Part-Time Work at the RBA Board

The so-called part-time members of the RBA Board were even more part-time than usual in October:

The minutes of the October board meeting, released yesterday, reveal that only three of the six independent board members attended the meeting, with the key voices on the health of retailing, manufacturing and the global economy absent. It was the lowest board meeting attendance in the four years that the Reserve Bank has been releasing its minutes.

The chairman of Bluescope Steel and Brambles, Graham Kraehe, former Woolworths chief executive Roger Corbett, who is also a director of US retailer Walmart and chairman of Fairfax, and the board’s resident academic economist, Warwick McKibbin, all had other commitments.

It only takes five of the nine members to form a quorum.

posted on 20 October 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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Economists as Gurus

Among many great papers at the Mont Pelerin Society General Meeting in Sydney was Geoff Brennan’s contribution on The Economist as Guru, which looked at the supply and demand for gurus. There was some debate as to whether the willingness of some economists to misappropriate their intellectual authority mattered given a free market in ideas.

Perhaps the most outrageous case of a guru in financial markets is Nouriel Roubini, but this article shows that the market in ideas has not completely failed in exposing Roubini:

A closer inspection of Roubini’s record shows that while he was predicting doom and gloom for the US in 2004, his initial call had nothing to do with a runaway housing bubble.

Rather he argued that the Bush Administration was racking up massive deficits to foreign investors, namely the Chinese, and that the Chinese would scale back on their purchases of US debt, causing interest rates to spike and the dollar to decline in value, resulting in “financial trainwrecks for the US economy in a matter of a couple of years.”

Sounds good, but the problem with the theory is that it didn’t happen.

posted on 17 October 2010 by skirchner in Economics, Financial Markets

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The Perception that Will Not Die

The RBA wrong-footed the market and commentariat with Tuesday’s steady rates decision, although not quite as comprehensively as a similar decision back in February. The February decision provided a rather convenient backdrop for RBA Governor Glenn Stevens’ appearance before the House Economics Committee later that month, where he was questioned about RBA media backgrounding and said that ‘people do not leak the outcome’.

Despite the wrong-footing of the commentariat, most notably Terry McCrann, this has still not laid to rest financial market perceptions that the RBA engages in media backgrounding of selected journalists. Chris Joye quotes Kieran Davies:

note that the surprise decision today potentially signals a change in communication strategy by the Reserve Bank. In the past, the Bank has been fond of guiding the market via indirect signalling via the media. That hasn’t been the case this month, but it is not clear whether the Bank has permanently closed this channel.

Governor Stevens’ denial before the House Economics Committee and the wrong-footing of the commentariat has yet to convince those in financial markets. Having played favourites with the media for so long, it will be hard for the Bank to finally put this perception to rest.

For the record, here is what a former RBA official had to say in the AFR Magazine in 2001:

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. I think it’s right to do this from the bank’s point of view, but not necessarily from a public policy view: accountability and a critical press are very important in this system.

posted on 06 October 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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The CPI Pulse that Goes Dead Two Months in Three

HSBC chief economist for Australia and New Zealand, Paul Bloxham, makes the case for a monthly CPI. I made related arguments in this op-ed in The Canberra Times in March.

posted on 04 October 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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How to Name A Hedge Fund

...according to Nobel laureate Myron Scholes of Platinum Grove Asset Management:

One of my partners is Chinese, and he said we needed a name that had one metal in it and one wood.

posted on 30 September 2010 by skirchner in Economics, Financial Markets

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How to Start a Hedge Fund

Name your fund, then hire a law firm.

posted on 29 September 2010 by skirchner in Economics, Financial Markets

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You Know You’ve Got a Perception Problem…

When hedgies write satirical songs about RBA leaks:

Hong Kong specs buy it
London’s hedge funds will buy it
We could be a CTA
Run a model like the RBA
With the boys from the Darwin and the Swan and Murray
But there’s no danger
It’s a professional career
Though it could be arranged
With just a word in Mr. McCrann’s ear.
If you’re out of work or out of luck
We really couldn’t give a f*ck

posted on 28 September 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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The Euro Zone’s Plunge Protection Team

The group that doesn’t exist.

posted on 25 September 2010 by skirchner in Economics, Financial Markets

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Probability Australia Will Hold Another Election in 2010

16.8%, according to iPredict.

posted on 03 September 2010 by skirchner in Financial Markets, Politics

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Fundamentals of Australian House Price Inflation

There is a lot of ill-informed offshore commentary about Australian house price inflation, with anecdotal reports suggesting that some hedge funds are putting on trades designed to capitalise on what they see as an inevitable Australian house price bust.

