The Contradictions of Behavioural Economics
Andrew Ferguson on behavioural economics:
You can see how useful the notion of irrational man is to a would-be regulator. It is less helpful to the rest of us, because it runs counter to every intuition a person has about himself. Nobody sees himself always as a boob, constantly misunderstanding his place in the world and the effect he has upon it. Surely the behavioral economists don’t see themselves that way. Only rational people can police the irrationality of others according to the principles of an advanced scientific discipline. If the behavioralists were boobs too, their entire edifice would collapse from its own contradictions. Somebody’s got to be smart enough to see how silly the rest of us are.
I make related arguments in my review essay ‘Authoritarian Economics’.
posted on 14 April 2010 by skirchner in Economics, Financial Markets
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Bond Market Vigilantes No Check on Fiscal Excess
I have an op-ed in today’s SMH questioning whether higher inflation and interest rates are the most likely outcome from the fiscal policy excesses that have followed the global financial crisis. Classical liberals fret about rising inflation and interest rates, but this is not entirely consistent with their view that the expansion of the state is bad for long-run growth prospects, which could be expected to depress both. This is not necessarily good news for bonds, as it points to an environment of depressed returns across all asset classes.
The latest unsolicited review copy to cross my desk is Accelerating out of the Great Recession: How to Win in a Slow-Growth Economy, by two partners at the Boston Consulting Group. Like many business books, it is useful mainly for what it tells us about the zeitgeist. The sub-title says a lot about current expectations for future growth, but I was also struck by this recommendation from the authors:
Prepare for government intervention and changes in the external environment, which will likely include a reduction in consumers’ disposable income and restrictions in free trade.
If this is what sells business books, then we have a problem and it’s not higher interest rates.
posted on 13 April 2010 by skirchner in Economics, Financial Markets
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Data are the More than Just the Plural of Anecdote
The debate over foreign investment in Australian property is being fuelled by anecdote rather than data, largely because the available data on the subject is so limited. In today’s Australian, Natasha Bita reports her experiences trying to extract information from the FIRB (an all too familiar story):
The Australian provided the FIRB with a list of questions, including whether it is monitoring the impact on the property market of its relaxed rules, which richocheted for three days between FIRB and the Treasury.
Eventually, a spokesman for Sherry failed to say if, or how, the impact was being monitored.
A request for a copy of FIRB’s advice to Treasury to change the foreign investment rules also was ignored.
Asked to provide up-to-date data on the sale of residential property to foreigners and temporary residents, the minister’s spokesman replied: “FIRB approvals for temporary residents to buy established houses as a percentage of the total number of transfers of established housing that occurred in the eight capital cities were at a level of approximately between 1.5 per cent and 2 per cent in recent times. Data are not available after 31 March 2009 given that temporary residents were exempted from FIRB notification requirements.”
Even the Reserve Bank, which claims to be monitoring the situation, is having trouble getting any meaningful data from FIRB.
Its only analysis is a two-page internal briefing note, based on statistics from FIRB’s 2007-08 annual report and temporary resident numbers.
“For analysis you would try to get hard data on this but there is in fact no hard data,” the Reserve Bank’s head of domestic markets, John Broadbent, says.
“The Treasury were the ones who decided to cease collecting some of the data sets on the basis they were looking to reduce the administrative burden.”
Broadbent says an analysis of “older data” from the FIRB shows the share of foreign buyers of residential properties has risen from 0.4 per cent of properties in the late 90s to 1 per cent in 2008.
This is a very good illustration of how the FIRB’s lack of transparency undermines support for foreign investment in Australia. The publication of more detailed and timely data on the subject would go a long way to dispelling popular fears about foreign investment. That said, I also have some sympathy for the Treasury position. It is unrealistic to expect FIRB to monitor and enforce compliance with the rules in relation to thousands of property transactions. Indeed, it is doubtful whether FIRB even has the resources to monitor compliance with the many conditions it has been piling on to some of the more high profile cross-border M&A transactions. The government’s appetite for regulation in this area greatly exceeds its administrative capacity. Much of the liberalisation of foreign investment rules undertaken by the Rudd government has been an attempt to ease the administrative burden on the FIRB.
