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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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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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John Garnaut continues to expose the chaos in the regulation of foreign direct investment in Australia:
a whole industry of lawyers, lobbyists and retired politicians is springing up to earn fees by promising China that they can divine the mysteries of Australia’s foreign investment laws. Many contacted by BusinessDay are critical of the review board and others are critical of the Australian media. But they are all fearful of speaking publicly, lest they offend the agency they are paid to deal with.
Garnaut quotes my former colleague Stephen Joske on the government’s failure to construct a coherent framework for dealing with China:
“There wasn’t strong public resistance to Chinese investment in Australia a few years ago,” he said.
“But indecision from the Government and negative signals created a vacuum in which concerns grew. As soon as FIRB started to define what the national interest is they bound their hands without really resolving the issue; now FIRB is being used to fan public opinion and concerns about state-owned enterprises.”..
He said he was “shocked” at Treasury’s failure to brief its boss, Swan, on the usual pros and cons of foreign investment…
Joske said the investment policy setting was getting worse because of a lack of leadership.
“There is no strategic framework with China,” he said. “I don’t know what caused it but it’s a fact. Because of this vacuum you get crap policy.”
And the result, he said, is that the review board ‘‘has been allowed to depart from the spirit of the open economy and to effectively dominate the entire economic relationship”…
“The thing that’s inexplicable is this is the overall approach to China: you’re setting foundations for Australia’s economic future,” he said. “The business lobbyists have dropped the ball, the bureaucracy is under-resourced, BHP is doing what it always does and the Opposition is making things worse.”
posted on 15 October 2009 by skirchner in Economics, Foreign Investment
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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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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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The Centre for Independent Studies has a Facebook page that can be used to follow CIS media, publications and events. The latest issue of Policy magazine is also available, including my review essay on behavioural economics.
posted on 07 October 2009 by skirchner in Centre for Independent Studies
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John Garnaut has a story in the SMH highlighting the arbitrary and capricious nature of Australia’s regulation of foreign direct investment and the damage it is doing to Australia’s international reputation as an investment destination. If Garnaut is to be believed, the FIRB is a bureaucracy turned feral, which would help explain the Patrick Colmer speech debacle. Extract over the fold, but read the whole thing.
continue reading
posted on 06 October 2009 by skirchner in Economics, Foreign Investment
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Matthew Stevens coins the phrase ‘the Colmer Doctrine’, but as his own analysis suggests, the real problem is the complete absence of anything that could be called a doctrine:
There are two quite different conclusion[s] to draw from Colmer’s contribution to last week’s Australian China Business Council conference. Either he is a very new kind of beast in FIRB, in that he has seized the opportunity offered by government uncertainty to help shape foreign investment policy.
Or, as is far more likely, the commentary he offered was vetted and approved by a government still unwilling to formally define its preferences on Chinese investment…
That we are 18 months into our national reflection on China’s investment intentions and we are still so unsure about the FIRB process says only that the government had failed to plainly explain its policy.
That failure would seem to reflect either policy uncertainty or a failure of will. Either way, it is time to sort it out.
posted on 02 October 2009 by skirchner in Economics, Foreign Investment
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Glenda Korporaal weighs in on the Pat Colmer speech:
A week later the FIRB says there is no transcript of the speech, and the Australia China Business Council, which is to be commended for organising a conference with a wide range of Australia-Chinese experts, has been deluged with requests for a copy from every lawyer advising on foreign investment.
As of yesterday afternoon none was available…
The fact that the speech is not yet available—and may not be made available—to people who would genuinely like guidance on foreign investment applications can only add to the potential for criticism that Australia’s foreign investment policy is less than clear…
That said, there is still a real hunger for more information and more clarity about both the official policy and the administration of that policy.
This is an issue that should be acknowledged and addressed at higher levels than the FIRB director, but making the speech generally available would be a start.
The Executive Director of the FIRB is the designated Australian National Contact Point (ANCP) under the OECD Guidelines for Multilateral Enterprises. According to the government, ‘the ANCP is committed to carrying out these responsibilities in accordance with the Guidelines requirement for NCPs to be visible, accessible, transparent, and accountable.’
