard to understand. They were very opaque. But we are talking here about subprime and investment markets in the US. I think your question might have had an Australian link, but I would have to take it on notice.
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Senator JOYCE—The article says we are not aware of the risk that we are dealing with. I am asking whether that is the case with the products here. Because about 40 per cent of corporate profits are coming from transactions on the share market, as opposed to about 40 years ago when it was about 10 per cent, we have to start questioning the efficiency of the market, whether it is sustainable to make these profits by moving buckets of money around without actually producing anything and whether that inherent risk is also now feeding into the market.
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CHAIR—We have to conclude the questioning at this stage.
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Dr Laker—May I just finalise part of the answer to Senator Joyce? The other point I just needed to make is that credit growth in housing in Australia is around the low teens—11 or 12 per cent. In the height of the boom conditions, it was running over 20 per cent. That is an important difference. It is why I would be very reluctant to engage in a debate about boom times here compared to the US now. I think the comparison has got about a three-year gap in between.