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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 17 May 2008 by skirchner in Economics, Financial Markets
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That 70s Show
RBA Governor Glenn Stevens revisits the economics of the 1970s:
“There is much less inclination than there once was to use fiscal policy as a counter-cyclical stabilisation tool,” he told alumni of the Sydney University economics faculty last night.
Mr Stevens and his predecessor Ian Macfarlane have set little store by the use of the budget to influence inflation or rates.
Mr Stevens earlier this year said the budget should be judged for the value of the measures it contained and the sustainability of government finances.
“It shouldn’t be judged through the narrow prism of what might it mean for the overnight cash rate,” he said in January.
This does not stop the commentariat and Access Economics from living in a 1970s time-warp.
posted on 16 May 2008 by skirchner in Economics, Financial Markets
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The Future Fund and the Statism of the Commentariat
There is something about the Future Fund that brings out the latent statism of the commentariat. Here’s Alan Kohler, praising the growing amount of revenue being hoarded by the Australian government:
Sometime next year Australia will have its own $US100 billion sovereign wealth fund (SWF) and the Government will have a positive net worth for the first time.
…it finally puts Australia on the right side of global decoupling, as one of the world’s resource rich nations building wealth for the future. It’s been that for a while, except the proceeds have been frittered over the past few years.
We still have the Anglo-Saxon west’s propensity for lots of personal and household debt, but at least the Government will be entirely debt-free (including [sic] pension obligations) and building real wealth.
What Kohler doesn’t seem to understand is that the Future Fund and its sister funds announced in this week’s Budget are simply holding vehicles for future government spending. If the government were spending all of these funds today, Kohler would likely deem it irresponsible. But it makes no difference whether future government spending is paid for out of current or future taxes (the investment returns on the Fund are simply compensation for the opportunity cost of not spending the money today). It is far more likely that these funds will be ‘frittered away’ by government than by taxpayers. All the Future Fund does is ensure that current taxpayers are now paying for the government frittering of the future, as well as the present.
The ‘real wealth’ being ‘built’ in the Future Fund is no such thing. It comes entirely at the expense of the current wealth-generating capabilities of the private sector.
posted on 15 May 2008 by skirchner in Economics, Financial Markets
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Budget Wrap
The Labor government’s first budget had more in common with those of its predecessor than it would care to admit. The chief fiscal problem confronting policymakers is not fighting inflation, but finding a home for the revenue growth that continues to exceed Treasury forecasts and for which the government has no current use after delivering on its election tax cuts and other commitments. At 1.8% of GDP, the underlying budget surplus is larger than at any time since 1999-00, but still a trivial tightening on the 1.5% of GDP seen in 2007-08. The Commonwealth has now been running surpluses of 1% of GDP or more since 2002-03 and at least 1.5% of GDP since 2004-05. As Alan Wood notes ‘The cynicism born of many budget lock-ups says that this is a remarkably convenient pattern of surpluses.’
Peter Costello’s solution to the problem was a combination of tax cuts and hoarding revenue in the Future Fund, which is much the same approach taken by Labor with its Building Australia Fund and revamped higher education fund. Whether revenue is better used buying financial assets or invested in as yet unspecified infrastructure is far from clear. If infrastructure needs were so pressing, the government would not need a body like Infrastructure Australia to go in search of suitable projects and would instead have no problem drawing up a list and timetable of projects in the Budget itself. Investment spending has been at post-war record highs as a share of GDP, so there is no shortage of investment on the part of the private sector. The danger is that the BAF becomes a public sector white elephant fund.
At the same time, Labor has still not fully funded the ‘aspirational’ part of its election tax cuts, which aim to reduce the existing four tax scales to three by 2013: 15%, 30% and 40%. These aspirational tax cut commitments would have more credibility if they had been fully funded in the budget and could conceivably even have immediate supply-side benefits if the public were convinced they would be delivered. The failure to fully fund them suggests that the ‘aspirational’ part of the tax cuts will remain just that. Social democrats like John Quiggin are openly looking forward to the inflation tax that will claw back the tax cuts.
Ross Gittins and Chris Richardson still seem to think that the main role of the Budget is to save RBA Governor Stevens from having to do any work. According to Gittins:
Even if further interest-rate increases don’t prove necessary, the budget does nothing to bring forward the day when the Reserve Bank is able to start cutting rates.
