‘Fiscal Conservatism’ for All

Seems not everyone got the memo on ‘fiscal conservatism’:

KEVIN Rudd faces intensifying pressure from community groups for billions of dollars of new government spending, despite his promise of an austerity budget designed to ease pressure on inflation and interest rates.

As the Prime Minister told a business breakfast in Perth yesterday of his plans to cut spending in the 2008-09 budget, to be delivered in May, his office was being flooded with requests for more than $7 billion in spending on health, infrastructure and climate change.

posted on 22 January 2008 by skirchner in Economics, Financial Markets, Politics

(0) Comments | Permalink | Main

How to be a ‘Fiscal Conservative,’ Without Really Trying

Prime Minister Kevin Rudd is promising budget surpluses of 1.5% of GDP, as part of the government’s ‘war on inflation.’  Relative to the forward estimates contained in the previous government’s Mid-Year Economic and Fiscal Outlook, this represents a fiscal contraction of a mere 0.2% of GDP.

Contrary to popular perception, Commonwealth fiscal policy is already the tightest it’s been in two decades.  Looking at actual budget outcomes, as opposed to the forward estimates or the arbitrary counterfactuals the commentariat love to play with, the fiscal impulse (ie, the change in the budget balance as a share of GDP) has been either neutral or contractionary for the entire period since 2001-02.  The underlying cash surplus has ranged between 1.5-1.6% of GDP since 2004-05, a GDP share not seen since the peak of the last cycle in the late 1980s.  The automatic stabilisers would probably cough-up another surplus of 1.5% of GDP anyway, regardless of any contribution from discretionary policy actions.

The fiscal impulse has been largely irrelevant to inflation and interest rate outcomes in recent years.  Today’s announcement suggests that is not about to change.

posted on 21 January 2008 by skirchner in Economics, Financial Markets, Politics

(1) Comments | Permalink | Main

Contrarian Indicator Alert: Mum & Dad Gold Bugs

The phones are running hot at the Perth Mint.

For an Australian dollar-denominated investor, gold should hold even less than usual appeal.  As a major producer, Australia is already long gold.  The Australian dollar is positively correlated with the US dollar gold price, so the Australian dollar gold price tends to underperform gains in the world price. 

Little known fact: China became the world’s number one gold producer in 2007, according to GFMS Ltd’s annual Gold Survey.

posted on 21 January 2008 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

Paypal’s Exchange Rates

I regularly transfer US dollar Paypal balances to Australian dollars, which are normally converted at a 2.5% spread to wholesale spot rates.  Paypal update their exchange rates twice daily.  Since I have real-time access to wholesale spot rates, I can check the spread to spot and it is usually pretty close to 2.5%. 

Recently, however, I have had a problem with Paypal failing to quote me updated exchange rates.  I asked other Paypal account holders to get quotes on the USD-AUD exchange rate and they were being quoted different conversion rates that better reflected the 2.5% spread over spot rates.

I then checked to see what would happen if I logged into my account from a different computer, thinking it might be a caching issue.  This finally resulted in an updated quote, but when I transferred a USD balance, the transfer was made at the former stale exchange rate I was being quoted previously.

Apart from being weird and different from my previous experience with Paypal, this is also inconsistent with Paypal’s Product Disclosure Statement required of financial service providers under Australian law.  The exchange rate was not being updated regularly, the quoted spread was not the 2.5% mentioned in the PDS (at least not for me) and Paypal processed the conversions at a different rate to the one they quoted me immediately before I made the transaction.

My enquiries with Paypal have only elicited irrelevant boilerplate responses, so I’m thinking of referring the matter to the banking industry ombudsman.  But before I do, I thought I would see if anyone else has had similar problems or had an explanation for what might be going on.  I would actually be even more impressed to hear from someone with Paypal Australia.  Any tech or financial journalists who would like to follow-up the story are also welcome to get in touch.

UPDATE (February 1): Paypal have finally acknowledged the error in an email to me:

We are actually aware of the issue and are working towards a resolution. We have added your account as another example of the error to expedite the urgency of the issue.

