Putting Central Bankers to the Flesch-Kincaid Test: Greenspan Beats Bernanke
ICAP economist Michael Thomas runs the speeches of leading central bankers through the Flesch-Kincaid test:
Australia’s central bank chiefs are easier to understand than their U.S. peers, though both lose out to straight-talking Bank of England Governor Mervyn King, according to a study by stockbroker ICAP Australia.
U.S. Federal Reserve Chairman Ben Bernanke’s speeches require listeners to hold a bachelors degree with honors, said Michael Thomas, ICAP Australia’s head of economics. By contrast, high-school leavers could understand the speeches of incoming Reserve Bank of Australia Governor Glenn Stevens, and ``on a good day, King could hold court at his local primary school,’’ Thomas said.
The study of recent speeches by central bankers used the Flesch-Kincaid test, which measures syllables per word and words per sentence, to assess how clearly a person speaks, and the education level a listener would need to understand the speaker. Former Fed chairman Alan Greenspan was famous for his sometimes obscure language—or, as Thomas put it, ``in his heyday, Greenspan could make a grocery list indecipherable.’’
Still, Greenspan outperformed Bernanke in the Flesch-Kincaid test, while both lagged Australia’s Stevens and the outgoing Reserve Bank Governor Ian Macfarlane.
posted on 14 September 2006 by skirchner in Economics
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Fundamentals of House Price Inflation
Another installment in our continuing series, dismissing the notion of house price inflation as a monetary policy-driven ‘bubble,’ this time from the Chicago Fed:
the housing boom has not been driven by unusually loose monetary policy. This is not to say that monetary policy has not been unusually loose, but that to the extent it has been loose, this is not what has been driving spending on housing. Second, the current levels of spending on housing are largely explained by the wealth created by dramatic technological progress over the previous decade. Third, changes in the demographic, income, educational, and regional structure of the population account for only one-half of the increase in homeownership. ... The last finding is that substitution away from rental housing made possible by technology-driven developments in the mortgage market, such as subprime lending, could account for a significant fraction of the increase in residential investment and homeownership. The current spending boom thus may be a temporary transition toward an era with higher homeownership rates and a share of spending on housing that is nearer historical norms.
(HT: Mark Thoma)
posted on 14 September 2006 by skirchner in Economics
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The Sleeper Awakes! (with apologies to H G Wells)
At least someone thinks Doomsday Cult Central is worth getting out of bed for:
I’ve taken a job at RGE Monitor, where I’m going to be setting up a new economics blog which I’m rather excited about. Launching soon – all ideas and suggestions gratefully received! (Not just on economics: any tips for how to get up every morning? I haven’t done it since December 2000, and I was woefully bad at it then…)
posted on 13 September 2006 by skirchner in Economics, Financial Markets
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Yet More Friends the ‘Austrian School’ Could Do Without
We have previously noted the increased prominence that bowlderised versions of Austrian business cycle theory (ABCT) have assumed in popular discourse on macroeconomics and financial markets. Much of the appeal in ABCT rests in its seeming ability to provide a causal mechanism for what many people like to label as ‘bubbles’ in financial markets. Without this underlying causal mechanism, the notion of a ‘bubble’ is little more than a tautology invoked by people who can’t understand why economies and financial markets fail to adhere to their preconceived and often mistaken notions of appropriate behaviour
An article in the FT provides further evidence of the growing reliance on ABCT as a device to make sense of the economy and financial markets:
The investment theme of the autumn will instead be the vindication of the Austrian economists and their theories about the nature of the business cycle…
The aspect of Austrian economics that will be central to investment decision-making this autumn is the role of central banking in generating unsustainable investment booms and subsequent busts.
Yet there is little evidence to support ABCT as even a stylised account of business cycle and financial market dynamics, at least under current central bank operating procedures in the major industrialised countries, which have been dominated by interest rate and inflation targeting for at least the last 10 years.