Just as predictably, Chris Richardson said that:
Tax cuts are clearly inflationary and clearly dangerous in an economy that is still at full stretch. Much of them will be spent.
The budget has no relevance for inflation and interest rate outcomes, but even if it did, why would we prefer restraint in demand to come from higher taxes than higher interest rates? On political economy grounds, we should prefer higher interest rates. The interest rate cycle will eventually turn, whereas the expansion of government probably won’t. The real agenda of those who oppose tax cuts is to support the secular expansion of the state.
posted on 14 May 2008 by skirchner in Economics, Financial Markets
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Government versus Private Saving
David Uren highlights the private sector offset to increased public sector saving:
there is a good body of academic research showing that savings decisions by government and individuals are inversely related—that increases in government surpluses are financed, at least in part, by consumers running down their savings.
The superannuation industry, which has doubled its contribution to tax revenue to $10 billion in the past five years, has always argued that the Government’s surpluses are based upon sequestering the savings of households.
Research conducted by the OECD shows that for Australia, every additional dollar saved by the public sector results in a fall in private savings of about 50c. This is in line with the international average.
The OECD study looked at the savings performance of government and individuals in 21 countries, including Australia, over a 30-year period.
It suggested that the trade-off between individual and public sector saving would be greatest at times when public sector debt was low and private sector debt was high, as is the case now in Australia.
I review similar evidence here. This is just one of the reasons why budget surpluses don’t put downward pressure on interest rates, because dissaving by the private sector offsets the government contribution to national saving. In any event, the domestic saving-investment balance does not determine domestic interest rates given an open capital account.
posted on 12 May 2008 by skirchner in Economics, Financial Markets
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Raining on ‘Rainy Day’ Richardson
Terry McCrann poses some questions to Chris ‘Rainy Day’ Richardson:
What would have been - dangerously - fiscally irresponsible is to have not had the cuts each year. If Costello had listened to the twitterings of Access Economics, which opposed every single one of the yearly cuts, the budget would be groaning under surpluses of $70 billion a year or more.
Ceteris paribus - all other things being equal - as the economists like to say. When, of course, they wouldn’t have been, either in terms of the impact on the economy or the political process.
It was hard enough keeping the hands of his cabinet colleagues, from the prime minister down, off even the tax cut-reduced surpluses.
Even the team at Access would - should be forced to - concede the literal impossibility of letting those surpluses mount ever higher. But perhaps Access’s Chris Richardson could say when over the last five years and how such huge surpluses would have been spent.
And/or how they would be dispersed today and tomorrow. He objects to the current $31 billion of tax cuts over the next four years, at the supposed cost of higher interest rates.
I doubt, though, that he would be endorsing cuts of $100 billion over that time frame. Just to take the last three years of Costello’s tax cuts.
posted on 10 May 2008 by skirchner in Economics, Financial Markets
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 10 May 2008 by skirchner in Economics, Financial Markets
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Glenn Stevens’ 2010 Christmas Wishlist
The RBA’s quarterly Statement on Monetary Policy contained an inflation forecast consistent with the 2-3% medium-term target range, assuming you don’t mind waiting until Christmas 2010 to get it. This was achieved largely by way of a dramatically lower economic growth forecast. Non-farm GDP is now expected to slow to 1.75% by the end of this year, compared to the 2.75% forecast in the February Statement. This is an annual growth rate not seen since 2001 in the wake of the recession in domestic final demand that followed the introduction of the GST in the second half of 2000. In effect, the RBA has dramatically raised the bar on the weakness we will have to see in the activity data this year for the RBA not to further raise interest rates. The RBA’s forecasts highlight the growth sacrifice that will now need to be made to tame inflation. Even then, inflation will still be sitting at the upper-end of the target range.
posted on 09 May 2008 by skirchner in Economics, Financial Markets
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The Raisins of Mild Inconvenience
Gerard Baker on the Great Depression that wasn’t:
I don’t know about you but I feel a bit cheated. There we all were, led to believe by so many commentators that the sub-prime crisis was going to force the United States into a new era of dust bowls and breadlines, a slump that would call into question the very functioning of the capitalist system in the world’s largest economy. Carried away on the surging wave of their own economically dubious verbosity, the pundits even speculated that this unavoidable calamity might presage some 1930s-style global political cataclysm to match.