We have heard all this before from a local debate about house prices that goes back to at least 2003 and substantially predates international interest in this issue since 2007. In 2005, Robert Shiller declared that Australia had suffered a burst housing bubble the previous year, a proposition that has become even more laughable with the passage of time.

Chris Joye reviews the latest data in his presentation for offshore investors.

posted on 02 September 2010 by skirchner in Economics, Financial Markets, House Prices

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How Much Stimulus is Too Much?

Richard Epstein wants to know.

posted on 01 September 2010 by skirchner in Economics, Financial Markets, Fiscal Policy

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Fiscal Policy After the Election

Tony Makin argues in The Australian that:

Whichever side forms government, it will have to live with the legacy of the fiscal extravagance since October 2008. Just as present budgetary actions have implications for future economic activity, past actions have economic implications for the present and the near future.

Questions that will most likely arise during the term of the next government include the following: Why are long-term interest rates and the cost of obtaining funds from abroad continuing to rise? Why is private investment not improving as expected? Why is future economic growth now likely to be lower than otherwise? Why are inflationary pressures continuing to build?

The answer to each of these questions is the same. It’s either mostly, or partly, due to the excessive fiscal stimulus of the past two years.

My view is that activist fiscal policy in Australia and abroad will have negative consequences through a rather different channel: a negative wealth effect from increased government debt that will weigh on economic growth and consequently lower rather than raise long-term interest rates globally. I made this argument in a recent op-ed. Recent developments in global long-term interest rates have been consistent with this view.

For those interested, I will be discussing these issues as part of a panel at this year’s Australian Conference of Economists on the topic of ‘Monetary-Fiscal Interactions: How to Improve Policy Outcomes.’ Other panellists include Don Brash (ex-RBNZ), Jacopo Cimadomo (ECB), Carl Wash (UCSC) and Jan Libich (La Trobe).

posted on 30 August 2010 by skirchner in Economics, Financial Markets, Fiscal Policy

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Political Insiders and Anti-Gaming Wowsers

There are calls to ban political insiders from election betting markets. Apart from the usual anti-gaming wowsers like Nick Xenophon, I suspect this is motivated by the same mistaken notion of fairness that supports anti-insider trading laws in relation to equity securities. As Henry Manne’s work has shown, anti-insider trading laws are based on a fundamental misunderstanding of the role of markets. Simon Jackman notes that a ban on political insiders would be impractical, but this is no less true of anti-insider trading laws in general.

It is interesting to note that for all the reports of trading by political insiders, prediction markets got the election outcome ‘wrong’ in an ex post sense. While the betting market odds bounced around with the polls, they consistently gave a strong probability to a Labor win, while the polls suggested a tighter contest.

This is not necessarily anomalous, because they measure different things. Polls measure vote shares, but these translate only very loosely into seats won and the ability to form government, so betting markets can quite reasonably imply results that are not obviously supported by the polls. Still, the polls were a better guide to the overall result than the prediction markets on this occasion (have not looked at individual seat markets).

My guess is that political insiders are little better than noise traders. We should be happy to let the market professionals milk them for all their worth.

posted on 26 August 2010 by skirchner in Economics, Financial Markets, Politics

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Low Expectations: Why Financial Markets Didn’t Care About the Election Result

Financial markets usually take federal election outcomes in their stride, an indication that the result is either not a surprise or makes very little difference to expected economic and financial outcomes.

The fact that markets have been just as sanguine when faced with the prospect of a hung parliament for the first time since 1940 implies that markets do not expect public policy outcomes to be appreciably worse under the various options for a minority or (small ‘c’) coalition government than under a majority government. One can only conclude that markets had very low expectations for the public policy outcomes from any majority government and those expectations have not in any way been disappointed by a hung parliament.

posted on 24 August 2010 by skirchner in Economics, Financial Markets, Politics

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