The ASX-SGX Merger and the National Interest
ASX commissioned Access Economics to produce a report on why the ASX-SGX merger is in the national interest. As the report notes, internationally ‘no previously proposed cross-border exchange sector transaction has failed to proceed on the basis of regulatory disallowance.’ But in Australia, as Jennifer Hewett has noted, ‘the politics are overwhelmingly stacked against it’.
posted on 09 December 2010 by skirchner in Economics, Financial Markets, Foreign Investment
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Inflation Pop Quiz
Take Zimran Ahmed’s pop quiz:
You’re a responsible Brazilian living in your decent Sao Paolo apartment (paid off!). You have a tidy pile of cruzeiros in your local bank, saved from the income your reasonable private sector job generates. But it’s 1979 and you’re worried about inflation looming on the horizon. What do you do?
Nic Rowe re-phrases the question for the benefit of a PhD candidate operating under the constraints faced by an economics blogger:
Using a macroeconomic model with monopolistically competitive firms, explain how an increase in the expected future price level will cause an increase in the current price level. Also explain whether there is an effect on real output.
Your answer must use words only, with no diagrams or equations. Be very precise about all the mechanisms that would be involved in this interdependent system of simultaneous causation. Your answer must assume no previous knowledge of economic theory or familiarity with economic concepts on the part of the reader. Try to make your answer as realistic as possible, using 10 real-world goods as examples. These should be goods that a homeowner with liquid domestic currency assets living in Sao Paolo Brazil in 1979 might want to buy in response to an increase in the expected future price level. Any transactions in your explanation must be shown to be consistent with double-entry bookkeeping. Please write clearly.
You have 2 hours to answer this question.
Of course, this has never been a deterrent to Scott Sumner, who writes blog posts faster than you can read them.
posted on 08 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy
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The Most Pronounced Disinflation Since 1981
Inflation outcomes are the ultimate test of whether monetary policy has been too easy or too tight. With disinflationary pressures in the US at their most pronounced since the Volcker disinflation of the early 1980s, critics of quantitative easing would do well to ponder the counter-factual in which US monetary policy was not as accommodative. The data suggest that the risk of inflation being too low has been greater than the risk of inflation being too high.
posted on 07 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy
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The Conservative Case for Quant Easing
David Beckworth argues that conservatives need QE to work to reduce the risk of more government intervention.
posted on 03 December 2010 by skirchner in Economics, Financial Markets, Monetary Policy
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Tories for FDI Protectionism
Opposition to FDI in Australia often comes from the political right. Canada is no different, with Mark Milke noting the hypocrisy of Canada’s Tories:
The decision by the federal Conservative government to reject the Australian mining company BHP Billiton Ltd.’s takeover bid of Potash Corp in Saskatchewan was only the latest in a series of anti-investment moves by a plethora of Canadian governments…
Those who claim that resource ownership akin to oil and gas reserves was at stake are fibbing. As with oil and gas, the subject of the takeover attempt was a company that extracts the resource; it was not about ownership of the resource itself. Oil, gas and potash all belong to provincial governments.
posted on 02 December 2010 by skirchner in Economics, Foreign Investment
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The FHA as Predatory Lender
The FHA takes over from Freddie and Fannie:
While everyone has been watching Fannie and Freddie, the administration has quietly shifted most federal high-risk mortgage initiatives to FHA, the government’s original subprime lender. Along with two other federal agencies, FHA now accounts for about 60 percent of all U.S. home purchase mortgage originations. This amounts to more than $1 trillion and is rising rapidly. The administration justifies this policy by saying it is necessary to support the mortgage market, yet borrowers are once again receiving high-risk loans…
The Dodd-Frank Act, however, exempts FHA and other government agencies from appropriate standards on mortgage quality. This will give low-quality mortgages a direct route into the market once again; it will be like putting Fannie and Freddie back in the same business, but with an explicit government guarantee.
For example, thanks to expanded government lending, 60 percent of home purchase loans now have down payments of less than 5 percent, compared to 40 percent at the height of the bubble, and the FHA projects that it will increase its insured loans total to $1.34 trillion by 2013. Indeed, the FHA just announced its intention to push almost half of its home purchase volume into subprime territory by 2014-2017, essentially a guarantee to put taxpayers at risk again.
posted on 01 December 2010 by skirchner in Economics, Financial Markets
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Political Leadership on Foreign Investment
Andrew Leigh gives News Ltd a taste of its own pitchfork:
An iron law of populism is that while Australian businesspeople investing abroad are portrayed as job-creating entrepreneurs, foreign investors are depicted as rapacious robber-barons.
And so it is with the latest tabloid campaign against foreign investment. Under headlines such as ‘Chinese buying up our farms’, ‘It’s time to stop selling off the farm’, and ‘It’s time to save our farms from foreign investors’, News Ltd tabloids have recently embarked upon a fear campaign against foreign investment in Australian agriculture. With anecdotes taking the place of statistics, foreign investment has been labelled ‘a dramatic global land grab’, fed by ‘a looming global food shortage’...