Well, it’s early days, to be fair, but so far the Great Depression 2008 is shaping up to be a Great Disappointment. Not so much The Grapes of Wrath as Raisins of Mild Inconvenience.
posted on 07 May 2008 by skirchner in Economics, Financial Markets
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US Housing Downturn All But Over
Traxis Partners MD Cyril Moulle-Berteaux argues the US housing downturn is all but over:
In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.
The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in “months of supply” terms. That’s the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.
Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.
Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won’t stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.
posted on 06 May 2008 by skirchner in Economics, Financial Markets
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Wages Breakout versus Imagination Land
Once-were-inflation-warrior turned inflation capitulationist ‘Henry Thornton’ concedes:
if wages begin to surge, all bets will be off and the bank will need to hit the economy with additional rate rises until people demanding wage increases get the message.
If you like record-breaking growth rates in the labour price index, then you are probably going to love next week’s March quarter release.
Meanwhile, over in Imagination Land:
BRENDAN NELSON will today challenge Labor’s first budget a week before its release by claiming there was no need for spending cuts because Australia’s inflation crisis was “imaginary” and “a complete charade”.
posted on 06 May 2008 by skirchner in Economics, Financial Markets, Politics
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Inflation and Monetary Policy
Regular readers will not be surprised to learn I’m in furious agreement with Don Harding:
The most egregious error occurs when people argue that the Reserve Bank has aggressively tightened monetary policy. It has done nothing of the sort. The relevant measure for assessing whether the RBA has tightened monetary policy is the real (inflation-adjusted) cash rate, which stood at 3.1 per cent in March 2005 and now stands at 3.0 per cent. The seven increases in the nominal cash rate over this period have just kept pace with inflation and do not represent a tightening of policy…
The danger is that if I am right and inflation accelerates because the RBA’s approach is too soft, then the RBA will need to move aggressively and hike rates several times.
We got the first bottom-up look at June quarter inflation today, with the release of Don Harding’s inflation gauge for April. It was a shocker at 0.5% m/m and 4.3% y/y, the strongest annual growth rate on record for this series. Core inflation (ex-volatile items) rose 0.5% m/m and 3.9% y/y compared to 3.3% y/y in March. The trimmed mean, which proxies for the RBA’s preferred measures of underlying inflation, rose 0.6% m/m and 4.3% y/y compared to 3.8% y/y in March.
posted on 05 May 2008 by skirchner in Economics, Financial Markets
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 03 May 2008 by skirchner in Economics, Financial Markets
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AussieMac? No Thanks
Alan Wood on the Gans-Joye proposal to harness government guarantees to under-write mortgage lending:
The creation of a government - that is, taxpayer - subsidised institution, largely for the benefit of non-bank mortgage lenders, would need to be justified either by the existence of a long-term structural problem in the provision of housing finance in Australia, or evidence of a short-term collapse in the availability of home loans.
Neither problem is evident, and in any case it would take too long to set up such a body for it to be of any use in the current credit crisis. Nor is it warranted as a hedge against future crises.
Interestingly, in his upbeat press release, Greg Medcalf was obliged to include the following sentence: “While the proposal has received encouraging feedback, Mr Medcalf said there was some concern the enhancements were addressing a short-term market issue that did not require a long-term fix”. Just so.
posted on 03 May 2008 by skirchner in Economics, Financial Markets
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US Recession Indicator Index
James Hamilton updates his recession indicator index following the advance Q1 GDP release:
Recent sluggish growth rates bring our recession indicator index for the fourth quarter of 2007 up to 26.9%. That’s its highest value since the 2001 recession, but still well short of the 65% reading that we require in order to make a declaration that the U.S. economy had entered a recession as of 2007:Q4.
The numbers are reminding us that if, for example, the tax rebates were to keep GDP growth positive in the second quarter, we would end up characterizing the most recent experience as a period of slow growth rather than a typical economic contraction.
