What Would Friedman Do? Support Ben Bernanke

David Beckworth and William Ruger argue that Friedman would support Ben Bernanke. I often point to this op-ed, in which Friedman argued in favour of quantitative easing for Japan in the late 1990s in circumstances not unlike those in the US today. While I doubt Friedman would see quantitative easing as a panacea (it certainly wasn’t for Japan from 2001-2006), he would surely argue that monetary policy should be as accommodating as possible.

In the classical liberal circles in which I travel, mindless criticism of quantitative easing is all too common, but this only highlights the lack of knowledge of the classical liberal tradition in monetary economics among many people who should know better.

posted on 22 October 2010 by skirchner in Economics, Monetary Policy

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Part-Time Work at the RBA Board

The so-called part-time members of the RBA Board were even more part-time than usual in October:

The minutes of the October board meeting, released yesterday, reveal that only three of the six independent board members attended the meeting, with the key voices on the health of retailing, manufacturing and the global economy absent. It was the lowest board meeting attendance in the four years that the Reserve Bank has been releasing its minutes.

The chairman of Bluescope Steel and Brambles, Graham Kraehe, former Woolworths chief executive Roger Corbett, who is also a director of US retailer Walmart and chairman of Fairfax, and the board’s resident academic economist, Warwick McKibbin, all had other commitments.

It only takes five of the nine members to form a quorum.

posted on 20 October 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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‘American housing finance is the envy of the world’

Not anymore.

posted on 20 October 2010 by skirchner in Economics

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Matt Ridley on Econtalk

Russ Roberts interviews Matt Ridley about his book The Rational Optimist. Last time I looked, the book was still available for free on Amazon’s (US) Kindle. Here is Ridley on what might be called ‘peak wheat’:

In 1898, the centenary of Malthus’s pessimistic prognostication, the eminent British chemist Sir William Crookes gave a similar jeremiad in his presidential address to the British Association entitled ‘The Wheat Problem’. He argued that, given the growing population and the lack of suitable new acres to plough in the Americas, ‘all civilisations stand in deadly peril of not having enough to eat,’ and unless nitrogen could be chemically ‘fixed’ from the air by some scientific process, ‘the great Caucasian race will cease to be foremost in the world, and will be squeezed out of existence by races to whom wheaten bread is not the staff of life.’ Within fifteen years his challenge had been met. Fritz Haber and Carl Bosch invented a way of making large quantities of inorganic nitrogen fertiliser from steam, methane and air…

So thanks to tractors, fertilisers and new varieties, by 1931, the year in which Crookes had chosen to place his potential future famine, the supply of wheat had so far exceeded the demand that the price of wheat had plummeted and wheat land was being turned over to pasture all over Europe.

posted on 19 October 2010 by skirchner in Economics

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Economists as Gurus

Among many great papers at the Mont Pelerin Society General Meeting in Sydney was Geoff Brennan’s contribution on The Economist as Guru, which looked at the supply and demand for gurus. There was some debate as to whether the willingness of some economists to misappropriate their intellectual authority mattered given a free market in ideas.

Perhaps the most outrageous case of a guru in financial markets is Nouriel Roubini, but this article shows that the market in ideas has not completely failed in exposing Roubini:

A closer inspection of Roubini’s record shows that while he was predicting doom and gloom for the US in 2004, his initial call had nothing to do with a runaway housing bubble.

Rather he argued that the Bush Administration was racking up massive deficits to foreign investors, namely the Chinese, and that the Chinese would scale back on their purchases of US debt, causing interest rates to spike and the dollar to decline in value, resulting in “financial trainwrecks for the US economy in a matter of a couple of years.”

