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I have an article in Online Opinion questioning the dominant narrative of the recent financial crisis and its role in conditioning regulatory responses to the crisis:
Perhaps the most pernicious myth about the crisis is that it was the failure of the US government to rescue Lehman Brothers that precipitated these events. Indeed, it has become common practice to date the crisis from 15 September 2008 when Lehman Brothers was allowed to fail. Yet trouble had been brewing in credit markets for more than 12 months before.
The failure of Lehman Brothers was a trivial event compared to a much bigger but largely ignored financial failure that took place one week before when the two US mortgage giants Freddie Mac and Fannie Mae were put into conservatorship by the US government. These Congressionally-mandated, government-sponsored enterprises (GSEs) either owned or guaranteed two-thirds of the bad mortgages in the US financial system. They were far more highly leveraged than the private US or European investment banks. They will also ultimately cost US taxpayers more than all the other bail-outs of private financial institutions combined…
The failure of Lehman Brothers was merely a symptom rather than a cause of the crisis and the unwillingness of the US authorities to rescue Lehman was perhaps the one good US policy decision made through this episode. Federal Reserve Chairman Ben Bernanke conceded as much recently, when he tried to defend the decision as a necessary one, but then undercut his own argument by maintaining that the decision also had disastrous consequences. What Bernanke should have argued was that the winding up of Lehman Brothers was fairly orderly as far as these things go and not a source of major systemic problems in the financial system.
Other contributions in this series can be found here.
posted on 16 March 2011 by skirchner in Economics, Financial Markets
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Frederic Mishkin is in Australia and will be presenting at the Reserve Bank on Thursday. He was interviewed by Alan Kohler for Inside Business:
ALAN KOHLER: So therefore do you join those who call Ben Bernanke a money printer?
PROFESSOR RICK MISHKIN: No, so… I don’t at all. The purpose here is not to print money and to just not worry about future inflationary consequences.
There is, however, an issue that when you have a balance sheet which is this large - and particularly in long-term assets and even more so in housing assets - the Fed is now involved in the most politicised of all financial markets in the US. The Federal Reserve and also the government has been involved in very large transactions to help the economy and bail outs.
The government’s not going to lose a penny on everything but one - the Fannie and Freddie, a couple [sic] of hundred billion dollars. So again, this is an indication of how crazy some of our policies have been.
Economists didn’t get - we missed a lot of things in this crisis, we got a lot of things wrong. Much to trusting for example of the quality of prudential supervision, which by the way in your country was done much, much better than in many other places, so you know, I don’t know whether you’re just lucky or good but…
ALAN KOHLER: Good!
posted on 14 March 2011 by skirchner in Economics, Financial Markets, Monetary Policy
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Alan Greenspan, writing in International Finance, highlights the role of government activism in undermining economic recovery in the US:
What is most notable in sifting through the variables that might conceivably account for the lacklustre rebound in GDP growth and the persistence of high unemployment is the unusually low level of corporate illiquid long-term fixed asset investment. As a share of corporate liquid cash flow, it is at its lowest level since 1940. This contrasts starkly with the robust recovery in the markets for liquid corporate securities. What, then, accounts for this exceptionally elevated level of illiquidity aversion? I break down the broad potential sources, and analyse them with standard regression techniques. I infer that a minimum of half and possibly as much as three-fourths of the effect can be explained by the shock of vastly greater uncertainties embedded in the competitive, regulatory and financial environments faced by businesses since the collapse of Lehman Brothers, deriving from the surge in government activism.
posted on 06 March 2011 by skirchner in Economics, Financial Markets
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John Taylor has accused Ben Bernanke of mis-representing him in testimony before Congress over Taylor’s preferred version of his eponymous rule. This is a rather bizarre dispute, because naming rights aside, there can never be a definitive formulation of the Taylor rule. The Taylor rule depends on assumptions about unobservable variables such as the equilibrium real interest rate and potential output. There are dozens of methodologies for recovering these latent variables, all of which have strengths and weakness, but none of which yield definitive answers, especially not in the real time setting in which monetary policy is actually made. Alan Greenspan was always very careful to highlight the implications of uncertainty in relation to these variables, whereas Taylor seems untroubled by this issue in his recent commentary on Fed policy.