Fed funds futures now imply a 78% chance the FOMC will leave the Fed funds rate unchanged at its June 25 meeting.
posted on 01 May 2008 by skirchner in Economics, Financial Markets
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The US Recession that Isn’t
US Q1 GDP is given a 69% chance of being positive, according to last trade prices on prediction market Intrade (contract expiry is based on the final GDP release, not today’s advance release). Intrade pricing suggests a better than even chance that US GDP growth will be positive for every quarter in 2008. The chance of a recession in 2008 is put at 44.9%, with recession defined as two consecutive quarters of negative GDP growth for the purposes of contract expiry. The absence of recession on this definition would not necessarily preclude a recession being declared based on the NBER Business Cycle Dating Committee’s methodology.
posted on 30 April 2008 by skirchner in Economics, Financial Markets
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Interest Rates & Housing Affordability: Mike Rann’s Blame Shifting
SA Premier Mike Rann writes to RBA Governor Stevens asking him not to raise interest rates in order to ‘maintain housing affordability.’ As RBA Deputy Governor Ric Battellino noted in his recent presentation to the Senate Select Committee on Housing Affordability, mortgage interest rates in Australia are no higher now than in the mid-1990s, when housing affordability was at record highs. Instead, Battellino suggests another culprit in record low housing affordability:
the rise in house prices has been much faster than that in construction costs, so the implication is that most of the increase in house prices has been due to increases in the price of land.
That would be the responsibility of state governments.
If APM are to be believed, higher interest rates are improving housing affordability as we speak.
posted on 30 April 2008 by skirchner in Economics, Financial Markets, Politics
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Once Were Inflation Warriors
Terry McCrann on former inflation hawks Hewson and Jonson:
OK, you drop the 2-3 target and replace it with . . . what exactly?
Hewson’s 3-4 per cent? Maybe 4-6 per cent? Perhaps a return to a 1970s: hey babe, whatever feels good? Or a vague, contradictory and confusing ‘check list’?
Whatever, the clear implication is that we should accept a “little more inflation”.
Apart from the fact that the RBA is already explicitly doing that - something most of the critics either don’t understand, or wilfully ignore.
posted on 29 April 2008 by skirchner in Economics, Financial Markets
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Steyn versus Caplan on EU Succession
Mark Steyn accepts Bryan Caplan’s EU succession wager:
If any current EU member with a population over 10 million people in 2007 officially withdraws from the EU before January 1, 2020, I will pay you $100. Otherwise, you owe me $100.
Unfortunately, Caplan has closed his book after three people took him up on the bet. Perhaps Intrade can be persuaded to make a contract out of it?
Incidentally, while Intrade’s US 2008 recession contract is trading at just over 50%, the contracts for the quarterly GDP outcomes are suggesting a better than 50% chance that growth will be positive for every quarter this year, with the exception of Q2. Intrade’s definition of recession is two consecutive quarters of negative GDP growth.
posted on 28 April 2008 by skirchner in Economics, Financial Markets
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Failing on Inflation? Then Shift the Goal Posts
With inflation in Australia running well above the 2-3% medium-term target range, the usual and even some not so usual suspects are starting to argue against an anti-inflationary monetary policy. As Alan Wood notes, this argument transcends the usual partisan alignments:
On an unlikely unity ticket, failed prime ministerial aspirant John Hewson and the ACTU’s Sharan Burrow are calling for the RBA’s inflation target band to be widened - with a new ceiling of, say, 4 or 5 per cent…
A second siren song, sung this week by Opposition Treasury spokesman Malcolm Turnbull, is that “while there are inflationary pressures evident in our economy, many of them are beyond our control, such as higher oil and commodity prices”. The implication is that Australian monetary policy can do little about this.
In this context, it is worth pointing out that the RBA’s inflation target is already overly generous by international standards. The ECB, BoE, BoC and RBNZ all have inflation targets with ceilings or mid-points of 2%. The Fed has no formal target, but Federal Reserve officials have long stated a preference for inflation not to exceed 2%. The 2.5% medium-term average that the RBA would deem a policy success would constitute a policy failure by the standards of comparable countries.
