Yeah baby, the bad boy, Jack, is well and truly back; but be warned, those who cannot handle the heat should get out of the driver's seat. For better or worse, Jack is not one for idle chitchat. Indeed, where possible, he abides by Machiavelli's favourite maxim, "in a world of lonely wolves tis safer to be feared than loved."

No folks, more seriously, I do apologise for the dearth of dialogue since my (rather controversial) debut---you remember, the detailed dissection of the soon-to-be-consummated Goldman Sachs-JB Were merger, which, truth be told, ended up pushing some pretty important noses out of joint (you know what those bloody investment wankers are like; and if you don't, big black Jack certainly does, since he used to be one).

Anyway, it's been awfully hectic here at Stiglitz & Sons, with our long-short strategy delivering truckloads of tasty alpha, and hence rapid growth in assets under management. In fact, the fund size has breached the beautiful $1.5 billion barrier. And rest assured, I have been running those two blonde babes---Jessie and Janine---absolutely ragged. (But then, they do love it!) Such has been our recent success that I decided to expand the flesh franchise to the UK. And so, Jack now manages modelling agencies in London, New York and San Francisco! Honestly, what more could a humble heterodox want?

In spite of these responsibilities, and the dislocation associated with basing oneself on the beaches of Bermuda, the big fella has kept his ear to the policymaking ground. And with all the hysterical hoopla surrounding housing at present, I thought it'd be appropriate to dedicate my second instalment to a discussion of some of the political dynamics. Oh Jack, you handsome devil, what do you really know about the interface between policy and real estate, I hear you venture? A helluva lot, thank you very much. Let's just say that I spent hundreds of hours reflecting on the functions of the housing market whilst studying at MIT (but keep that between you and me, as it is liable to damage my reputation as an unrepentant recalcitrant).

Notwithstanding this know-how, I thought it best to do some due diligence so as to bring myself up to speed with the latest developments in the domestic domain. And after two long days perusing the (admittedly impressive) findings of the Prime Minister's Home Ownership Task Force, I now consider myself to be something of an expert on all matters related to housing! But where, dear readers, does one begin---on the demand or supply-side of this complicated theatre? Well, how about we start by pondering Peter's ill-conceived comments at the Federal Government's National Convention (oh my, Jack is about to step over the mark)!

Now the poor man has clearly cultivated a complex of sorts after sacrificing nearly a decade as little Johnny's dutiful deputy. And it is in this context that one should view his remarks about the advent of 'equity finance' (an explanation of which will be provided later). Penultimate Pete had evidently had enough, and felt that it was high time he threw a few low blows (how history will judge him is, of course, an entirely different matter). And this was, to be sure, one issue on which the PM was thought to be very vulnerable. But irrespective of what the bozos who monopolise Australia's media would like us to believe, the PM had the courage to stand up and support a radical innovation that was only embryonic in form. A participant at the time is said to have heard him observe, "Why do the pundits relentlessly criticise creativity? The mind is, after all, one of the great levers of human progress!" Wise words indeed from our brave battler ...

By way of contrast, consider the acerbic Alan Ramsey, who gleefully parades as the gonfaliere of the loony left. Almost every piece that he's published in the recent past has been typified by vitriolic invective and a total absence of constructive suggestions apropos future reform. Why say that A, B and C have made mistakes here, there and everywhere, when he could, on the other hand, outline a suite of alternative actions? There is little doubt that most members of the public would be better served by listening to Ramsey's ideas, rather than the jejune belittling of others. And I am convinced that he is in cahoots with Latham's preferred proxy, Laura Tingle, since the two of them constantly recycle one another's tallypoo.

Without going too far off the deep end here, what is with the AFR these days? Most of its Canberra correspondents are so obviously subject to the dictates of a partisan agenda that it is, by construction, impossible for them to objectively report on the political rhythms of the day. (Polemicists such as Ramsey, on the other hand, are paid to tender particular perspectives, and cannot therefore be accused of seeking to insidiously manipulate the minds of the masses.) The complexion of the op-ed pages is an absolute disgrace, and dominated by the likes of Barker, Hewson, Harris, Quiggin and Tingle! In fact, so overwhelming is the AFR's venomous verbiage that Jack sometimes feels like he's reading the goddamned Guardian. Let there be no doubt folks that this is one of the most left-wing (and expensive) financial broadsheets in the developed world today! It is certainly sad to think that many readers will be left with the impression that the vast majority of Australian journalists are intellectual invalids in desperate need of a decent dose of cerebral steroids.

