Nouriel Roubini versus the Dow
An illustrated history of Nouriel’s money-losing calls of 2009.
posted on 11 November 2009 by skirchner in Economics, Financial Markets
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Tens of Billions Lost
RBA Board member Warwick McKibbin, on the resource cost of fiscal stimulus:
RESERVE Bank director Warwick McKibbin has publicly questioned whether the Rudd government dumped him from the Prime Minister’s science council as payback for saying its fiscal stimulus package was “too big”.
Speaking yesterday after Wayne Swan said the RBA was “entirely comfortable with our fiscal policy”, Professor McKibbin said he had no doubt history would show that the Rudd government had overdone the stimulus.
Professor McKibbin also revealed that part of the motivation behind establishing a new council of eminent economists to debate policy issues was to encourage academics to speak out.
“I think when people look through the entrails of this, they will find billions, if not tens of billions, that was just lost,” he told The Australian.
A few weeks after he suggested that the second part of the stimulus package was too large while giving evidence at a Senate inquiry in May, he was dumped from a government advisory role on the Prime Minister’s Science and Innovation Council, Professor McKibbin said.
posted on 09 November 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, Politics
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‘I Have Been Corrupted, A Little’: How Spin-Resistant Are Economics Bloggers?
The US Treasury has been running high level briefing sessions for economic bloggers. Officialdom has obviously recognised that bloggers are an influential voice and need to be managed like old media. Fortunately, economics bloggers are proving a little more spin-resistant than Treasury perhaps expected. Here is what Naked Capitalism thought about the briefing:
It wasn’t obvious what the objective of the meeting was (aside the obvious idea that if they were nice to us we might reciprocate. Unfortunately, some of us are not housebroken).
And Steve Waldman:
The second thing I’d like to discuss is corruption. Not, I hasten to add, the corruption of senior Treasury officials, but my own. As a slime mold with a cable modem, it was very flattering to be invited to a meeting at the US Treasury. A tour guide came through with two visitors before the meeting began, and chattily announced that the table I was sitting at had belonged to FDR. It very clearly was not the purpose of the meeting for policymakers to pick our brains. The e-mail invitation we received came from the Treasury’s department of Public Affairs. Treasury’s goal in meeting with us was to inform the public discussion of their past and continuing policies. (Note that I use the word “inform” in the sense outlined in a previous post. It is not about true or false, but about shaping behavior.)
Nevertheless, vanity outshines reason, and I could not help but hope that someone in the bowels of power had read my effluent and decided I should be part of the brain trust. The mere invitation made me more favorably disposed to policymakers. Further, sitting across a table transforms a television talking head into a human being, and cordial conversation with a human being creates a relationship. Most corrupt acts don’t take the form of clearly immoral choices. People fight those. Corruption thrives where there is a tension between institutional and interpersonal ethics. There is “the right thing” in abstract, but there are also very human impulses towards empathy, kindness, and reciprocity that result from relationships with flesh and blood people. That, aside from “cognitive capture”, is why we should be wary of senior Treasury officials spending too much time with Jamie Dimon. It is also why bloggers might think twice about sharing a conference table with masters of the universe, public or private. Although the format of our meeting did not lend itself to forging deep relationships, I was flattered and grateful for the meeting and left with more sympathy for the people I spoke to than I came in with. In other words, I have been corrupted, a little.
In Australia, it is worth noting that most of the running on the issue of RBA media backgrounding has been from new media like Business Spectator and bloggers, although old media have since picked-up the story too. Spin control becomes a lot more difficult when dealing with a proliferation of unregulated media with no stake in the status quo.
posted on 06 November 2009 by skirchner in Economics, Financial Markets, Politics
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The Efficient Market Fantasy of Justin Fox
Eugene Fama reviews The Myth of the Rational Market, by Justin Fox:
The book is fun reading, but its main premise is fantasy. Most investing is done by active managers who don’t believe markets are efficient. For example, despite my taunts of the last 45 years about the poor performance of active managers, about 80% of mutual fund wealth is actively managed. Hedge funds, private equity, and other alternative asset classes, which have attracted big fund inflows in recent years, are built on the proposition that markets are inefficient. The recent problems of commercial and investment banks trace mostly to their trading desks and their proprietary portfolios, and these are always built on the assumption that markets are inefficient. Indeed, if banks and investment banks took market efficiency more seriously, they might have avoided lots of their recent problems. Finally, MBA students who aspire to high paying positions in the financial industry have a tough time finding a job if they accept the EMH.
I continue to believe the EMH is a solid view of the world for almost all practical purposes. But it’s pretty clear I’m in the minority. If the EMH took over the investment world, I missed it.