The RBA’s 2-3% medium-term inflation target means that Australia’s policymakers have already institutionalised a higher rate of inflation than would be considered acceptable in comparable countries. While short-run inflation outcomes are subject to external shocks, medium-term inflation outcomes are a matter of policy choice.
posted on 26 April 2008 by skirchner in Economics, Financial Markets
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 25 April 2008 by skirchner in Economics, Financial Markets
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US Monetary Policy & the Financial Crisis of 2007-8
A useful primer on the financial crisis and the US monetary policy response, from Stephen Cecchetti and the Centre for Economic Policy Research. As Cecchetti notes:
By lending both cash and securities, based on collateral of questionable value, the Fed has tried to bring some order back to the market. And the amounts are massive. By the end of March 2008, the Fed had committed more than half of their nearly $1 trillion balance sheet to these new programs.
posted on 24 April 2008 by skirchner in Economics, Financial Markets
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Australia 2020 or 1930
Henry Ergas finds little new in the 2020 summit:
This reliance on government, which sets the tone for the summit outcomes, is hardly “new thinking”. Rather, it brings eerily to mind W. K. Hancock’s great work Australia, published more than 70 years ago, where he noted the tendency among Australians to “look upon the state as a vast public utility, whose duty it is to provide the greatest happiness to the greatest number”. Though “generally matter-of-fact people who distrust fine phrases and understand hard realities”, Australians are, he concluded, “in politics, incurable romantics” who, out of intellectual laziness and profligacy born of the country’s wealth, “constantly confuse ends and means (and are) reluctant to refuse favours, to count the cost, to discipline the policies which they have launched”.
History shows all too clearly where that path leads: not to the glorious future the summiteers have in mind, but to waste and inefficiency, disappointed hopes and dashed expectations. If that is the best we can come up with, the road ahead will be painful indeed.
posted on 22 April 2008 by skirchner in Economics, Politics
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Ideas So Big, they Fit on Post-It Notes
Big ideas from the 2020 Summit:
Other “big ideas” on tax, captured on Post-it notes included:
■ Reduce the number of taxes;
■ Eliminate payroll tax and stamp duty.
Like no one ever thought of that before! There has never been a shortage of ideas in relation to tax reform – just a shortage of governments willing to implement them.
At least Andrew Norton dissented from the final standing ovation.
posted on 21 April 2008 by skirchner in Economics, Politics
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 20 April 2008 by skirchner in Economics, Financial Markets
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Don’t Blame the Fed
Why Arnold Kling is not an Austrian:
over the past year the shocks to financial markets in the United States have sent signals to entrepreneurs and workers to leave the housing construction industry and instead to get into, say, export industries or import-competing industries. This is easier said than done, so in the meantime unemployment rises and output falls short of potential.
I believe that shocks to the financial system often are market-generated. In contrast, an Austrian would insist that the Fed is responsible for all bad things, such as the subprime mortgage market boom and bust.
Attributing every financial distortion to Fed behavior can be almost tautological if one is not careful. Here, the Austrian bias against empiricism gives me trouble. I would like the hypothesis that all economy-wide shocks are caused by the Fed to be falsifiable.
To the extent that Austrians make predictions that sound falsifiable, they tend to be like Paul Krugman (who is not an Austrian), repeating a mantra “bad times are coming, bad times are coming” every year. Then, when bad times come they can say, “See, I told you so.” It would be more interesting if every once in a while they predicted good times.
posted on 18 April 2008 by skirchner in Economics, Financial Markets
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More Monetary Policy Central Planning from the AEI
The AEI’s John Makin wants the Fed to print money and centrally plan asset prices:
The monetary easing I’m recommending can occur by having the Fed print money to purchase mortgages directly, or purchase Treasury securities directly…
The postbubble period has yielded some very unattractive policy alternatives. They clearly underscore the rationale for having the Fed target asset prices – in a world where asset markets affect the real economy more than the real economy affects asset markets.
Makin’s argument is that this is preferable to a nationalisation of the mortgage industry. In fact, a temporary nationalisation of the mortgage market to facilitate an orderly work out would be relatively harmless in comparison. In any event, there is no guarantee that one policy option would prevent the other.
As we have noted previously, John Makin and Desmond Lachman have consistently positioned the AEI as one of the most interventionist think-tanks in Washington on macro policy issues. By way of contrast, the Peterson Institute’s Adam Posen has argued cogently against the dangers of asset price targeting on the part of central banks. As Posen notes, if we live in ‘a world where asset markets affect the real economy more than the real economy affects asset markets,’ then only by engineering massive booms and busts in the real economy could central banks hope to manage asset prices.
posted on 14 April 2008 by skirchner in Economics, Financial Markets
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Business Spectator Column
This week’s Business Spectator column. If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list. Email info at institutional-economics dot com.
