Tens of Billions Lost
RBA Board member Warwick McKibbin, on the resource cost of fiscal stimulus:
RESERVE Bank director Warwick McKibbin has publicly questioned whether the Rudd government dumped him from the Prime Minister’s science council as payback for saying its fiscal stimulus package was “too big”.
Speaking yesterday after Wayne Swan said the RBA was “entirely comfortable with our fiscal policy”, Professor McKibbin said he had no doubt history would show that the Rudd government had overdone the stimulus.
Professor McKibbin also revealed that part of the motivation behind establishing a new council of eminent economists to debate policy issues was to encourage academics to speak out.
“I think when people look through the entrails of this, they will find billions, if not tens of billions, that was just lost,” he told The Australian.
A few weeks after he suggested that the second part of the stimulus package was too large while giving evidence at a Senate inquiry in May, he was dumped from a government advisory role on the Prime Minister’s Science and Innovation Council, Professor McKibbin said.
posted on 09 November 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, Politics
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‘I Have Been Corrupted, A Little’: How Spin-Resistant Are Economics Bloggers?
The US Treasury has been running high level briefing sessions for economic bloggers. Officialdom has obviously recognised that bloggers are an influential voice and need to be managed like old media. Fortunately, economics bloggers are proving a little more spin-resistant than Treasury perhaps expected. Here is what Naked Capitalism thought about the briefing:
It wasn’t obvious what the objective of the meeting was (aside the obvious idea that if they were nice to us we might reciprocate. Unfortunately, some of us are not housebroken).
And Steve Waldman:
The second thing I’d like to discuss is corruption. Not, I hasten to add, the corruption of senior Treasury officials, but my own. As a slime mold with a cable modem, it was very flattering to be invited to a meeting at the US Treasury. A tour guide came through with two visitors before the meeting began, and chattily announced that the table I was sitting at had belonged to FDR. It very clearly was not the purpose of the meeting for policymakers to pick our brains. The e-mail invitation we received came from the Treasury’s department of Public Affairs. Treasury’s goal in meeting with us was to inform the public discussion of their past and continuing policies. (Note that I use the word “inform” in the sense outlined in a previous post. It is not about true or false, but about shaping behavior.)
Nevertheless, vanity outshines reason, and I could not help but hope that someone in the bowels of power had read my effluent and decided I should be part of the brain trust. The mere invitation made me more favorably disposed to policymakers. Further, sitting across a table transforms a television talking head into a human being, and cordial conversation with a human being creates a relationship. Most corrupt acts don’t take the form of clearly immoral choices. People fight those. Corruption thrives where there is a tension between institutional and interpersonal ethics. There is “the right thing” in abstract, but there are also very human impulses towards empathy, kindness, and reciprocity that result from relationships with flesh and blood people. That, aside from “cognitive capture”, is why we should be wary of senior Treasury officials spending too much time with Jamie Dimon. It is also why bloggers might think twice about sharing a conference table with masters of the universe, public or private. Although the format of our meeting did not lend itself to forging deep relationships, I was flattered and grateful for the meeting and left with more sympathy for the people I spoke to than I came in with. In other words, I have been corrupted, a little.
In Australia, it is worth noting that most of the running on the issue of RBA media backgrounding has been from new media like Business Spectator and bloggers, although old media have since picked-up the story too. Spin control becomes a lot more difficult when dealing with a proliferation of unregulated media with no stake in the status quo.
posted on 06 November 2009 by skirchner in Economics, Financial Markets, Politics
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The Efficient Market Fantasy of Justin Fox
Eugene Fama reviews The Myth of the Rational Market, by Justin Fox:
The book is fun reading, but its main premise is fantasy. Most investing is done by active managers who don’t believe markets are efficient. For example, despite my taunts of the last 45 years about the poor performance of active managers, about 80% of mutual fund wealth is actively managed. Hedge funds, private equity, and other alternative asset classes, which have attracted big fund inflows in recent years, are built on the proposition that markets are inefficient. The recent problems of commercial and investment banks trace mostly to their trading desks and their proprietary portfolios, and these are always built on the assumption that markets are inefficient. Indeed, if banks and investment banks took market efficiency more seriously, they might have avoided lots of their recent problems. Finally, MBA students who aspire to high paying positions in the financial industry have a tough time finding a job if they accept the EMH.
I continue to believe the EMH is a solid view of the world for almost all practical purposes. But it’s pretty clear I’m in the minority. If the EMH took over the investment world, I missed it.