The Fox book is an example of a general phenomenon. Finance, financial markets, and financial institutions are in disrepute. The popular story is that together, they caused the current recession. I think one can take an entirely different position: financial markets and financial institutions were casualties rather than the cause of the recession.
posted on 05 November 2009 by skirchner in Economics, Financial Markets
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Steve Keen’s Accidental Demonstration of the Efficient Market Hypothesis
Following the release of the ABS house price data for the September quarter, Steve Keen concedes defeat in his bet with Rory Robertson and will be hiking from Canberra to the top of Australia’s highest mountain wearing a teeshirt that reads ‘I was hopelessly wrong on house prices, ask me how.’ Keen’s answer is to blame the gub’nent:
“I didn’t know the government was going to be stupid enough to bring in the first home buyer’s boost”.
While I would agree that the increased first home-owners grant has inflated house prices, transferring wealth from taxpayers to incumbent property owners, it would be an exaggeration to say that this prevented a decline in house prices of the magnitude Keen has been predicting. Moreover, any forecast needs to discount the likely actions of policymakers.
Steve Keen has inadvertently supplied yet another observation in favour of the efficient market hypothesis, much like Robert Shiller’s suggestion in 1996 that investors should stay out of the stock market for the following decade. The EMH maintains only that we cannot predict future innovations in asset prices. It is ironic that both Keen and Shiller have demonstrated the truth of this proposition in the course of trying to refute it.
Perhaps the teeshirt should read, ‘The EMH was right on asset prices, just don’t ask me how’.
posted on 03 November 2009 by skirchner in Economics, Financial Markets, House Prices
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The RBA and the Media Revisited
I featured in a Lateline Business story last night on Reserve Bank media backgrounding in relation to monetary policy. Lateline Business supervising producer Richard Lindell deserves considerable credit for pursuing this story in the face of both official and unofficial stonewalling. Credit is also due to Alan Kohler, Adam Carr and Christopher Joye, who have all spoken out on this issue. Some of the people who originally agreed to appear on camera for the story were prevented from doing so by their employers. As I said to Richard Lindell, ‘now you know why market economists don’t criticise fiscal stimulus.’
A 2001 AFR Magazine profile of then RBA Governor Ian Macfarlane by Peter Hartcher quoted a former RBA official as saying:
The Bank uses newspapers to manage expectations. It’s a game the Bank manages very well. Senior people talk to a small handful of the economics writers from the major papers on a strictly non-attributable basis.
The quote was re-produced in Stephen Bell’s 2004 book on the Reserve Bank, Australia’s Money Mandarins (see my review). Journalists and academics should be the standard-bearers for due process, procedural fairness and public accountability. Yet many commentators view the RBA’s manipulation of the media as simply a clever use of power.
The practice is a legacy of a less transparent era at the Reserve Bank. With so many open channels of communication now available to the Bank, there is no longer any excuse for it to continue.
There is more on Reserve Bank governance here.
posted on 03 November 2009 by skirchner in Economics, Financial Markets, Monetary Policy
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Tax Competition and the Future Fund
Australia’s sovereign wealth fund, the Future Fund, does not pay tax, which would be pointless, but it is not too keen on paying foreign taxes either. The Fund’s 2008-09 Annual Report shows five Cayman Islands subsidiaries. As the report notes ‘the Fund seeks to maximise after tax returns and, where it is legitimate to use a structure which protects the claim to sovereign immunity, this path has been taken.’ The Australian government has been an enthusiastic participant in international efforts to crack-down on so-called ‘harmful’ tax competition, but is not averse to having its own proprietary trading operation take advantage of these opportunities. To be clear, this is meant as a criticism of the government’s participation in such efforts and not the Future Fund.
The Fund saw a real rate of return of -5.7% (ex-Telstra), which is pretty poor compensation for the tax cuts forgone as a result of the Fund’s creation. The Fund remains 41.1% invested in cash (ex-Telstra), down from 62.1% at the end of the previous financial year. The government could have achieved a better return with less risk and at lower cost simply leaving the funds on deposit with the Reserve Bank.
posted on 30 October 2009 by skirchner in Economics, Financial Markets, Fiscal Policy
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Why the Financial Crisis Proves the Efficient Market Hypothesis
Jeremy Siegel on why the financial crisis proves rather than disproves the efficient market hypothesis:
is the Efficient Market Hypothesis (EMH) really responsible for the current crisis? The answer is no. The EMH, originally put forth by Eugene Fama of the University of Chicago in the 1960s, states that the prices of securities reflect all known information that impacts their value. The hypothesis does not claim that the market price is always right. On the contrary, it implies that the prices in the market are mostly wrong, but at any given moment it is not at all easy to say whether they are too high or too low. The fact that the best and brightest on Wall Street made so many mistakes shows how hard it is to beat the market.
posted on 28 October 2009 by skirchner in Economics, Financial Markets
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Never Mind the Prices, Check the Volumes
As Australia records the biggest annual percentage decline in Australian dollar export prices since comparable data began in 1974, Stephen Green predicts ‘enormous’ Chinese demand for Australian iron ore next year.
I discuss the relationship between Australian export prices and volumes in this article.
posted on 23 October 2009 by skirchner in Economics, Financial Markets
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Absolute Greed
The rhetoric of class hatred from Prime Minister Kevin Rudd:
If you want a definition of social injustice this was it in brutal colour - millions of innocent workers losing their jobs because a few thousand financial executives around the world surrendered any pretence of social responsibility in their blind pursuit of absolute greed.