My suggestion would be that anyone with recent Paypal exchange rate conversions should check the rate they were given against wholesale spot rates.  If the spread is not around 2.5%, you may want to get on to Paypal to seek a correction.

posted on 19 January 2008 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

Paypal Spot Rate Check Bleg

Would be grateful if any readers with a Paypal account and a USD balance could do a check on the USD-AUD exchange rate (not AUD-USD) quoted by Paypal.  Note that there is no need to do an actual conversion, just go into ‘manage currency balances,’ where it will give you a quote without having to follow through with the conversion.  I need the quote to five decimal places (try converting more than one US dollar to get the full quote).  Potentially an interesting story in it.  Will post a link from my site to yours as reward for your trouble.  Thanks in advance.  My email is info at institutional-economics.com.

UPDATE: No more quotes thanks.  I have what I need.

posted on 18 January 2008 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

The CEO of Princeton Economics

Australia’s House Economics Committee may be cringe-inducing at times, but at least they generally know who they are talking to.  Here’s Representative Marcy Kaptur, D-Ohio, grilling Fed Chairman Bernanke at a Budget committee hearing:

KAPTUR: Number three, seeing as how you were the former CEO of Goldman Sachs, what percentage level—oh, investment—were you not…
BERNANKE: No, you’re confusing me with the Treasury Secretary.
KAPTUR: I got the wrong firm?
BERNANKE: Yes.
KAPTUR: Paulson. Oh, OK. Where were you, sir?
BERNANKE: I was a CEO of the Princeton Economics Department.
KAPTUR: Oh, Princeton. Oh, all right. Sorry. Sorry.
(LAUGHTER)

Also caught on Youtube.

posted on 18 January 2008 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

A Monetarist’s Work is Never Done

At the ripe old age of 92, Anna Schwartz is still giving the Fed a hard time:

“There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for,” she says.

While this is a widely held view, it is one I (respectfully, in this case) disagree with.  It is hard to pin the under-pricing of risk in credit markets on monetary policy, as opposed to the innovative nature of the products involved.  One can make a case that the amplitude of the most recent Fed funds rate cycle has been a factor in triggering widespread mortgage defaults, but that in turn reflected the preponderance of fixed rate mortgages in the US, which delayed the pass through of changes in the Fed funds rate to actual lending rates.  The Fed was simply not getting much of an effect from changes in the Fed funds rate back in 2002 and 2003, which was also a factor in the very gradual re-tightening from mid-2004.  If anything, this suggests that the US economy is not all that responsive to changes in official interest rates.  The Fed stopped tightening and held rates steady for more than a year before the problems in credit markets emerged.  It is hard to believe that the Fed triggered a credit shock by doing nothing for more than 12 months.

Few of the people who are now blaming the Fed were complaining about low interest rates in 2003.  For its part, the Fed was fretting over the prospect of deflation instead.  As the linked story notes:

Bernanke insists that the Fed has leant the lesson from the catastrophic errors of the 1930s. At the late Milton Friedman’s 90th birthday party, he apologised for the sins of his institutional forefathers. “Yes, we did it, we’re very sorry, we won’t do it again.”

Of course, there is no reason why we shouldn’t revise our analysis of events ex-post.  But to blame subsequent events entirely on monetary policy is as unhelpful as it is implausible.

Still, you’ve got to hand it to Anna, fronting up to work at the NBER at 92.  Most of us should be grateful to still be constructing coherent sentences at that age.  If Friedman and Schwartz are any guide, monetarism is good for your health.

posted on 17 January 2008 by skirchner in Economics, Financial Markets

(3) Comments | Permalink | Main

Yet Another ‘New Era’?

Having promised a ‘new era’ of Reserve Bank independence, the government is now promising the Reserve Bank a ‘new era of fiscal discipline’:

KEVIN Rudd and Wayne Swan have personally told the Reserve Bank of their determination to cut budget spending to reduce the need for further interest rate rises.

Following their meeting at the Reserve Bank’s Sydney headquarters with deputy governor Ric Battellino and Treasury secretary Ken Henry, Mr Swan said they had “flagged a new era of fiscal discipline”.

“It’s critical we demonstrate restraint as we frame our first budget, because that sends a clear message to the Reserve Bank,” Mr Swan said.