The Taylor rule and related literature shows that it is much easier to explain monetary policy with reference to the economy than it is to explain the economy with reference to monetary policy. This is just another way of saying that monetary policy for the most part responds endogenously to economic developments and the exogenous component of monetary policy is very small. Anyone who has tried to motivate a role for official interest rates in standard economic models (the sort of empirical work that few Austrians are prepared to undertake) knows what a problematic exercise this can be.
This makes the claim that, but for the supposed monetary policy errors of central banks, the amplitude of business and asset price cycles would be greatly reduced extremely implausible, at least under contemporary interest rate/inflation targeting regimes. Indeed, we know that under the gold standard, the preferred monetary regime for many Austrians, volatility was more pronounced, with inflexibility in prices and exchange rates simply forcing any adjustment on to the real side of the economy.
The increased prominence of ABCT in popular discourse actually has profoundly anti-market implications, because it leads people to believe that there is something wrong with macroeconomic and financial market outcomes that are in fact largely market-determined and have very little to do with either monetary policy or ‘bubbles.’
posted on 06 September 2006 by skirchner in Economics, Financial Markets
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RBA Governor Macfarlane: ‘Shamefully Misquoted’
RBA Governor Macfarlane presides over his final RBA Board meeting today. Macfarlane has given more newspaper interviews in the last few weeks than in the last 10 year combined. In the latest interview, he complains about being verballed on the issue of tax cuts:
On the eve of his departure, Mr Macfarlane told The Australian Financial Review he saw little need to amass large budget surpluses just because the economy was growing solidly.
“I have heard people* say, `Oh, we should let the fiscal stabilisers work,’” Mr Macfarlane told the newspaper.
“I think they are working. I think if you have an economy that is growing at 3 per cent, as we have, there’s no reason why you would need bigger and bigger surpluses, in other words, why you would need to restrain it with some sort of fiscal restraint.
“What we have got is a tax system which is unintentionally much more income-elastic than anyone designed it to be or even thought it was, and so that even with the economy going at trend growth, we are pulling in a huge amount of taxes and pushing ourselves into surplus.”
Mr Macfarlane also endorsed Treasurer Peter Costello’s decision to deliver income tax cuts in his budget worth $36.7 billion over four years.
He said his comments on fiscal policy had been “shamefully misquoted” all year.
“I had no problem with what the Treasurer did in the May budget,” Mr Macfarlane said.
“The great irony - and I feel sorry for him in this respect - is that the same people who are urging him to make huge tax cuts have now turned around and said that what he did is pushing up interest rates.”
* [That would be you Ross Gittins! - ed]
posted on 05 September 2006 by skirchner in Economics
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Endogenous Fed Policy: Why You Can’t Profit from Nouriel Roubini
Those who have argued that rising commodity prices, particularly gold, are symptomatic of easy Fed policy face the embarrassment of explaining why commodity prices have fallen rather than surged in response to the recent Fed pause. As usual, James Hamilton has already said what I wanted to say on this:
What brought commodity prices and long-term nominal yields down is the same thing that induced the Fed to pause, namely, the recognition that the magnitude of the incipient economic slowdown is more significant than many were anticipating a few months ago. To be sure, many other factors influence the price of any given commodity, and some commodities, such as silver, lead, and nickel, are up rather than down over the last two months. But other things equal, slower growth of real economic activity is bearish for any commodity, and as the reality of the slowdown has sunk in, commodity prices have responded, one by one.
This reinforces a point we have made on many occasions previously, that monetary policy is more often than not an endogenous response to economic developments rather than a driver of them.
It is worth noting that the CRB index is now at risk of breaking its multi-year uptrend from the 2001 lows. If you think this sounds bearish, you’re right. But what commodity prices and Treasury yields are telling us is that an economic slowdown is already largely discounted. It’s the slowdowns that are not priced in that you have to worry about. While Nouriel Roubini likes to portray himself as an out-of-consensus contrarian, the reality is that the market already largely agrees with him. Or to invert Glenn Reynolds, the permabears are a herd, not a pack.
posted on 31 August 2006 by skirchner in Economics, Financial Markets
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Shiller Runs with the Housing Herd
Robert Shiller and Karl Case argue that:
Deterioration in that intangible housing market psychology is the most uncertain factor in the outlook today.