The Taylor rule can also be given a backward or forward-looking specification. Monetary policy is supposed to be forward-looking, so forecasts for inflation and the output gap are more relevant to judging the appropriateness of policy than contemporaneous or lagged values. Again, these forecasts are necessarily subject to considerable uncertainty. Insert the Federal Reserve Board’s staff forecast for inflation and the output gap circa 2003 into a reasonably parameterised Taylor rule and you will get different implied policy settings than if you use historical data, not least because the historical values will have been influenced by the stance of policy, which in turn was influenced by the forecast.
Taylor’s 1993 rule was an outstanding contribution and most economists have embraced it, but they have also significantly improved upon it. John Taylor’s 1993 specification may be his own, but it is far from definitive and may not be the optimal or efficient rule. Taylor should concede this much at least.
posted on 03 March 2011 by skirchner in Economics, Monetary Policy
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WikiLeaks confirms what many have long suspected. The Australian government runs a secretly discriminatory policy on foreign direct investment by China:
The Foreign Investment Review Board told US diplomats that new investment guidelines signalled “a stricter policy aimed squarely at China’s growing influence in Australia’s resources sector”.
The anti-China rationale was set out in confidential discussions with US embassy officers in late September 2009 by the head of the Treasury Foreign Investment Division, Patrick Colmer, who is also an executive member of the Foreign Investment Review Board.
The embassy report on MrColmer’s remarks, titled “New Foreign Investment guidelines target China” and classified “sensitive”, is among US embassy cables leaked to WikiLeaks and provided to the Herald.
Based on Mr Colmer’s briefing, US diplomats reported that the Australian government privately wished to “pose new disincentives for larger-scale Chinese investments”.
The documents also confirm that the recent liberalisation of FIRB review thresholds was designed to alleviate the administrative burden on an over-worked FIRB that has increasingly sought to micro-manage high-profile FDI transactions.
My own whistle blowing efforts in relation to Australian FDI policy can be found here, although I obtained the document legally through the Freedom of Information Act.
posted on 03 March 2011 by skirchner in Economics, Foreign Investment
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I have an op-ed in today’s Australian arguing against the campaign by the Australian Workers’ Union and the federal opposition to strengthen Australia’s anti-dumping regime:
The AWU has dressed up its anti-dumping campaign in the language of free trade and adherence to World Trade Organisation rules. But there is nothing in the WTO rules that prohibits dumping and WTO members are not required to maintain an anti-dumping system…
It is far more likely that Australian consumers and producers will end up paying more because of misplaced fears about foreign predation than due to the acquisition of international monopoly power by foreign producers. Anti-dumping measures bring about the very outcome they are designed to prevent.
The Productivity Commission has recommended the introduction of a public interest test, which would improve the operation of our anti-dumping system by allowing greater consideration of the economy-wide implications of dumping.
But a simpler reform that would have greater benefits for Australian consumers and the majority of producers would be for Australia to dump its anti-dumping system. This was one of the recommendations of the 1989 Garnaut Report. It shows just how little progress has been made in this area that we have still not acted on Garnaut’s recommendation two decades later.
posted on 02 March 2011 by skirchner in Economics, Free Trade & Protectionism
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In my CIS Policy Monograph Bubble Poppers, I was dismissive of the notion that Fed policy had anything to do with the US house price boom and bust of last decade. The Reinharts take this Fed irrelevance proposition much further in a new NBER Working Paper:
We take a close look at the responses of asset markets to changes in the short-term policy interest rate since the founding of the Fed in 1914. Changes in the federal funds rate have no systematic effect on either long-term interest rates or housing prices over nearly a century. Indeed, since the mid-1990s the policy rate had a negative relationship with long-term interest rates. This is consistent with a global view of capital markets where massive cross-border flows shape the availability of domestic credit and asset prices. The evidence casts doubts on arguments that a moderately different monetary policy path might have mattered.
I tried telling the same story to John Taylor once, without much success. Maybe the Reinharts will be more convincing.
posted on 02 March 2011 by skirchner in Economics, Financial Markets, House Prices, Monetary Policy
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The G20, solving the world’s problems one complicated but meaningless sentence at a time:
Negotiators from the world’s leading economies haggled all night over seemingly technical details regarding how to measure global economic imbalances. They eventually produced a 53-word sentence intended to appease all sides—and open to interpretation by all sides…
All 20 countries must agree on any technical detail for there to be a deal. If one country walks away, no deal.
The key agreement they came up with on Saturday—one sentence in the four-page “communiqué”—essentially says that exchange rates and fiscal and monetary policies will be taken into consideration when determining whether a country’s policies lead to imbalances.
