A noted economics professor fears that pessimism is outweighing common sense.

It's hard to keep a level head when everyone around you is losing theirs, which is why Professor Don Harding is choosing his words very carefully.

"I don't think we're in a recession or near a recession yet but it depends what happens in the rest of the world," he says.

Speaking at the height of the recent panic that gripped global financial markets, before the co-ordinated international bail-out of the banking system, Harding was concerned that only the most pessimistic voices were being heard.

"I've never seen anything quite like this. I think our economy is in a better situation [than other developed economies] but I don't know how much better," he says.

Harding is professor of economics at La Trobe University, where his interests include the business cycle and macroeconomics, interests forged during another cruel turn in the business cycle.

"I was born on a sheep farm [and] my parents went broke when I was 16. We sold our sheep for 50cents a head and a year later they were $10 to $15 a head. I wanted to understand why we went broke - how do economic systems work?

"I went to school in Canberra and was desperate to get back on the land but I went to [the Australian National] university because there was not much else to do and found economics interesting," says Harding who continued his studies at Yale.

After starting his career at the Australian Bureau of Statistics, he worked at the Industry Assistance Commission (now the Productivity Commission), the Australian Treasury, the Melbourne Institute and Melbourne University before taking up his current post.

Harding believes the Australian banking system is sound and better regulated than comparable banking systems. He's also confident that the measures being taken in the US and Europe will make banks more willing to lend to each other.

"The Reserve Bank has a long way to move on interest rates if it needs to and the Federal Government has a lot of room to move with fiscal stimulus if it needs to," he says.

While he is not of the view that Australia is necessarily headed for recession, he does concede that we're in for a period of slow growth and tough times and that any further fall in consumer sentiment and consumer spending would be very bad for the economy.

"Probably one of the most worrying things is the housing sector in Australia - not because of interest rates but because no one will see capital gains for a while and this has been a big motivation in the past ... it's hard to see what will happen to house prices over the next few years," he says.

Even so, he doesn't envisage a dramatic fall in house prices; more likely a reduction in building, with prices stagnant or falling slightly. "I don't think people will realise their losses [by selling]. That would be stupid," he says.

Harding is perhaps best known as the co-creator of a widely used measure of inflation, the TD Securities-Melbourne Institute Monthly Inflation Gauge. Inflation was about 5per cent in the year to September, well outside the Reserve Bank's target range of 2 to 3per cent. But with the economy showing signs of a slowdown, he doesn't think the central bank will focus too much on inflation.

Source: Brisbane Times
4/11/08

A noted economics professor fears that pessimism is outweighing common sense.

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