If the anecdotes are to be believed, then the liberalisation of foreign investment rules in relation to property has been a success. If there is a policy failure, it is in the inability of the supply-side of the market to respond flexibly to both foreign and domestic demand. The danger now is that the government implements another of its short-term political fixes ahead of this year’s federal election and re-tightens the rules rather than addressing the supply-side constraints besetting Australian residential property.
posted on 12 April 2010 by skirchner in Economics, Foreign Investment, House Prices
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ASIC Shuts Down Betting on RBA Board Meetings and the ASX 200
ASIC is seeking to prevent Centrebet from offering betting markets on the outcome of RBA Board meetings and the ASX 200 index, on the grounds that the bets are derivatives within the meaning of the Corporations Act. Sinclair Davidson and Ian Ramsay both suspect regulatory protectionism is at work:
Professor Ramsay said ASIC may have turned its attention to the bookmaker following a complaint from a competitor after it set up a market on the ASX200 share price index in March.
This will simply divert betting interest to offshore markets like iPredict, which enjoys the support of the Reserve Bank of New Zealand.
posted on 11 April 2010 by skirchner in Economics, Financial Markets, Monetary Policy
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Break Up the States
Former NSW Treasury Secretary Percy Allan argues for breaking up the states into 15 to 25 smaller governments. It is a refreshing alternative to the kneejerk centralisation that characterises the political response to most problems. Increased jurisdictional competition and regulatory arbitrage would go a long way to solving a host of problems. Handing more power to Canberra just compounds these problems by making decision-making even more remote from the localised and often tacit knowledge needed to address them.
posted on 06 April 2010 by skirchner in Economics, Politics
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Mid-Week Linkfest
1. Greece and the internet’s dark pools of hate.
2. None dare call it stimulus.
3. McTeer and Hamilton on inflation and interest rates.
4. Chris Berg on immigration (the overlooked counterpart to Bob Birrell’s Policy essay).
5. David Goldman on Barack Obama.
6. Chris Joye’s Sydney house price growth guessing competition.
posted on 31 March 2010 by skirchner in Economics
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The Biggest Bail-Out: Where’s The Outrage?
Matthew Richardson on the missing outrage over Freddie and Fannie:
There’s a chance that the support thrown at the rest of the financial sector—$465 billion of direct capital, $285 billion of loan guarantees and insurance of $418 billion of assets—isn’t all money down the drain. $175 billion has been returned, the loan guarantees look much safer, and the insurance program, mainly for Citigroup, has been terminated.
Even the poster child for financial excess, AIG, may be able to fully pay off the government if the housing market doesn’t deteriorate further or the economy substantially improves.
But the chances are slim to none that Fannie or Freddie will be able to pay back the funds. It is highly likely that taxpayers will lose well over $200 billion—and it may well pass $300 billion. When the history of the crisis is all written, these two institutions will turn out to be the most costly of the financial sector—worse than AIG, Citigroup or Bank of America/Merrill Lynch.
So where is the outrage?
It’s not the pay packages: Compensation at Fannie and Freddie was right up there with other financial firms. For example, in 2006 and 2007, as housing conditions were weakening and the crisis started, the CEO salaries of Fannie were $14.4 and $12.2 million, and Freddie were $15.5 million and $19.8 million.
As Eric Falkenstein has also noted, the losses attending Freddie and Fannie are equal to around 90 Nick Leesons.
posted on 30 March 2010 by skirchner in Economics, Financial Markets
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Glenn Stevens Goes Where Ian Macfarlane Feared to Tread
Former RBA Governor Ian Macfarlane took pride in never having given an on-the-record media interview in his 10 years in office. Macfarlane’s public appearances were about as common as those for your average thylacine. Macfarlane only drew attention to the problem by engaging in a post-retirement media blitz that sought to set the record straight on all the issues where he claimed to have been misquoted or misrepresented while Governor.
Stevens has more than doubled the annual number of public speeches that Macfarlane gave in his last full year as Governor. If the last two months are anything to go by, Stevens will double his own record this year. His senior officers have also been considerably more active in terms of public appearances.