posted on 12 April 2008 by skirchner in Economics, Financial Markets
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Glenn vs Glenn
Alan Wood defends one Glenn against tabloid populism, while rejecting the claims of another Glenn who should know better:
I cannot recall a previous occasion where there has been such a scurrilous personal attack on the governor of the bank as the one on Glenn Stevens in Sydney’s The Daily Telegraph on Saturday, when he was labelled the most useless man in Australia for simply stating the facts about rising bank interest rates. This economically illiterate piece of populism is offensive but, fortunately, irrelevant in the broader debate on monetary policy…
However, what is disturbing is Glenn Milne’s report in his column on this page on Monday that Stevens “in the view of Canberra’s economic and governance elite is at a tipping point in personal, presentational and policy terms”. Milne also said there was a view at the most senior levels of the Rudd Government that Stevens needed to urgently improve his presentation, not least because he had spectacularly contradicted Treasurer Wayne Swan’s narrative that independent rate rises by Australia’s banks were not always justified….
According to Milne, Stevens has few friends in Canberra. If the view that the Rudd Government has lost confidence in the central bank governor became widespread, it could have dangerously destabilising effects on already unstable financial markets. Is it true? Having spoken to a few of Canberra’s “economic and governance elite”, I haven’t detected any loss of confidence in Stevens, with one government source describing his Friday remarks as spot-on.
Terry McCrann adds:
So the chairman of a group which had led one of those boom-time private equity - meaning, loaded with debt - buyouts of the Myer stores doesn’t like rising rates which cut consumer discretionary spending.
Now that’s a surprise. And an obvious lesson. We must immediately hand interest rate decisions to Bill Wavish.
McCrann is being ironic, but the fact is that we do allow retailers to sit on the RBA Board.
posted on 09 April 2008 by skirchner in Economics, Financial Markets, Politics
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Greenspan Defends His Legacy
Former Fed Chair Greenspan defends his legacy in an interview with the WSJ:
Mr. Greenspan now admits he was wrong about the improbability of a housing bubble. Yet he has long maintained that bubbles are an unavoidable feature of a dynamic economy. He pulls out a 1999 speech and shows, underlined in green marker, passages in which he warned of recurring but unpredictable patterns of overconfidence followed by investor panic. He does not share some foreign central bankers’ belief that their job is to defend against excessive asset-price inflation: No sensible policy, he maintains, could have prevented the housing bubble.
“I am reasonably certain that I am right here,” Mr. Greenspan says. If proved wrong, he says, “I will change. I do not have a vested interest in holding wrong ideas."…
Unable to find out how many homes are bought with subprime mortgages, Mr. Greenspan spent several months designing his own data system. Some of what he has learned is going into a new chapter for the paperback edition of his book, to be released Aug. 26. It will explain events after last June, when he finished writing the original.
The biggest question mark over Mr. Greenspan’s record is his decision to slash interest rates to 1% in 2003 and wait to raise them until 2004, and then only slowly.…
To prevent deflation, the Fed spurred growth by keeping interest rates low. At the time, he notes, the only dissenting votes on the Fed policy committee were those who wanted to set rates even lower. The Fed, he said, initially raised rates gradually to give businesses and investors time to prepare. In 2004 and 2005, it raised rates faster than private economists expected…
In Mr. Greenspan’s view, if the Fed’s policies were to blame, the housing bubble would have been mostly limited to the U.S. Yet, he argued, many other countries had housing bubbles, too. A better culprit, he suggested, was the glut of savings globally.
posted on 08 April 2008 by skirchner in Economics, Financial Markets
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Nelson, Swan and RBA Independence
Treasurer Wayne Swan, responding to opposition leader Brendan Nelson’s view that the RBA has gone too far in raising interest rates, says that:
The fact that Dr Nelson and the Liberals can’t decide whether they still support the independence of the Reserve Bank or not shows just how badly the Liberals have lost their way on the economy.
This is a common misunderstanding of what it means for the RBA to be independent of government. At its most basic, RBA independence means that it is free to set interest rates without the approval of the Treasurer. The RBA enjoys what is often called ‘operational independence.’
This is no sense precludes the government or opposition from taking a different view on monetary policy to the RBA or being publicly critical of central bank policy actions. The RBA has been made progressively more independent of government precisely in order to facilitate differences of opinion with government. Divided authority in relation to monetary and fiscal policy is a valuable institutional protection against macroeconomic policy mistakes. Under the Reserve Bank Amendment | 