Most ironic about the recent tabloid campaign against foreign ownership in agriculture is the fact that the newspapers responsible are themselves owned by US citizen Rupert Murdoch. Indeed, if a campaign were to be waged against foreign ownership in the media industry, you would expect these newspapers to be among the first to describe it as economic populism. It’s funny what happens when the pitchfork is in the other hand.
posted on 30 November 2010 by skirchner in Economics, Foreign Investment
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What Would Friedman Do III?
Yes, Friedman was a ‘money printer’:
David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?
Milton Friedman: Yes, indeed… It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.
(HT: Doug Irwin via David Beckworth)
posted on 30 November 2010 by skirchner in Economics, Financial Markets, Monetary Policy
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Chinese Inflation
Coming to a store near you.
posted on 27 November 2010 by skirchner in Economics, Financial Markets
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No Disgrace in Pointing Out the Obvious
In a previous post, I speculated about the likely media reaction to any comment by RBA Governor Stevens that might be seen to be critical of the NBN. Unsurprisingly, the need for a cost-benefit analysis of the NBN came up during the Governor’s appearance before the House Economics Committee. Michael Stutchbury says:
It’s a disgrace that the Reserve Bank governor has had to be dragged into political hot water to point this out.
As I argued in a previous op-ed, this is a misreading of the role of an independent central bank governor in public debate. The ability to speak out on important public policy issues is a mark of the Reserve Bank’s independence, not a threat to it. While the government may be in hot water as a result of the Governor’s comments, that is hardly a problem for Glenn Stevens.
posted on 27 November 2010 by skirchner in Economics, Politics
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Central Bankers Behaving Badly and Not So Badly
Larry White, George Selgin and William Lastrapes recently argued that the Fed has been a failure by comparing the periods before and after its establishment in 1914. Yet there are enormous differences in the way the Fed has approached monetary and other policies in the period since 1914 that would seem to be more important in explaining these outcomes than the existence of the Fed itself. Charles Calomiris notes that for the period 1914-1951, the Fed was beholden to fallacious economic doctrines, which makes its failures readily explicable. Monetary theory and policy practice have come a long way since then. As Henderson and Hummel note, Fed policy has been far more benign than the critics would suggest.
posted on 24 November 2010 by skirchner in Economics, Monetary Policy
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Not a Currency War
Just normal currency markets responding to events, argues Jim O’Neill:
through the ebb and flow of foreign exchange movements, our system of floating rates will demonstrate its utility. It will ultimately deliver much more sense than many of those who currently opine about it.
posted on 24 November 2010 by skirchner in Economics, Financial Markets
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Why Central Banks Should Not Lean Against the Wind
The Cato Institute held its 28th Annual Monetary Policy Conference on the theme of ‘Is Monetary Policy Responsible for Bubbles?’ Adam Posen (a social democrat rather than a classical liberal) presented a paper titled ‘Do We Know What We need to Know in Order to Lean Against the Wind?’ This was his conclusion:
even the seemingly least controversial assumption required for leaning against the wind to succeed – that central banks can discern destabilizing booms with sufficient notice to pre-empt them – will be invalid. Since this argument is solely about the ability of monetary policymakers to recognize and react to asset price booms, and not about the viability of their means to affect asset prices, this should concern advocates of discretionary macroprudential policymaking as well, even when using non-monetary tools.
Posen wrote an even more thorough critique of using monetary policy to manage asset prices that can be found here. My own effort in this regard can be found here.
posted on 23 November 2010 by skirchner in Economics, Monetary Policy
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The QE Bunnies Meet Jim Hamilton
The non-cartoon version of QE.
posted on 23 November 2010 by skirchner in Economics, Monetary Policy
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Another Small Catch from the FOI Desk at the Oz
Another fishing expedition from the FOI desk at The Australian turned up this, with the following sub-editorial spin:
THE Reserve Bank deliberately intervened in the political debate over the property boom to stop governments releasing more land.
While I’m certainly not above using the FOI process to get a headline, a little more context would have been appropriate for this story. Luci Ellis wrote an RBA RDP in 2006 that argued that it was the combination of a demand-side shock from increased household sector leverage in a low inflation-low interest rate environment and an inflexible supply-side that gave rise to the early 2000s house price boom.
I agree with Chris Joye that the RBA had it wrong in the early 2000s and has now changed its tune. The RBA’s fingering of negative gearing in its 2004 submission to the Productivity Commission inquiry was possibly an attempt to set the government up as a scapegoat in case the early 2000s housing boom had ended badly in the context of a monetary policy tightening cycle. The RBA’s then jaw-boning of a supposedly over-heated market now looks rather quaint.
There has been a change in leadership at the RBA since then. Glenn Stevens’ more recent comments about ‘serious supply-side constraints’ in housing are pretty brave by the standards of an Australian central banker (imagine the reaction to Stevens making an even vaguely critical remark about the NBN and you will see what I mean). They are a damning criticism of policy at all levels of government. The only reason it hasn’t been written up that way is that many in the media simply don’t believe that housing affordability is a supply-side problem requiring supply-side solutions.
posted on 22 November 2010 by skirchner in Economics, House Prices, Monetary Policy
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