The Fox book is an example of a general phenomenon. Finance, financial markets, and financial institutions are in disrepute. The popular story is that together, they caused the current recession. I think one can take an entirely different position: financial markets and financial institutions were casualties rather than the cause of the recession.
posted on 05 November 2009 by skirchner in Economics, Financial Markets
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The Revenge of the Three Amigos
An insight into how Australia is perceived abroad, care of Holman Jenkins in the WSJ:
What most infuriated their hosts, though, was Telstra’s abandonment of its traditional deference to policy makers. The company took regulators to court over mandates requiring it to lease its network to competitors at knockdown rates. Mr. Burgess bashed civil servants and politicians by name, in a fashion apparently deemed unbecoming a corporate citizen in Australia…
Australia lacks America’s bottomless think-tank and K Street resources for publicizing policy differences. Its parliamentary government puts all the policy levers, including a ready resort to secrecy, in the ruling party’s hands. Australia is a small nation, with a small elite that tends to place limits on burn-the-bridges debate.
posted on 04 November 2009 by skirchner in Economics, Politics
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Steve Keen’s Accidental Demonstration of the Efficient Market Hypothesis
Following the release of the ABS house price data for the September quarter, Steve Keen concedes defeat in his bet with Rory Robertson and will be hiking from Canberra to the top of Australia’s highest mountain wearing a teeshirt that reads ‘I was hopelessly wrong on house prices, ask me how.’ Keen’s answer is to blame the gub’nent:
“I didn’t know the government was going to be stupid enough to bring in the first home buyer’s boost”.
While I would agree that the increased first home-owners grant has inflated house prices, transferring wealth from taxpayers to incumbent property owners, it would be an exaggeration to say that this prevented a decline in house prices of the magnitude Keen has been predicting. Moreover, any forecast needs to discount the likely actions of policymakers.
Steve Keen has inadvertently supplied yet another observation in favour of the efficient market hypothesis, much like Robert Shiller’s suggestion in 1996 that investors should stay out of the stock market for the following decade. The EMH maintains only that we cannot predict future innovations in asset prices. It is ironic that both Keen and Shiller have demonstrated the truth of this proposition in the course of trying to refute it.
Perhaps the teeshirt should read, ‘The EMH was right on asset prices, just don’t ask me how’.
posted on 03 November 2009 by skirchner in Economics, Financial Markets, House Prices
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The RBA and the Media Revisited
I featured in a Lateline Business story last night on Reserve Bank media backgrounding in relation to monetary policy. Lateline Business supervising producer Richard Lindell deserves considerable credit for pursuing this story in the face of both official and unofficial stonewalling. Credit is also due to Alan Kohler, Adam Carr and Christopher Joye, who have all spoken out on this issue. Some of the people who originally agreed to appear on camera for the story were prevented from doing so by their employers. As I said to Richard Lindell, ‘now you know why market economists don’t criticise fiscal stimulus.’
A 2001 AFR Magazine profile of then RBA Governor Ian Macfarlane by Peter Hartcher quoted a former RBA official as saying:
The Bank uses newspapers to manage expectations. It’s a game the Bank manages very well. Senior people talk to a small handful of the economics writers from the major papers on a strictly non-attributable basis.
The quote was re-produced in Stephen Bell’s 2004 book on the Reserve Bank, Australia’s Money Mandarins (see my review). Journalists and academics should be the standard-bearers for due process, procedural fairness and public accountability. Yet many commentators view the RBA’s manipulation of the media as simply a clever use of power.
The practice is a legacy of a less transparent era at the Reserve Bank. With so many open channels of communication now available to the Bank, there is no longer any excuse for it to continue.
There is more on Reserve Bank governance here.
posted on 03 November 2009 by skirchner in Economics, Financial Markets, Monetary Policy
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Tax Competition and the Future Fund
Australia’s sovereign wealth fund, the Future Fund, does not pay tax, which would be pointless, but it is not too keen on paying foreign taxes either. The Fund’s 2008-09 Annual Report shows five Cayman Islands subsidiaries. As the report notes ‘the Fund seeks to maximise after tax returns and, where it is legitimate to use a structure which protects the claim to sovereign immunity, this path has been taken.’ The Australian government has been an enthusiastic participant in international efforts to crack-down on so-called ‘harmful’ tax competition, but is not averse to having its own proprietary trading operation take advantage of these opportunities. To be clear, this is meant as a criticism of the government’s participation in such efforts and not the Future Fund.
