KEEN'S DEBT MARCH: Rory's repudiation

Day 4

Oh dear. I hope Macquarie's Rory Robertson hasn't thrown out his walking boots.

Day four of the trek brings a coffee-sputtering revelation on the sunny verandah of our Cooma motel. (For last Friday's instalment see: KEEN'S DEBT MARCH: Honk if you're a bear.)

The Keen-Robertson bet that culminated in this march through the Australian Alps, turns out to be not quite what it seemed.

One of the Keen entourage, between earnest discussions of endogenous theories of money supply and the failings of sine-wave-based descriptions of business cycles, lets slip that the terms of the original bet are recorded in crystal clear audio, on the website of the parliamentary library in Canberra.

Business Spectator hurried off to have a chuckle over the audio record of the duo's now-famous intellectual jousting, but was astounded at what it found – this bet has four years to run.

Worse, based on the recording, the post-GFC financial environment now looks very much like a scenario the 'winner' of the bet, Robertson, suggested would not be seen for "a generation” to come.

No financial commentator likes to be reminded of what they said 18 months ago – yet the recording contains the natural corollary to the reporting (including by Business Spectator) of 'loser' Steven Keen's humiliating march to the nation's highest peak.

The Australian, for instance, last Friday ran the headline 'Keen the loser walks'. In that article, The Australian's Michael Bennet quoted an email reportedly sent to a number of journalists by Robertson. Bennet wrote:

Robertson...took issue with [The Age reporter, Chris] Zappone's reporting of Keen's view that the second part of the bet – that home prices will sink by 40 per cent within 15 years – remains open. "Contrary to various reports, however, there is no 'second part' or 'second half' of the bet . . . the one and only bet that was made has been won and lost'."

Not so. Since listening to the audio version of the bet, Business Spectator has been forwarded several emails – correspondence between Robertson, Keen and our own property blogger Christopher Joye (who has written on Steve's misjudging of the economics at the heart of the bet, and on reports of a subsequent redrafting of the bet), that show some later private discussion over the terms.

Nonetheless, the bet that was witnessed by more than 70 parliamentary staff in 2008 cannot be overlooked. Here's what the audio reveals:

Keen, when unexpectedly challenged to the bet, loudly and clearly interjects that his forecast was for a 40 per cent nominal fall in house prices "in a 10 to 15 year timeframe”. Robertson, does not respond to the interjection, and continues with his presentation.

In audience question time, some 20 minutes later, Keen describes how he sees the Australian economy foundering in a way quite different to the American experience: "Americans had a housing crisis, a credit crunch and then macroeconomic (downturn)… we're going to go through a macroeconomic, housing, then credit crunch after that – and I see this taking about five years.”

At this point, Robertson responds: "I'm still only going to give Steve five years to get his 40 per cent.”

Note too, that in the first articulation of the bet, Robertson generously offers to walk if house prices fall 40 per cent peak-to-trough, with Keen required to walk only if prices fall by less than half that – 20 per cent.

Giving Robertson full benefit of the doubt, therefore (given that he appears at first to accept the 10-15 year timeframe, only later suggesting the 5 year timeframe), the bet is this:

Keen must walk to Kosciusko if nominal house prices fall by less than 20 per cent before October 2013.

What then, is this 230 kilometre struggle if it is not a lost bet? It is looking increasingly like Keen's sly way of warning the nation of something that in October 2008, not even the more bullish Rory Robertson expected – yet more 'cheap money' asset inflation.

At that time – admittedly amid the confusion of the post-Lehman losses – Robertson answered a question on regulation thus:

"…This is sort of self-regulating, in that people who've lost a fortune playing the equity markets aren't going to play again. So there won't be a bubble [pauses]. This is the bubble to end all [pauses] – the Great Depression cured people of wanting to take on debt for generations. You know, all of us had parents or grandparents who said we should save to buy a car rather than borrow to buy a car.

"This problems that's unfolding now [in October 2008] won't be a problem for another generation, is my guess.”

No economist, including Steve Keen, has foresight of what is to come. Yet after a 3.8 'peak-to-trough' fall in property prices during the GFC (the basis for Keen's apparent 'losing' of the bet), Australians have returned to asset markets with gusto – the S&P/ASX 200 is hovering around 5000, and house prices seem unstoppable. On Friday AAP reported:

"First home buyers are rapidly being priced out of the property market as cashed up investors snap up properties amid a housing shortage…a buoyant economy and strong jobs prospects have spurred established home owners to invest in property or upgrade their homes as house prices continue to rise…Average loans now were 40 per cent larger than in 2005, although the number of loans had not increased greatly…

"First home buyers, on average, now put 40 to 45 per cent of their income aside for mortgage repayments while established owners were paying between 25 and 30 per cent…”

This, for the bulls, is evidence of a sustainable recovery from the horrors of late 2008 and the first quarter of 2009. Perhaps, later today, the delayed market reaction to Goldman Sachs being charged with fraud on Friday will give some clue as to how robust the current global asset inflation is.

But over steak and chips at the motel in Cooma on Sunday night, as Steve Keen holds court amid a dozen tired walkers – a disparate bunch of economists, businesspeople, mathematicians, soldiers, public servants – it is evidence of something far less hopeful.

There's no doubt the bet is still on – still for the taking. Yet the thought of Keen winning this bet remains a terrifying prospect.

Read part four in this series here