Italian-French Food Fight: How to Regulate FDI
A couple of US lawyers note the global trend towards invoking bogus strategic and national interest considerations to support political intervention in cross-border acquisitions. They suggest the following principles for regulating politically-sensitive transactions:
First, the review process should encourage investment and be tailored to apply to transactions implicating true national security interests. Screening for other reasons, such as a “national interest” standard should require an exceptionally high standard for intervention. To support this principle, reviews should be led by a responsible agency able to assign appropriate weight to the interests of open investment while also fully protecting against national security risks. The review process should be protected from political interference…
Also, the review mechanism should provide as much certainty as possible to investors…
Third, the government agencies conducting the review should be accountable.
Australia’s regime for regulating FDI fails on all three counts.
posted on 21 April 2011 by skirchner in Economics, Foreign Investment
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Symposium on Fiscal Stimulus
Agenda has published a symposium on fiscal stimulus, including papers by Sinclair Davidson, Tony Makin and Ross Guest, Creina Day and Nigel Stapledon. The papers can be downloaded for free.
posted on 19 April 2011 by skirchner in Economics, Fiscal Policy
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Wayne Swan at Home and Abroad
Wayne Swan before the G20 summit in South Korea:
“As we go forward we have to ensure that we don’t see a return to protectionism in new guises,” Mr. Swan said, citing the G-20’s success in staving off protectionist measures in the past two years as one of the global gathering’s “great achievements.”
Wayne Swan before federal cabinet:
Sources confirmed yesterday that Trade Minister Craig Emerson won approval for the shift with the backing of Ms Gillard, but only after her deputy, Wayne Swan, attacked the policy as lacking a political constituency. The sources said that, although the Treasurer, who has a long record of advocacy for trade liberalisation, did not attack the principles of the policy, he questioned the political wisdom of proceeding with the change at a time when the government was already fighting for reform on a range of other fronts, including the carbon tax.
posted on 15 April 2011 by skirchner in Economics, Free Trade & Protectionism
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What Caused the Housing Boom of the 2000s?
Not monetary policy.
posted on 14 April 2011 by skirchner in Economics, House Prices, Monetary Policy
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Budget Needs Micro Not Macro Focus
I have an op-ed in The Australian arguing that federal budget debates need a stronger micro rather than macro focus:
A good indicator of the macroeconomic importance of the budget is the reaction of financial markets on budget night. More often than not, the market reaction is minimal, highlighting the irrelevance of the change in the budget balance to economic growth and macro variables such as interest rates.
The real economic significance of the budget is its microeconomic implications: how tax and expenditure policies influence incentives to work, save and invest. Tax and spending policies should be evaluated based on the incentives they create, for better or worse.
As if to prove my point, Shadow Treasurer Joe Hockey has an op-ed on the same page arguing that the budget should be judged solely on the basis of the surplus.
The Centre for Independent Studies has also released my Policy Monograph Why Does Government Grow?
Economic Papers has published the papers from the symposium on Monetary and Fiscal Policy Interactions: How to Improve Policy Outcomes held at the 2010 Conference of Economists. My contribution can be found here.
posted on 13 April 2011 by skirchner in Economics, Financial Markets, Fiscal Policy
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A Failure of Political Leadership
I have an op-ed in the Straits Times that discusses Australia’s regulation of foreign direct investment in light of the Treasurer’s rejection of the SGX-ASX merger:
the Treasurer’s sweeping powers and the open-ended nature of Australia’s ‘national interest’ test are a standing invitation for politicians to pre-empt and second-guess commercial outcomes. The Foreign Acquisitions and Takeovers Act is a lightning rod for political intervention in the market for ownership and control of Australian equity capital.
The Act adds nothing useful to the regulation of business investment in Australia. It allows government to infringe the property rights of the owners of Australian equity capital, who are denied the opportunity to sell to the highest bidder and thereby realise the full value of their equity. That in turns reduces the amount of capital available for re-investment in Australia by the sellers of these assets. The Treasurer’s opposition to this and other deals devalues Australia’s stock of equity capital.
posted on 12 April 2011 by skirchner in Economics, Foreign Investment, Politics
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ASX-SGX RIP: Wayne Swan’s ‘No-Brainer’
Treasurer Wayne Swan’s rejection of the SGX-ASX merger is given an explicitly protectionist rationale:
“Becoming a junior partner to smaller regional exchange through this deal would risk us losing many of our financial sector jobs,” he told media.