Yet in the same op-ed, Shiller and Case provide evidence from trading in their own house price indices on the Chicago Merc that suggests a downturn in house prices is already discounted:
The U.S. now has a futures market based on home prices. The market that opened in May at the Chicago Mercantile Exchange is now showing backwardation in all 10 metropolitan areas trading. The backwardation can be expressed as implying a rate of decline of 5% a year for the S&P/Case-Shiller Composite Index by May 2007. Since the margin requirement is only about 2.5%, an investor who is sure that prices cannot actually fall by next May has, on that assumption, a sure return of at least 200% from buying a futures contract, and even more if prices rise at all. But there can’t really be so much “money on the table.” It must be that people really no longer see it as a sure thing that prices won’t start falling across the metro areas.
Not much uncertainty there. Shiller and Case also can’t help but invoke these notorious contrarian indicators:
the air is now full of talk of a bust. The covers of the New Yorker, the Economist, The Wall Street Journal and virtually every news magazine and newspaper in America has heralded the bursting of the “housing bubble.”
While Nouriel Roubini likes to portray himself as an out-of-consensus contrarian, both he and Shiller are just running with the herd in calling for a recession on the back of a housing sector downturn. Yet recessions are rarely caused by events that are well anticipated, which is why they are almost never heralded on the front pages of newspapers until they are already well underway. Based on the NBER business cycle reference dates, the 2001 recession in the US was all but over by the time it hit the front page. The expansion began in November 2001, yet as late as the September terrorist attacks, there was still debate about whether or not the US was in recession.
posted on 30 August 2006 by skirchner in Economics, Financial Markets
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What China Really Does with its Foreign Exchange Reserves
SHANGHAI, Aug 29 (Reuters) - Beijing is expected to inject a large amount of capital into China Reinsurance (Group) Co., the country’s biggest reinsurer, to help it compete with foreign rivals, sources close to the situation said on Tuesday.
Central Huijin, the investment arm of the central bank, has submitted a proposal for the capital injection to the State Council, China’s cabinet. The plan could win approval before the end of this year, the sources said.
After approval, the central bank and China’s foreign exchange regulator would authorise Central Huijin to use part of the country’s more than $940 billion in foreign exchange reserves as capital for China Reinsurance, the sources said.
The size of the proposed injection is unclear, but one financial source close to the State Council said it was unlikely to exceed 10 billion yuan ($1.25 billion).
posted on 29 August 2006 by skirchner in Economics, Financial Markets
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Eeyore or Jack Ass? Bears of Very Little Brain
Nouriel Roubini pronounces himself a member of the ‘Shrill Order of the Reality-Based Reputable Eeyores.’
As I recall my Pooh, Eeyore’s pessimism was rarely validated and had a lot to do with having a pin stuck in his butt, which I guess might also explain the shrill tone.
posted on 28 August 2006 by skirchner in Economics, Financial Markets
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Plus Ca Change
John Garnaut, on the RBA’s not so distant past:
Back then [1989], the Reserve Bank was a crusty old institution in desperate need of reinvention and it still hated the idea of being run by an outsider.
Some would argue that not a whole lot has changed.
posted on 26 August 2006 by skirchner in Economics
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The House Price Bust that Wasn’t
Remember those 20-30% declines in house prices that were meant to have thrown Australia into recession by now? Neither do I. The ABS median established house price index rose 3.1% q/q and 6.4% y/y for the June quarter, based on a weighted average of capital cities. The weighted average once again concealed considerable variation between capital cities, ranging from a 0.5% y/y decline in Sydney to a 35.4% y/y increase in Perth.
The ABS has been doing a lot of work trying to improve the quality of its data on house prices, partly in response to RBA demands for a more timely series that is less prone to compositional distortions. The latest data suggest that the trough in the weighted average of capital city house prices was seen in the March quarter of 2005, when house prices were essentially flat compared to the March quarter 2004. This coincided with the peak decline in Sydney house prices of -5.9% y/y. This was enough for Robert Shiller to pronounce that Australia had suffered a burst housing ‘bubble,’ yet with the exception of Sydney and Canberra, none of the other capital cities recorded a decline in nominal house prices at an annual rate. Melbourne got down to +0.4% y/y at the end of 2004, one quarter ahead of the Sydney trough. Cities like Perth never even managed a decline over a quarter, much less a year.