To draft that sentence, officials from the U.S., Canada, France, Germany, China, Russia, Indonesia, Brazil and India were just some of the members who weighed in—at times with much different views—according to several people present. The sentence had one colon, one semi-colon, three commas, and the word “and” appeared six times…
“The way it’s written, the French can say it’s an indicator and the Chinese can say it’s not really,” said one G-20 official after the meetings.
posted on 20 February 2011 by skirchner in Economics, Financial Markets
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The FT’s Kevin Brown on the proposed ASX-SGX merger:
a handful of ultranationalist mavericks holds the balance of power in Australia’s divided parliament…
The tricky element in this strategy is finding a way to get the government and the opposition to move together, so that neither is able to outflank the other by suddenly adopting the nationalist agenda.
posted on 16 February 2011 by skirchner in Economics, Foreign Investment
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Bryan Caplan on GMU faculty:
None of us discovered economics in a mainstream econ class, found it fascinating, then decided to try to ascend the academic hierarchy. Instead, our inspiration came from libertarian books, libertarian friends, and libertarian intellectuals, plus our broader reading in philosophy, history, and the history of economic thought. Once we fell in love with ideas, we asked, “How can I make a career out of this?” We would have preferred to be instantly anointed as public intellectuals. But the best realistic path, we learned, was “Become a professor of economics.”
Throw in a couple of diversions via politics and financial markets and you have my career in a nutshell.
posted on 16 February 2011 by skirchner in Classical Liberalism, Economics
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Proto-seasteading:
The story itself is fascinating enough: it includes pirate radio, shotguns and .50-caliber machine guns, rampant copyright infringement, a Red Bull skateboarding special, perpetual motion machines, and the Montevideo Convention on the Rights and Duties of State. But its implications for the rule of law are even more remarkable.
posted on 15 February 2011 by skirchner in Classical Liberalism, Economics, Rule of Law
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The Business Council of Australia has included a report by Stephen Bartos making the case for an independent Commission of Budget Integrity in its pre-Budget submission to the government. Bartos references a similar proposal by Robert Carling and I on the subject, as well as earlier work by Nic Gruen, which drew on a 1996 proposal by Larry Ball when Larry was visiting the RBNZ.
The report does something we did not do, which is to cost the proposal. Bartos puts a 30-40 member commission with two executives and a board at $10m a year. To put this in perspective, it is less than the extra $15m the ABS wants to increase the frequency of the CPI from a quarterly to monthly release.
posted on 15 February 2011 by skirchner in Economics, Fiscal Policy
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Atlas Shrugged Part 1 (I’m guessing they weren’t brave enough to run with the tag line ‘Non-Contradiction’). I agree with what Tyler has to say. It needs a deco rendering. For a novel that has the cinematography and direction more or less written into it, there’s not much excuse.
posted on 13 February 2011 by skirchner in Rand
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An investment banker speaking to Bill Shorten gets a less than cogent response:
IT WAS mid January and Bill Shorten, the Assistant Treasurer, was in Hong Kong attending an Australian Chamber of Commerce function.
In an address to a relaxed gathering of ‘‘Australians in finance’‘, Shorten told the audience of the importance of financial services, and if anyone had fresh ideas they should approach him in the informal setting.
David Webb, a former director of the Hong Kong Stock Exchange, elected on a corporate governance ticket by institutional investors, took up the offer. A well-known activist and retired investment banker, he now devotes much of his time to dealing with corporate governance in Hong Kong.
When Webb’s turn came for a chat, the Englishman told the minister that Australia should consider scrapping the Foreign Investment Review Board as it was an impediment to attracting foreign capital. Other regulators could consider contentious investments, he said.
According to Webb, Shorten said the board was necessary, turning the topic to a looming decision on the takeover of the Australian Securities Exchange by its Singapore counterpart…
But what Shorten said next surprised Webb.
‘‘His attitude about this was … that foreign ownership or a perceived foreign takeover would result in Australian investors being screwed. He didn’t make very cogent arguments to me.’‘
posted on 12 February 2011 by skirchner in Economics, Financial Markets, Foreign Investment, Rule of Law
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An inflation hawk tackles virtual commodity price inflation. The virtual world would seem to be a good place to test the macroeconomic implications of alternative monetary regimes.
posted on 11 February 2011 by skirchner in Economics, Financial Markets, Monetary Policy
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