The Fund saw a real rate of return of -5.7% (ex-Telstra), which is pretty poor compensation for the tax cuts forgone as a result of the Fund’s creation. The Fund remains 41.1% invested in cash (ex-Telstra), down from 62.1% at the end of the previous financial year. The government could have achieved a better return with less risk and at lower cost simply leaving the funds on deposit with the Reserve Bank.
posted on 30 October 2009 by skirchner in Economics, Financial Markets, Fiscal Policy
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Why the Financial Crisis Proves the Efficient Market Hypothesis
Jeremy Siegel on why the financial crisis proves rather than disproves the efficient market hypothesis:
is the Efficient Market Hypothesis (EMH) really responsible for the current crisis? The answer is no. The EMH, originally put forth by Eugene Fama of the University of Chicago in the 1960s, states that the prices of securities reflect all known information that impacts their value. The hypothesis does not claim that the market price is always right. On the contrary, it implies that the prices in the market are mostly wrong, but at any given moment it is not at all easy to say whether they are too high or too low. The fact that the best and brightest on Wall Street made so many mistakes shows how hard it is to beat the market.
posted on 28 October 2009 by skirchner in Economics, Financial Markets
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Complete Confusion
You know it’s Friday whenever the government slips out another late afternoon FDI approval. The government continues to micro-manage FDI in Australia, with another long list of conditions attached to Yanzhou Coal Mining Company Limited’s acquisition of Felix Resources, while creating even more uncertainty about government policy:
One adviser to Chinese companies trying to invest in Australian resources, who has had potential takeovers of Australian public companies quashed by FIRB before they were made public, expressed frustration at the lack of consistency.
“It creates complete confusion as to what the policy is,” he said.
“All we can see is that there is no policy.”
Senator Sherry’s office would not comment on what could be gleaned from the decision in terms of policy.
Because there is none.
posted on 24 October 2009 by skirchner in Economics, Foreign Investment
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Never Mind the Prices, Check the Volumes
As Australia records the biggest annual percentage decline in Australian dollar export prices since comparable data began in 1974, Stephen Green predicts ‘enormous’ Chinese demand for Australian iron ore next year.
I discuss the relationship between Australian export prices and volumes in this article.
posted on 23 October 2009 by skirchner in Economics, Financial Markets
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Steve Keen, They Hardly Knew You
The latest 12-month consumer house price expectations from Westpac-Melbourne Institute:
Some 73% of respondents expect prices to increase over the next 12 months with 15.9% expecting no change and 9.9% expecting a decline. The proportion expecting an increase compares with 53% in July and 32% – a minority – in May.
posted on 21 October 2009 by skirchner in Economics, House Prices
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What If You Got Pink Bats and a School Hall for Christmas?
Scroogenomics author Joel Waldfogel, on the welfare costs of poorly chosen Christmas gifts:
My favorite way to do it is to compare what would you be willing pay for stuff that you receive as a gift per dollar spent versus what would you be willing to pay for stuff you bought for yourself per dollar spent. The surveys converge on the idea that it is about 20% less. U.S. holiday spending per year is conservatively about $65 billion. So about 20% of that, something like $13 billion a year, is what’s destroyed through gift giving in the U.S. But it turns out it is by no means limited to the U.S.
You see the same pattern of spending in almost every major western economy, with a big bump in spending in December. You don’t see it in China and you don’t see it in Israel. But you see it in every country that is predominantly Christian, and some that aren’t. Japan also has it in a big way. If you add up that spending in the other major OECD economies you get, instead of $65 billion alone for the U.S., $130 billion (in holiday spending). There’s every reason to believe the dead weight loss is as big elsewhere. That would get you to $25 billion a year around the world in value destroyed through gift giving.
An almost perfectly analogous argument can be made against fiscal stimulus of the non-cash variety, except that the government has even less knowledge about your preferences, has even less of an incentive to satisfy them and you get sent a tax bill for the gifts you didn’t want. The rush to push stimulus dollars out the door is similar to the mad rush to buy presents before Christmas, resulting in poor quality spending decisions. The political Santa Claus also has a rather more selective view of who has been ‘naughty’ and who has been ‘nice’.
Fiscal stimulus spending is often viewed as valuable in its own right, as if it doesn’t matter what the government spends money on. When asked whether his proposal for less Christmas gift-giving would be bad for the economy, Waldfogel notes:
I’m not against spending, I’m just against spending done ignorantly by others… Although George Bush said go out and spend and other folks have exhorted us to spend at times, spending is not really a measure of success or satisfaction… When we say it is good for the economy, we can’t just look at the amount of spending, we want to think about the amount of satisfaction that we’re getting from the spending.
While Waldfogel’s argument is less applicable to so-called ‘cash splashes’, last year’s cash hand-outs were strategically timed just before Christmas. We will never know just how much of last year’s pre-Christmas cash splash ended-up in the great national stockpile of unwearable socks and ties.
posted on 19 October 2009 by skirchner in Economics, Fiscal Policy
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Absolute Greed
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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Fiscal Stimulus and Monetary Policy
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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When FDI Regulation Turns to Crap
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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