Sounds good, but the problem with the theory is that it didn’t happen.

posted on 17 October 2010 by skirchner in Economics, Financial Markets

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Behavioural Economics at the Mont Pelerin Society

Blogging will be even lighter than usual next week, as I will be attending the Mont Pelerin Society General Meeting in Sydney. I will be the lead discussant for a paper by Doug Ginsburg and Joshua Wright, ‘Behavioural Economics, Law and Liberty’. The paper should be topical, with the Nobel prize for economics announced next week and behaviouralists currently leading the field of potential winners at iPredict. While Richard Thaler would be a deserving recipient, it would be unfortunate if Robert Shiller were a co-recipient (indeed, it would be a tacit admission that Shiller should not win in his own right). Oddly enough, I was on the same Sydney-New York flight as Shiller when I went to the MPS special meeting in February last year, but did not spot him until after we had landed. Shiller can thank Qantas for not putting me next to him for 22 hours (that would have been an interesting conversation).

posted on 08 October 2010 by skirchner in Classical Liberalism, Economics

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The Perception that Will Not Die

The RBA wrong-footed the market and commentariat with Tuesday’s steady rates decision, although not quite as comprehensively as a similar decision back in February. The February decision provided a rather convenient backdrop for RBA Governor Glenn Stevens’ appearance before the House Economics Committee later that month, where he was questioned about RBA media backgrounding and said that ‘people do not leak the outcome’.

Despite the wrong-footing of the commentariat, most notably Terry McCrann, this has still not laid to rest financial market perceptions that the RBA engages in media backgrounding of selected journalists. Chris Joye quotes Kieran Davies:

note that the surprise decision today potentially signals a change in communication strategy by the Reserve Bank. In the past, the Bank has been fond of guiding the market via indirect signalling via the media. That hasn’t been the case this month, but it is not clear whether the Bank has permanently closed this channel.

Governor Stevens’ denial before the House Economics Committee and the wrong-footing of the commentariat has yet to convince those in financial markets. Having played favourites with the media for so long, it will be hard for the Bank to finally put this perception to rest.

For the record, here is what a former RBA official had to say in the AFR Magazine in 2001:

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. I think it’s right to do this from the bank’s point of view, but not necessarily from a public policy view: accountability and a critical press are very important in this system.

posted on 06 October 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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Peter Reith’s Triumph of Hope Over Experience

Robert Carling and I recently argued that a parliamentary budget office was the wrong model for an improved fiscal responsibility framework in Australia. Former federal minister Peter Reith has an op-ed in today’s Australian arguing for a PBO, but his review of overseas experience does not inspire confidence:

Hopefully, Australia’s PBO will not have the rocky start that the Canadians have had. Only recently, while I was in Canada, former deputy minister of finance Scott Clark wrote that the PBO had been an experiment in transparency and accessibility “that was doomed from the start”. Clark told me it was ironic that the Conservatives established the PBO in 2008, then undermined it from the start. The big problems have been a lack of independence, the failure to properly resource the PBO and the failure of government departments to provide necessary information. Clark says the PBO should be appointed and dismissed by parliament, not by the prime minister. It should be adequately resourced and have access to the same information as the auditor-general.

Carling and I have argued for an independent statutory Fiscal Commission, with Commissioners appointed in consultation with the states in much the same manner as the ACCC Commissioners. This was a theme I pursued at the recent Conference of Economist panel on Monetary and Fiscal Policy Interactions organised by Jan Libich from La Trobe University. The papers from the panel will appear in a future issue of Economic Papers.

posted on 05 October 2010 by skirchner in Economics, Fiscal Policy

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The CPI Pulse that Goes Dead Two Months in Three

HSBC chief economist for Australia and New Zealand, Paul Bloxham, makes the case for a monthly CPI. I made related arguments in this op-ed in The Canberra Times in March.

posted on 04 October 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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We’re from the Nudge Unit…

...and we’re here to socially integrate you.

posted on 01 October 2010 by skirchner in Economics

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How to Name A Hedge Fund

...according to Nobel laureate Myron Scholes of Platinum Grove Asset Management:

One of my partners is Chinese, and he said we needed a name that had one metal in it and one wood.

posted on 30 September 2010 by skirchner in Economics, Financial Markets

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How to Start a Hedge Fund

Name your fund, then hire a law firm.

posted on 29 September 2010 by skirchner in Economics, Financial Markets

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You Know You’ve Got a Perception Problem…

When hedgies write satirical songs about RBA leaks:

Hong Kong specs buy it
London’s hedge funds will buy it
We could be a CTA
Run a model like the RBA
With the boys from the Darwin and the Swan and Murray
But there’s no danger
It’s a professional career
Though it could be arranged
With just a word in Mr. McCrann’s ear.
If you’re out of work or out of luck
We really couldn’t give a f*ck

posted on 28 September 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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