For reasons argued here, demand management is the wrong focus for fiscal policy and is not likely to have much impact on interest rates in any event.  Rising interest rates are in fact symptomatic of economic strength, not weakness.  What the government should fear most is that the RBA should start cutting interest rates, since that will be one of the first signs that the Australian economy has succumbed to the deteriorating global growth outlook.  Rising interest rates should be the least of the government’s worries.

This is not to deny that Australia has an inflation problem, but all the finger-pointing between the government and the opposition misses the point that there is only one public institution in Australia with an explicit mandate to control the cyclical component of inflation, and that’s the Reserve Bank.  Next week’s Q4 CPI release will likely show underlying inflation running above the RBA’s 2-3% medium-term target range.  Given the lags between changes in official interest rates and inflation outcomes, this tells us that the RBA was not doing its job properly 12-18 months ago.  The newly elected Labor government has inherited an inflation problem from the Reserve Bank, not the former Coalition government.

posted on 16 January 2008 by skirchner in Economics, Financial Markets, Politics

(4) Comments | Permalink | Main

Douglas Holtz-Eakin on John McCain

Douglas Holtz-Eakin, economic policy adviser to Republican presidential candidate John McCain, talks to Bloomberg’s Tom Keene (mp3) about why McCain is the only candidate he has ever worked for.

posted on 15 January 2008 by skirchner in Economics, Politics

(0) Comments | Permalink | Main

‘Nice Bank You’ve Got There.  Shame if Something Were to Happen to It’

Former Treasurer Peter Costello boasts that he thugged the banks better than Treasurer Swan:

Mr Costello claimed during his tenure as treasurer he was able to apply pressure to the bank’s chiefs not to raise rates as a result of the global credit crunch.

“They’ve taken the opportunity of a new treasurer who is not on top of the job to increase their margins and he came out and of behalf of the Labor Party he approved it,” Mr Costello said.

“I made it clear there were no grounds for the banks to increase interest rates,” Mr Costello said.

Treasury are not the only ones glad to see the back of Peter Costello.

posted on 11 January 2008 by skirchner in Economics, Financial Markets, Politics

(0) Comments | Permalink | Main

China’s Credit Crunch II

China continues to rely on quantitative lending controls to address the inflationary implications of its peg to the USD:

China will limit next year’s commercial bank loan growth to 15 percent and has urged banks to adhere to quarterly lending targets or risk punishment, the official Shanghai Securities News reported on Friday.

The government also urged lenders to spread new loans more evenly through 2008 and indicated they should lend out 35 percent of the full-year quota in the first quarter, 30 percent in the second, 25 percent in the third and 10 percent in the fourth, the newspaper said, citing unnamed banking sources.

Those that lend more excessively than told may face administrative penalties, be issued with central bank bills at below-market interest rates or be ordered to set aside more deposits at the central bank as reserves, the newspaper said.

Meanwhile, Morgan Stanley gets a capital infusion from Chi-com sovereign wealth fund, China Investment Corp.  As Macro Man notes, all those years of sucking-up by Morgan’s resident Sinophile, Stephen Roach, have finally paid-off.

posted on 21 December 2007 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

The Euro’s Day Will Not Come

Adam Posen, on why recent strength in the euro does not herald its rise to greater international status:

So a strengthening of the euro against the dollar, even for several months in a row, is not indicative of a decline in the dollar’s global role and usage, or for that matter much of anything else. People started talking about a move away from the dollar in the 1970s when US long-term economic prospects were far more uncertain relative to Europe and Japan than they are now compared even to China—and nothing happened in terms of a decline in the dollar’s global role…

No one should read too much into exchange rate swings, including the recent decline of the dollar against the euro. It takes much more than such a depreciation to cause a shift in reserve currency status. The euro may someday play a global role beyond its current use, but until the eurozone’s financial markets integrate, its sustainable growth rate rises, and its willingness to import increases, that day will not come.