In a further break with the RBA’s secretive past, Governor Stevens has even put in an appearance on the Sunrise program. David Koch is not exactly Kerry O’Brien or Tony Jones, but the program’s reach is much greater. It sets an important precedent, but could be taken further. As I have argued previously, the RBA Governor should be made to front a media conference after every Board meeting and CPI release. A Treasurer with half a brain would insist on it.
The Governor’s comments on house prices during the program were somewhat risky, in that they could easily give the impression that house prices are a target rather than merely one of many indicators for monetary policy. If the public think Stevens is targeting house prices, then the Bank will end up owning them (figuratively, not literally, as with the US Fed). A better strategy would be to go on highlighting the supply-side constraints on the housing market. The public is smart enough to figure out who is to blame for those.
posted on 29 March 2010 by skirchner in Economics, Financial Markets, Monetary Policy
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A FIRB with Chinese Characteristics
I often accuse Australia’s regulation of foreign direct investment as having disturbing parallels with China’s regulatory environment. I was amused therefore to see the following headline:
China to Set Up Foreign Investment Review Board:
“The new agency will work independently of the current anti-monopoly investigation system,” the above source revealed.
Stating that the Ministry of Commerce’s anti-monopoly review of foreign mergers and acquisitions is only focused on the level of influence that certain mergers and acquisitions may have on competition, not on national nor industrial security.
As for the approval process under any possible future foreign investment review board, “[The process] will basically be the same as before, we are merely adding one extra procedure.”
posted on 29 March 2010 by skirchner in Economics, Foreign Investment
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The Bond Market and Obamacare
A big f’ing deal indeed. While on the subject of fiscal train wrecks, Greg Mankiw retrieves a Paul Krugman column from 2003.
posted on 25 March 2010 by skirchner in
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Mid-Week Linkfest
1. Charles Calomiris on Greek debt default.
2. The mother of all bail-outs: Freddie and Fannie.
3. Eric Falkenstein on Gary Gorton and Michael Lewis.
4. Google takes on China…and Australia.
posted on 24 March 2010 by skirchner in Economics
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The Irrelevance of Bank Interest Rate Margins
At least one journalist gets the irrelevance of bank interest rate margins when the Reserve Bank is explicitly targeting credit conditions:
This means that the Reserve Bank, rather than bank gouging, is effectively targeting and setting the interest rate charged to mortgage borrowers because this is what influences the demand for credit. If the 20-25 basis point increase in the banks’ net interest margin suddenly disappeared, the Reserve Bank would simply hike its cash rate by the same amount so as to return mortgage lending rates back toward their more normal 7 per cent-plus levels.
As Stutchbury notes, bank bashing is little more than an attempt by politicians to divert attention from the implications of their own policies for interest rates. At least one bank is privately telling its shareholders to brace for more political thuggery:
Westpac is under financial pressure to raise its interest rates but fears a political backlash, chief executive Gail Kelly has reportedly told a private shareholder briefing.
Mrs Kelly told the briefing political pressure from Canberra could make it tough for the bank to increase home and business loan interest rates ahead of the federal election, due later this year
Mrs Kelly might also care to explain to Westpac shareholders why it is donating money to political parties that are actively seeking to damage the bank’s franchise.
posted on 23 March 2010 by skirchner in Economics, Financial Markets, Monetary Policy
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Electronic Frontiers Australia Fundraising Drive
Electronic Frontiers Australia has been campaigning for online civil liberties since 1994 and is currently on the frontline of the battle against the federal government’s internet filtering regime. They are currently conducting a fundraising drive and I hope IE readers will join me in making a donation. EFA Board members are not paid for their efforts, so you can be sure funds will be used for campaigning purposes.
posted on 22 March 2010 by skirchner in Media
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Did Ayn Rand Have Asperger’s Syndrome?
I pose the question in a review of two recently published biographies of Ayn Rand, forthcoming in the Autumn issue of Policy.
posted on 20 March 2010 by skirchner in Rand
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Stiglitz in Freefall
Eric Falkenstein’s devastating takedown of Nobel crank Joe Stiglitz:
A nice thing about being a Nobel prize winner in economics is when you write books with the same policy recommendations, but use inconsistent arguments in each book, you still get the front table at Barnes and Noble.
Read the rest.
posted on 18 March 2010 by skirchner in Economics
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