The upswing in global commodity prices that began in 2002 explains much of this regional variation, adding to incomes in the resource-rich states and driving the inter-state migration flows that the RBA has identified as an important source of weakness in Sydney house prices, which have now largely converged back to the same ratio to other capital cities seen in the early 1990s. While many people have argued that, but for the commodities boom, the rest of Australia would look like Sydney, it is more plausible to argue that Sydney is only as weak as it is because the commodities boom has drawn people away from Australia’s largest city. What many analysts saw as a prospective national house price bust emanating from Sydney that would wreck the Australian economy was in fact just one aspect of an exogenous commodity price boom that has been anything but harmful.
posted on 24 August 2006 by skirchner in Economics
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What Nouriel Roubini Won’t Tell You About the US Economy, Part II
More of the stuff that hits the cutting room floor at Doomsday Cult Central, from my associates at Action Economics:
A surprising array of major U.S. macro indicators continue to defy expectations of a slowdown, beyond pocketed weakness in the housing. Indeed, even here, construction activity remains solid despite housing due to robust business and public sector growth. Consumers are spending, factories are humming, profits are booming, and trade is turning the corner. Even the labor market clearly remains tight, despite the seemingly meaningful yet notably isolated restraint in monthly payroll growth.
The most important discrepancy between expectations and outcomes has come from the consumer, where nearly all economists projected some pull-back this year, even though spending strength has remained unwavering. As is evident below, nominal consumer spending growth was solid in both Q1 and Q2, and has actually gained steam in Q3. The “real” spending figures were hit in Q2 from soaring gasoline prices, but the hit was temporary. Since consumption accounts for 2/3rds of GDP, this steady growth is providing an important driver of economic growth.
posted on 23 August 2006 by skirchner in Economics, Financial Markets
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The Myth of Low Household Sector Saving
RBA Assistant Governor Ric Battellino tackles some of the myths around household sector saving in a speech on Developments in Australian Retail Finance:
the popular representation of Australian household finances is that they are in poor shape. In particular, three facts are usually put forward:
• household debt levels are rising relative to household incomes;
• household debt servicing costs, relative to incomes, are at record levels; and
• the household saving rate is low, and in fact negative of late.
There are, however, grounds for believing that household finances are in better shape than suggested by this depiction.
First, rising ratios of debt to income are not necessarily a sign that something is amiss. The evidence I showed earlier suggested that it is quite normal in a growing economy for the level of debt outstanding to rise relative to income. Financial variables typically rise faster than GDP…
households’ financial assets have increased by substantially more than their debt. There has been only one year during the past decade when they have not done so. As a result, even though household debt has increased, the net financial position of households has improved noticeably….
The often-stated fact that Australian households have now become net payers of interest is only true because households have shifted their financial assets from bank deposits (on which they earned interest) to equities and superannuation where returns accrue largely in non-interest forms. Taking account of interest, dividends and capital gains, the net investment returns of households, though variable from year to year, on average have remained strong…
The key point is that conventional measures of saving do not take into account capital gains. This has a particular bearing on Australian households because, as noted, they now hold a high proportion of their financial assets in investments such as shares and superannuation on which a significant part of the return is in the form of capital gains. In the May 2006 Statement on Monetary Policy, we showed that once allowance is made for capital gains, the saving rate of Australian households (broadly defined) is neither low nor falling.
posted on 22 August 2006 by skirchner in Economics
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RBA Governor Macfarlane Protests Too Much
In his appearance before the House Economics Committee on Friday, RBA Governor Macfarlane complained that some of his remarks before a previous Committee hearing had been taken out of context. In an interview in today’s SMH, Macfarlane also complains about the way the issue of interest rates was handled during the last federal election campaign, saying that:
we thought that the independence of the Reserve Bank was already so well established that that argument would not be a plausible argument.