posted on 19 December 2007 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

Greenspan: A Lifelong Libertarian Republican

Alan Greenspan’s memoir was released the day before his successor as Federal Reserve Chairman presided over a reduction in US interest rates of 0.50 percentage points, the first easing in US monetary policy since 2003.  Many have argued that the current economic problems in the US are attributable to Greenspan’s legacy as Fed Chairman.  Greenspan defends the policy actions of the Federal Open Market Committee (FOMC) during his tenure, but does not fully engage with his critics.  This is unfortunate, because Greenspan’s book could have served as a much needed corrective to those who argue that monetary policy is the principal driver of the business cycle and asset price dynamics.  This view has almost no empirical support, but has popular appeal as a simple, mono-causal explanation for economic developments that are not otherwise well understood.  Under Greenspan and his predecessor, Paul Volcker, US monetary policy focused more successfully on anchoring the long-run price level of the US economy than had been the case in earlier decades.  Greenspan and the other members of the FOMC did not and could not aim to eliminate the business cycle or asset price inflations and deflations, which are a normal part of the functioning of the economy and financial markets.  Those who argue otherwise are effectively calling for a kind of central planning via monetary policy that is likely to be far more destabilising than the current focus on long-run inflation control.

continue reading

posted on 16 December 2007 by skirchner in Economics, Financial Markets

(2) Comments | Permalink | Main

Collective Responsibility and RBA Board Secrecy

RBA Governor Stevens has elaborated on the rationale for the RBA’s new transparency regime in a speech to the Sydney Institute.  Stevens was careful to disassociate the new measures from the change in government, saying that the RBA had ‘reflected on this for some time this year,’ and that he ‘was very pleased to learn when I met the new Treasurer a couple of weeks ago that he supported the changes.’  It is likely that the new measures have as much to do with the change at the top of the RBA last year as the change in government this year, although their announcement at the first Board meeting after the federal election is surely not entirely coincidental.

Much of the speech is given over to the ‘limits of transparency,’ with Stevens arguing that:

The nature of the Reserve Bank Board – a majority of whom are part-time members, drawn from various parts of the Australian community, but seeking to make decisions in the national interest as opposed to any industry, geographical or sectional interest – needs to be considered when thinking about disclosure practices…

Readers will also observe that the pattern of votes of individuals is not recorded [in the new minutes], only the outcome. That is a point of difference with other central banks which publish minutes. But in those cases the decision-makers are full-time appointees, in some cases in systems with expressly individual, as opposed to collective, responsibility for their decisions. That is not the system Australia operates, and our pattern of disclosure reflects the institutional arrangements.

Stevens’ argument about collective responsibility is an embellishment of the RBA’s traditional argument for Board secrecy, which is that the backgrounds of the external Board members would subject them to undue external pressure if their behaviour on the Board in relation to monetary policy became known.  Stevens is smart enough not to make explicit what is really being argued here: that some of the external Board members are too conflicted to discharge their responsibilities in relation to monetary policy in a transparent fashion.  In any other setting, this argument would be considered absurd.  Indeed, the potential for such conflicts argues if anything for more transparency, not less.  More fundamentally, it is an argument for the removal of responsibility for monetary policy from the RBA Board.

Stevens says that the Bank of England ‘MPC’s culture is expressly, by the intention of its creators, one of individual accountability.’  The implication is that the RBA has a different institutional make-up and culture, so that ‘it would not make sense to “cherry pick” the high transparency aspects of every other system and assume that they should simply be grafted onto the Australian system.’  But this is exactly why more fundamental statutory reform of monetary policy governance is required.  The RBA Board and its statutory responsibilities date back to 1960, and are little changed on the central banking arrangements of the 1930s.  The RBA’s governance structures as they are currently constituted are simply incompatible with a fully transparent monetary policy regime. 

Stevens also cites the fact that the ECB does not publish minutes: ‘it is argued, not unreasonably, that publication of minutes and voting might prejudice the capacity of the national governors to take a euro area, rather than national, perspective.’  This is just one of many arguments against European Monetary Union rather than a valid defence of a lack of transparency in the conduct of monetary policy.