All rhetoric, no substance.
posted on 02 October 2009 by skirchner in Economics, Foreign Investment
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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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I really shouldn’t complain about FIRB secrecy. Variations on ‘Patrick Colmer speech’ are now the number one search term delivering traffic to this site. Alan Jury’s Chanticleer column in the AFR yesterday (gated, so no link) deserves considerable credit for highlighting the issue of making pseudo-policy announcements via speeches that are not in the public domain. As Jury noted, it makes a complete mockery of the government’s posturing on transparency and accountability in international fora like the G20, not to mention the ‘Government 2.0 Taskforce’ (I would settle for some Government 1.0).
posted on 01 October 2009 by skirchner in Economics, Foreign Investment
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I have an op-ed in today’s Wall Street Journal on the confusion being created by the government’s discretionary approach to the regulation of foreign direct investment.
This morning I read in one of the US equity analyst reports I receive that ‘we hear out of Australia that its foreign investment regulator wants to impose 15% caps for global purchases of the country’s large companies.’ This is over-stating the situation, but is indicative of the perceptions now being created among offshore investors.
Australian mining magnate Clive Palmer is not taking Patrick Colmer’s advice to leave the lawyers and media out of it and quietly cut deals in Canberra. He is threatening to take an FDI case to the High Court. Palmer is also calling Australia’s regulatory regime for FDI racist. I think ‘xenophobic’ is a better characterisation (hence the title of my monograph on the subject). Colmer effectively conceded as much when he said that part of FIRB’s role was to maintain public support for foreign direct investment by managing an ‘orderly’ flow of FDI transactions.
posted on 30 September 2009 by skirchner in Economics, Foreign Investment
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A Steve Keen forecast that might actually come true:
2010 should be an interesting year for property. I will probably have to walk to Kosciouscko [sic] at its beginning…
posted on 30 September 2009 by skirchner in Economics, House Prices
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Recently, I have been drawing attention to the implications of Australia’s population growth, the strongest since the echo of the baby boom in the early 1970s. Paul Sheehan quotes me on the issue here.
In the latest Rismark Monthly (gated), I’m quoted on the fact that Australia is now building fewer dwelling units per addition to the resident population since the early 1980s, based on one measure of dwelling commencements. On another measure, we are producing fewer dwelling units per person than at any time since the late 1960s.
The RBA’s head of economic analysis, Tony Richards, follows Governor Glenn Stevens in highlighting the implications of this dire supply situation for housing affordability. The RBA is performing a valuable service in putting this issue on the agenda for public debate. This is perhaps one of the few public policy issues the RBA can safely touch, because it straddles all three levels of government and so is less likely to be seen as criticism of a particular government’s policies.
posted on 29 September 2009 by skirchner in Economics, House Prices
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If you need further evidence that the rule of law is largely non-existent with respect to foreign direct investment in Australia, you need look no further than a speech FIRB director Patrick Colmer gave to the Australia-China Business Council last week, as reported in The Australian:
Mr Colmer said many of the foreign investment decisions were matters of “policy” rather than black-letter law.
He said the government had to balance the need for an orderly flow of foreign investment into Australia with the need to ensure continued public support for foreign investment proposals.
“One of the problems we have also seen is where lawyers get involved and try to turn a policy argument into a legal debate,” Mr Colmer said. “It is not effective. The lawyers don’t like us telling them that, but we do try to steer people through the policy issues rather than the legal issues ... Don’t turn it into a legal stoush, and deal with us the way we like to deal with you - in confidence.”
The last thing FIRB wants is a review of decisions on common law grounds (other forms of administrative and judicial review being effectively precluded). As the ACCC would no doubt tell their FIRB colleagues, legal process and case law are the enemies of bureaucratic discretion.
Perhaps the most tragic aspect of Colmer’s speech is that it was actually welcomed by some commentators as a clarification of the regulatory regime for FDI. This interpretation would be somewhat less ludicrous if Colmer’s speech were actually a publicly available document, accessible by foreign investors. FIRB is evidently too busy micro-managing FDI on behalf of the Treasurer to put the speech on its web site. I have emailed FIRB requesting a copy, but have no expectation of receiving a reply.
posted on 28 September 2009 by skirchner in Economics, Foreign Investment
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