The facts from the AEI’s Peter Wallison:
Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.
The role of the FHA is particularly difficult to fit into the narrative that the left has been selling. While it might be argued that Fannie and Freddie and insured banks were profit-seekers because they were shareholder-owned, what can explain the fact that the FHA—a government agency—was guaranteeing the same bad mortgages that the unregulated mortgage brokers were supposedly creating through predatory lending?
The answer, of course, is that it was government policy for these poor quality loans to be made.
posted on 16 October 2009 by skirchner in Economics, Financial Markets
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Fiscal Stimulus and Monetary Policy
RBA Governor Glenn Stevens, making the case for tightening monetary policy yesterday:
If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework. Experience here and elsewhere counsels against that approach.
The same argument can be made in relation to fiscal policy, but not because it will make the RBA’s job any easier. The main argument for winding back the fiscal stimulus at a faster pace is to avoid the long-run costs from crowding-out and resource misallocation rather to contribute to short-run demand management. There is no necessary contradiction in arguing that fiscal stimulus has been ineffective and that it should now be wound back, as some have suggested.
Standard New Keynesian models would predict that fiscal stimulus in a small open economy will induce capital inflows, put upward pressure on the exchange rate and crowd-out net exports, rendering discretionary fiscal policy wholly ineffective in stimulating aggregate demand. Treasury have argued that this does not apply in the context of a concerted global fiscal expansion. The problem with the Treasury’s argument is that Australia’s fiscal stimulus is one of the world’s largest as a share of GDP and we now have the exchange rate appreciation to show for it.
Despite the downturn, underlying inflation as measured by the RBA’s statistical core series remains above the upper-bound of the RBA’s 2-3% medium-term target range. The Bank’s forecast that underlying inflation will return to the middle of the target range by June 2010 is based on economic forecasts that look overly pessimistic. Little wonder that the inter-bank futures market is pricing an aggressive tightening cycle, with a further 50 basis points of tightening more than fully priced before the end of the year.
posted on 16 October 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy
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Policymakers Sold Australia Short
I have an op-ed in today’s AFR arguing that the budget economic forecasts are the wrong benchmark to use in evaluating the effectiveness of fiscal stimulus. Full text below the fold (may differ slightly from edited AFR text).
Alan Mitchell’s column on the facing page is worth reading for its discussion of the relationship between the Rudd government and the Treasury Secretary. Mitchell argues that ambiguity about the nature of this relationship is undermining accountability for government policy.
continue reading
posted on 14 October 2009 by skirchner in Economics, Financial Markets, Fiscal Policy
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Does the RBA Still Feed the Media Chooks?
Speculation about RBA media backgrounding in relation to future interest rate decisions is back again. Even if no such backgrounding has taken place, the perception that this still occurs is very damaging, not only for the integrity of financial markets, but also for the supposed beneficiaries of the backgrounding. It is well understood that politicians engage in selective leaks in order to control journalists. There is nothing more damaging to the credibility of a press gallery journalist than to be seen as the mouthpiece for a politician. The relationship between the RBA and journalists should not be viewed any differently.
The RBA could put a stop to the speculation by denying that the practice takes place or at least foreswearing its use in future. Not only would this benefit the integrity of financial markets, it would also give us more confidence that the rather generous treatment the RBA receives from many in the media was actually deserved.
posted on 07 October 2009 by skirchner in Economics, Financial Markets, Media, Monetary Policy
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Single-Issue Forecasting Tragics
Don Harding has a great piece on economic forecasting in today’s Australian:
In the future there will continue to be financial crises and recessions, all of which economists, bankers, finance gurus, bureaucrats, politicians and the public will fail to predict.
To be sure there will be some who claim predictive success… Most will be single-issue tragics who predict the next calamity in the same way that I, an Essendon tragic, successfully predicted their win over St Kilda in round 20 by predicting that Essendon would win every match. The only information in such predictions is about the tragics who make them.
Harding also notes the appalling state of the debate over fiscal stimulus in Australia:
Public policy standards are so low in Australia that my expectation is that we won’t get well-researched, evidence-based answers to these questions from either the bureaucrats or the politicians. Instead we will get spin, vitriol and blame shifting.
Here’s a suggestion for the FOI desk at The Australian: request all the materials that form the basis for the Treasury’s estimates of the impact of fiscal stimulus on economic growth and employment.
posted on 01 October 2009 by skirchner in Economics, Financial Markets, Fiscal Policy
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Oil is Found in the Minds of Men
And ‘peak oil’ is founded on ignorance, argues Peter Foster:
Peak Oil theory represents a combination of economic ignorance and moral rejection of markets as greed-driven and short-sighted. These all-too common attitudes usually go with a profound faith in effective government policy, despite the monumental weight of evidence to the contrary.
posted on 19 September 2009 by skirchner in Commodity Prices, Economics, Financial Markets, Oil
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