Former Treasurer Peter Costello resorted to similar protectionist arguments in boasting about his role in frustrating the globalisation of Australian business:
The head office generates the corporate, financial, legal and insurance services and the highly skilled jobs that come with them.
The regulation of foreign direct investment in Australia is now effectively an arm of domestic industry and employment policy. Swan has received advice on the matter from the RBA and ASIC, but it remains to be seen how much of this advice is publicly released and how much stays a state secret. No doubt The Australian will try and FoI all of it. The journalists at The Australian are the only ones who understand that this is principally a rule of law issue. The commercial merits and implications of the proposed transaction are a secondary consideration.
posted on 08 April 2011 by skirchner in Economics, Foreign Investment, Rule of Law
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Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance
The financial crisis has generated hundreds of wise-after-the-fact, morality play and melodrama books on the subject, almost all of which have been completely beside the point. Until now. James Pressley reviews Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance:
Fannie Mae and Freddie Mac’s growth reflected astonishing advantages they had over private rivals. They paid lower taxes, could borrow at cheaper rates and were required to hold less capital. How much less? When they guaranteed the credit risk of mortgage-backed securities, or MBS, the capital requirement was 0.45 percent—just 45 cents per $100 of guarantees, the authors say; when they invested such securities, the buffer was 2.5 percent, or $2.50 per $100.
A federally insured bank, by contrast, faced a capital requirement of 4 percent for holding residential mortgages—unless it held GSE MBS. In that case, the requirement fell to 1.6 percent, creating perverse incentives for banks to originate mortgages, sell them to the GSEs for securitization and buy them back as GSE MBS. Same risk, less capital.
A race to the bottom was on—a competition to churn out increasingly dicey mortgages—only now it pitted Godzilla Fannie Mae and Freddie Mac against King Kong banks deemed to have “a too-big-to-fail government guarantee,” the authors say. Here was “a highly leveraged bet on the mortgage market by firms that were implicitly backed by the government with artificially low funding rates.” America, the bastion of free markets, became anything but when it came to mortgages.
You can read Chapter One here.
posted on 31 March 2011 by skirchner in Economics, Financial Markets
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Greenspan on Dodd-Frank
Greenspan in the FT on the Dodd-Frank Act:
the largest regulatory-induced market distortion since America’s ill-fated imposition of wage and price controls in 1971.
posted on 30 March 2011 by skirchner in Economics, Financial Markets
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John Edwards Tipped for the RBA Board
John Edwards has been tipped as an appointment to the RBA Board. John’s Lowy Institute monograph Quiet Boom gives a good insight into the thinking he would bring to monetary policy decision-making. He is critical of the conduct of monetary policy in the late 1980s and early 1990s and directly challenges former RBA Governor Ian Macfarlane’s attempts to re-write the history of this episode. I review Edwards’ and Macfarlane’s interpretations of this episode in this essay.
As I have suggested previously, if the government is not going to re-appoint McKibbin, it could at least give thought to appointing an overseas economist to the Board. Here is an interview with Adam Posen, a US economist appointed to the Bank of England’s Monetary Policy Committee. He takes his job very seriously:
“If I have made the wrong call, not only will I switch my vote, I would not pursue a second term. They should have somebody who gets it right and not me. I am accountable for my performance.”
Meanwhile, Peter Diamond’s nomination to the Fed is being held up by Senate Republicans, revenge for the Democrats blocking Bush nominee Randall Kroszner. As Hassett notes: This is what we have come to: In the minds of our politicians, partisan manoeuvring and score-settling far outweigh the desire to populate government with skilled individuals.
posted on 29 March 2011 by skirchner in Economics, Monetary Policy
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When the Guano Runs Out
A RBA research paper obtained through FOI advocates an offshore sovereign wealth fund, although the story seems to contain some editorialising by Paul Cleary, who thinks Australia is just a bigger version of Timor Leste. Liberal MP Paul Fletcher seems to think Australia is just a bigger version of Naru:
More fundamentally, natural resources are finite. When they run out, the money will stop flowing. So we should make sure we put some of the money aside – rather than spending it all now.