Yet in the same interview, Macfarlane takes pride in his almost non-existent public profile during his 10 years as Governor:
He went the length of his term without giving an on-the-record interview to any Australian media outlet, or appearing once on TV or radio, a matter of considerable pride to him. “I’ve never been able to see how that could possibly be in the interests of the Reserve Bank. As far as I could see it would probably trivialise things. You have to be honest and forthright but you don’t have to be constantly pontificating. You’re not an economic commentator.”
He says there is a difference between transparency and self-promotion, “and I don’t think it would be a good idea to go into self-promotion”. There is an implied rebuke here to others, such as Greenspan, who have allowed their own personality cults to overshadow their institutions.
The comparison with the Fed is appropriate, because it shows what an absurd argument it is to suggest that the Governor of the Reserve Bank should not be an active participant in economic debate. The Fed Chairman, the Federal Reserve Board Governors and Federal Reserve Bank Presidents who serve on the Federal Open Market Committee have high public profiles, routinely speak out on a wide range of economic issues and are often critical of the government on issues such as fiscal policy.
Macfarlane was understandably reluctant not to have the Bank drawn into partisan political debate and it would certainly be inappropriate for the Bank to have adjudicated on competing claims about interest rates during the last federal election. Yet it is the Bank’s more general absence from public debate that makes it more likely that issues surrounding the determination of official interest rates will be misrepresented.
While Macfarlane would see himself as upholding the independence of the Bank, the fact that he felt unable to speak out as Governor for fear of coming into conflict with the Treasurer speaks volumes about the nature of the RBA’s independence. For all the hype surrounding the August 1996 Joint Statement on the Conduct of Monetary Policy, it amounted to little more than a codification of existing practice and left the statutory basis for RBA independence unchanged. A central bank governor who feels unable to publicly criticise the government of the day is lacking independence, not upholding it.
It should also be said that Macfarlane’s public reticence also extended to his areas of direct responsibility. In his appearance before the House Economics Committee on Friday, Macfarlane sounded positively put upon when asked to express an opinion on the direction of interest rates, having studiously avoided any discussion of the issue in his prepared statement. While Macfarlane did then venture an opinion, it was one the Bank did not bother to include in its Statement on Monetary Policy only two week’s previously. This was a repeat performance of the February hearings, when Macfarlane also offered a view on the direction of interest rates that was more explicit than the preceding SOMP. What this shows is that Bank often has a view on the direction of interest rates that it is not willing to share with the public, except on an ad hoc basis in response to questions from a Committee before which the Governor appears only twice per year.
Macfarlane can hardly complain about the course of public debate when he was so obviously unwilling to participate in it.
posted on 19 August 2006 by skirchner in Economics, Financial Markets
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Does Consumer Confidence Matter?
The most recent increase in official interest rates had a predictably negative impact on consumer confidence, as measured by the Westpac-Melbourne Institute survey. There was a similarly large fall after the March 2005 rate hike.
RBA research suggests that the consumer confidence survey in question tells us very little that we don’t already know from contemporaneous activity data. In other words, it is economic activity that drives sentiment, not the other way around.
Interestingly enough, the break-down by respondent shows that the fall in confidence in August was more pronounced on the part of people who own their homes outright, as opposed to those who are mortgagees. This suggests that there was more to the fall in confidence than just interest rates.
Another possible explanation for this is that those with mortgages are in fact better placed to smooth their consumption over time than those without them. Mortgage products have become more flexible in recent years, adding much greater flexibility to overall household balance sheets. High levels of household sector gearing may well result in smoother rather than more volatile consumption patterns, by easing liquidity constraints.
Prior to the mid-1990s, the household sector in Australia was a net lender rather than borrower, but this was probably a sub-optimal situation driven by a lack of financial innovation in retail lending. The shift to a net debtor position on the part of the household sector in recent years is probably a more accurate reflection of household balance sheet preferences.
posted on 17 August 2006 by skirchner in Economics
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