We argued in the previous post that the new statutory protections for the RBA Governor and Deputy Governor and the new appointments process for external Board members runs the risk of entrenching bureaucratic influence over monetary policy at the expense of the increased external participation and scrutiny that could be expected from a Bank of England MPC-type arrangement.  Indeed, the new arrangements substantially diminish accountability for monetary policy, in that there is no mechanism for the removal of the Governor or Deputy Governor for non-performance, which remains poorly benchmarked in any event.  Overlaying this with a doctrine of collective responsibility for monetary policy decision-making means that the new arrangements may actually serve to detract from transparency and accountability in the conduct of monetary policy.  The RBA has put in place many of the trappings of transparency, but without the substance that would ensure genuine accountability for decision-making.

posted on 12 December 2007 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

A New Era of RBA Independence or the Bureaucratisation of Monetary Policy?

The RBA Governor and Treasurer have announced a new Joint Statement on the Conduct of Monetary Policy, which Treasurer Swan has hailed as a ‘new era’ of central bank independence.  The Statement maintains the existing inflation target of 2-3% on average over the economic cycle.  The main change is that the positions of the Governor and Deputy Governor will have their level of statutory independence raised to be equal to that of the Commissioner of Taxation and the Australian Statistician. Their appointments will be made by the Governor-General in Council, and could be terminated only with the approval of each House of the Parliament in the same session of Parliament. 

In relation to appointments of external members to the RBA Board, the Secretary to the Treasury and the RBA Governor will maintain a register of ‘eminent’ candidates of the ‘highest integrity,’ from which the Treasurer will make new appointments to the Reserve Bank Board.

The improvements to the statutory independence of the Governor and Deputy Governor are welcome in that they serve to augment the existing provisions of the RBA Act that have always given the RBA Governor a high degree of independence from the government of the day.  Contrary to the myth propagated by former Treasurer Peter Costello, RBA independence did not begin in August 1996 with the first Joint Statement.  But these measures are unlikely to afford the Governor and Deputy Governor much additional independence in practice.  The best protection for the Governor and Deputy Governor is their own reputation, which would make any politically-motivated dismissal very damaging for the government of the day.  International capital markets could also be expected to punish any government that sought to overtly compromise the independence of the Bank.

The changes in relation to the external Board appointments are designed to remedy the situation by which these appointments have been used for political patronage, most recklessly in the case of former Treasurer Peter Costello’s appointment of Robert Gerard.  This may protect the appointments process from undue political influence, but creates a new problem in that it will effectively limit Board appointments to those who meet with approval from the official family of RBA and Treasury.  This is a backward step, which will work against promoting a diversity of viewpoints in the policymaking process. 

Under the former government, bureaucratic capture of the executive was just as big a problem as executive politicisation of the bureaucracy.  In the Treasury portfolio for example, Peter Costello was the subject of aggressive bureaucratic capture in relation to a broad-range of policy areas, from international tax harmonisation to the G20, allowing Treasury to promote its own interests.  The new appointments process for external Board members risks entrenching the influence of the RBA’s senior officers over the monetary policy decision-making process, at the expense of those who have been critical of past or current policy.  Given that the RBA is currently presiding over an inflation rate in breach of its mandate, this seems an odd time to be further entrenching bureaucratic influence over policy.

The involvement of the Treasury in this process is also at odds with international trends in central bank reform, which generally seek to increase the degree of separation between monetary policy and the fiscal authority.  The new register will serve to increase the influence of Treasury over policy.  The Treasury Secretary should be excluded from a direct role in monetary policy, with either no representation on the RBA Board, or non-voting representation only.  The Treasury should play no role in the appointments process for the RBA Board.

Ultimately, politics cannot be completely removed from the appointments process for both the Bank’s senior officers and the external Board members.  The RBA is a government creation and must at some level be answerable to the government of the day.  The best protection for the integrity of monetary policy is an extremely high level of transparency in monetary policy decision-making.  Unfortunately, the new arrangements for the release of the Board minutes will still keep secret the decisions of individual Board members in relation to monetary policy.  Coupled with the effective internalisation of the appointments process to those approved by the Treasury-RBA official family, the new arrangements may serve to entrench the de facto monopoly that the RBA’s senior officers enjoy over decision-making and minimise effective external participation in, and scrutiny over, monetary policy.

posted on 06 December 2007 by skirchner in Economics, Financial Markets, Politics

(0) Comments | Permalink | Main

Page 54 of 97 pages ‹ First  < 52 53 54 55 56 >  Last ›