In our own region, the micro-state of Nauru offers a sobering example of the folly of assuming that the good times will last forever. It used to have large reserves of guano, used to make fertiliser. With only a few thousand people and a steady flow of mining royalties, it was in a fortunate position.
But the money was largely frittered away. Then the guano ran out – and Nauru had little to show for decades of mining.
Resources are not finite in any economically meaningful sense. The Coalition seems to think that SWFs are a great idea once government debt is paid off (they set up the Future Fund after all). I make the case against further use of SWFs in this op-ed. Governments that are not prepared to commit to binding fiscal responsibility legislation cannot be trusted with SWFs.
posted on 28 March 2011 by skirchner in Economics, Fiscal Policy
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RBA Drags the Chain on Transparency
Fed Chair Bernanke joins overseas counterparts in holding post-FOMC meeting press conferences:
Chairman Ben S. Bernanke will hold press briefings four times per year to present the Federal Open Market Committee’s current economic projections and to provide additional context for the FOMC’s policy decisions.
In 2011, the Chairman’s press briefings will be held at 2:15 p.m. following FOMC decisions scheduled on April 27, June 22 and November 2. The briefings will be broadcast live on the Federal Reserve’s website. For these meetings, the FOMC statement is expected to be released at around 12:30 p.m., one hour and forty-five minutes earlier than for other FOMC meetings.
The introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve’s monetary policy communication. The Federal Reserve will continue to review its communications practices in the interest of ensuring accountability and increasing public understanding.
In this op-ed, I made the case for the RBA Governor to hold a press conference following each Board meeting and CPI release. Apart from the gains to monetary policy transparency, this would serve to reduce politicians’ media space in public debates over interest rates and inflation.
posted on 25 March 2011 by skirchner in Economics, Financial Markets, Monetary Policy
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Sovereign Fiscal Responsibility Index
Australia is number one (meaning we hit the wall only after 40 years, as opposed to being broke right now). The United States sits between Italy and Hungary.
These are the variables:
Fiscal Space: An analysis of the additional amount of debt a country could issue before it is likely to face a fiscal crisis. Compares a country’s weighted-average debt level to the estimated maximum debt level a country could carry.
Fiscal Path: A projection of a country’s future levels of debt. The measure uses a projection of a country’s weighted-average debt level every year until 2050, using those figures to then calculate how long it takes a country to meet its maximum debt level.
Fiscal Governance: A rating of a country’s spending rules, transparency about fiscal policy making, and whether those rules are actually enforceable.
posted on 24 March 2011 by skirchner in Economics, Fiscal Policy
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Go Canada, Go Australia
Substitute ‘Australia’ for ‘Canada’ in this story for no loss of generality.
posted on 22 March 2011 by skirchner in Economics, Financial Markets
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Offshore Perceptions of Australia: A Failure of Leadership
The WSJ on the failure of the federal government and opposition to provide leadership on the SGX-ASX takeover:
Ms. Gillard professes to understand the general principle involved, having said that “An open economy has been in Australia’s interest.” So the failure by her and Mr. Swan to more aggressively support lifting the ownership cap to open the economy further is puzzling.
She may feel politically constrained as the head of a minority government beholden to a small band of Greens and independents. But that’s all the more reason to mount an aggressive persuasion campaign. Equally disappointing is the reaction—ranging from silence to outright hostility—from members of the ostensibly more free market opposition.
On this issue, the federal opposition is not even ostensibly free market.
Jennifer Hewett argues the government won’t risk defeat on something it doesn’t care about anyway:
It would be hard enough to muster political energy and risk defeat for something the government strongly supported, but Labor doesn’t really like this deal one bit. That is even though it knows blocking it on national interest grounds would be awkward for a government already regarded with suspicion by the international investment community. It’s why the Treasurer is sounding so cautious.
posted on 22 March 2011 by skirchner in Economics, Financial Markets, Foreign Investment, Rule of Law
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