Oh jeez, I've clearly digressed. Returning to the Costello kafuffle, some of you out there may be oblivious to what exactly all this hoo-ha is about. In short, the central thesis can be described as follows. For centuries now, businesses in need of funds have had access to both debt and equity. Yet for households wanting to expand, mortgage finance has been their one and only alternative. In an attempt to rectify the asymmetry between corporate and consumer capital markets, Caplin and Joye recommend furnishing families with the option of issuing both debt and equity when purchasing their properties. In this way, aspirants could fund their housing needs with both a mortgage and a passive institutional partner that contributes equity (via a synthetic debt contract) to the dwelling in exchange for a claim on the prospective price movements, with no other monetary payments made between the parties. Importantly, occupiers would retain virtually all of the decision-making rights free and unencumbered, just as in traditional markets. They would not, however, be compelled to acquire 100 percent of the equity in their home nor single-handedly bear the burden of the vast financial responsibilities inherent in owner-occupation.

Anyway, after a briefing with one of the architects, the PM decided to lend some credibility to the cause and in September 2002 announced the establishment of a high profile task force to investigate the merits of this plan. Ten months later, Caplin and Joye delivered a 400 page opus that well and truly laid the countless critics to rest. Perhaps most impressive though was their ability to crystallize the support of leading academics right across the political spectrum (and indeed throughout the world)---an almost unprecedented accomplishment in the divisive policymaking realm. Over and above the empirical and theoretical analysis, another interesting contribution was Caplin and Joye's survey and focus group evidence. In brief, one in two non-owning households responded that the ability to issue equity to an institutional entity would increase the likelihood of them purchasing a property (intriguingly, this result was recorded in spite of the imposition of harsh financial terms). Furthermore, the enthusiasm so discerned had to overcome the inherent unfamiliarity of the product in question and a veritable tsunami of adverse media attention.

It would doubtless have been of immense embarrassment to both the Treasurer and his advisors when several large lenders declared that they were eager to commercialize the concept. Even the Australian Bankers Association is thought to be sympathetic. When all is said and done, I suspect Costello would be just as contented as the next Australian were the country to become the first place on the planet to introduce equity finance. At the very least, it could cut the costs of home ownership by 30 percent, significantly increase the average household's disposable income, and liberate a new $2.5 trillion asset class. What more could one realistically want? And yet the insipid reaction in certain sections of the journalistic community suggests that Machiavelli was right in almost all the particulars:

"There is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new system. For the initiator has the enmity of all who would profit by the preservation of the old institutions and merely lukewarm defenders in those who would gain by the new ones. The hesitation of the latter arises in part from the fear of their adversaries who have the laws on their side, and in part from the general scepticism of mankind, which does not really believe in an innovation until experience proves its value. So it happens that whenever his enemies have occasion to attack the innovator they do so with the passion of partisans while the others defend him sluggishly, so that the innovator and his party are alike vulnerable." Niccolo Machiavelli, "The Prince", (1513), quoted in Joye, Caplin, Butt, Glaeser, and Kuczynski (2003).

Never mind the irony implicit in the Treasurer's energetic attempts to exploit Caplin and Joye's supply-side insights (which were, of course, responsible for the establishment of the Productivity Commission Inquiry in the first place). Indeed, every man and their dog seems to be jumping---without due acknowledgement---on the boys' burgeoning bandwagon. Even that larrikin Latham has announced that eliminating artificial constraints on the production of new dwellings (via the release of greenfield and brownfield sites) will serve as a critical plank in his otherwise bare policy platform. Here Jack has some simple advice for the prodigal son: instead of incessantly criticizing the ideas of others, why not put pen to paper and actually advocate a couple of proposals of substance? It is, after all, awfully difficult to beat something with nothing---a point that most of the media have yet to cotton on to. It is certainly funny to think that prior to the release of the Menzies Research Centre's report Latham had nothing to say on this subject. Naturally, it is now apparent to all and sundry---especially those who posture in the op-ed pages---that the growing disjunction between the cost and price of housing in this country can be remedied by removing the regulatory sands that prevent supply from flexing to changes in demand.
 
Well, I've gotta run, so that's all folks!

Until next time,

Jack*

PS: Yes, I know, there are going to be some out there who, after reading this second instalment, will want to fry Jack's balls for breakfast! But before doing so, they will have to ship their barbecues out to Bermuda!

* Jack C. Stiglitz is a prominent hedge fund manager. He may be contacted at jackstiglitz@financier.com.  Female members of the audience are advised that he is single, extremely eligible, and partial to the prospect of entering into relationships with suitably qualified candidates.