About
Articles
Monographs
Working Papers
Reviews
Archive
Contact
 
 

2005 08

An Australian as Fed Chair?

If a job’s worth doing, get an Australian to do it.  Terry McCrann makes the case for RBA Governor Macfarlane to become the next Fed Chair.  Now we know why Macfarlane wanted his term extended only three years!

posted on 31 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

The Joke is on Costello

Treasurer Costello has ridiculed fellow Liberal MHR Malcolm Turnbull’s discussion paper on tax reform, but the joke is actually on Costello.  Turnbull’s paper has effectively exposed the fact that Costello is a policy-free zone.  Costello is the most conservative senior politician in Australia, in the non-political sense of the term.  He is uninterested in reform, because he sees it as potentially disrupting his path to the leadership.  What Costello brings to the leadership is nothing more than a well developed sense of entitlement.  Even as a political strategy, this is deeply flawed, as Paul Kelly argues:

Peter Costello’s reform was far too cautious. By changing the thresholds and keeping the rates, he doomed his package to eclipse before a more reformist push. Costello was too cautious - and caution is not the quality needed to replace Howard in the Lodge…

On the ABC’s 7.30 Report on Monday, Costello was the opposite of a can-do leader. He was, instead, Mr If. The Treasurer believes in lower tax but only “if” it is possible in political terms; his distaste for cutting the top rate was obvious. The Coalition, of course, has just won the Senate.

This is a bizarre and risky situation. Shadow finance minister Lindsay Tanner sees a lower top rate as part of tax reform with equity. So does trade union leader Bill Shorten, en route to the ALP caucus. They share much of the terrain sketched out by Liberal MP Malcolm Turnbull…

Politics is driving Costello’s position and he admits this. He told the 7:30 Report that he wanted to focus on the 97 per cent of taxpayers not the 3 per cent. So Costello is the champion of the mainstream against a more ambitious tax reform agenda. He debunked Turnbull’s base broadening, pointing out that it meant increasing some taxes.

The problem for Costello, however, is that this debate will only intensify. It doesn’t matter that his May reforms aren’t completed until next year. Nor does his populist 97 per cent-3 per cent paradigm to debunk Turnbull have much traction.

Costello’s worst mistake would be to fall into defensive mode and champion the status quo, a blunder Howard will never make…

The irony is that Tanner is more aggressive about tax reform than Costello. Tanner sees cutting the top rate as slotting into a bigger reform, and he’s right. There is a beautiful political position opening up for Labor with the Coalition assuming that Labor lacks either the brains or the guts to seize it.

posted on 31 August 2005 by skirchner in Economics, Politics

(14) Comments | Permalink | Main

| More

Some Hope for the Tories

At least one of the Tory leadership contenders has a promising intellectual pedigree:

The Observer can reveal the influence on Tory frontrunner David Davis of the political philosophy of Randy E Barnett, a 53-year-old right-wing academic from Boston University, whose book The Structure of Liberty has been hailed as a classic of conservative thought.

Barnett argues that political and legal decision-making should be devolved as locally as possible, with central government cut to the bone. He mounts a passionate argument for the right of self-defence for the property owner and the right of retribution for victims of crime.

More controversially, Barnett last year represented the Oakland Cannabis Buyers’ Co-operative in a Supreme Court action to defend their right to provide free cannabis to sufferers of conditions such as MS and glaucoma. The action failed, but Barnett was hailed by cannabis campaigners as an advocate of the rights of the citizen in the face of state power…

The men were introduced by John Blundell, head of a right-wing think-tank, the Institute of Economic Affairs…

Blundell said Davis’s intellectual hinterland is underestimated. He said that the young Davis was a keen reader of right-wing philosopher Karl Popper and free-market economist Milton Friedman, who provided the theoretical backbone to Thatcherism. ‘He is one of the brightest people I’ve ever met. It’s easy to typify him as a bruiser because of the broken nose and his SAS background, but he is a voracious reader and serious thinker.’

Davis is also the front-runner on the Intrade contract for next Tory leader.

posted on 30 August 2005 by skirchner in Politics

(0) Comments | Permalink | Main

| More

The Free Banking Origins of PayPal

Radley Balko reviews The PayPal Wars, highlighting its origins in the idea of currency competition:

In the book’s first chapter, Jackson recalls a speech Thiel gave to Confinnity employees, just a few days after he began work, in which he described his hopes for PayPal to become a borderless private currency. He saw PayPal facilitating trade in currency for anyone with an Internet connection by enabling an instant transfer of funds from insecure currencies to more stable ones, such as U.S. dollars. Thiel explained to his young staff how governments had historically robbed their own citizens through inflation and currency devaluation. The very rich could always protect themselves by investing offshore. It’s the poor and middle class, Thiel explained, who get screwed. “PayPal will give citizens worldwide more direct control over their currencies than they ever had before,” Thiel predicted. “It will be nearly impossible for corrupt governments to steal wealth from their people through their old means because if they try the people will switch to dollars or pounds or yen, in effect dumping the worthless local currency for something more secure.”

The story does not have a happy ending.

posted on 28 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

The Political Economy of Tax Reform

There is growing impetus for a new round of tax reform, thanks in no small part to Malcolm Turnbull, who has released an important paper on Taxation Reform in Australia: Some Alternatives and Indicative Costings.  It deserves to be widely discussed.  The Prime Minister has acknowledged the desirability of further reform.  Even opposition finance spokesman Lindsay Tanner has come out in favour of a reduction in the top marginal rate, an important policy shift for the Labor Party.

The only politician seemingly lacking enthusiasm for further reform is Treasurer Costello.  Any mention of the need for tax reform is an implicit criticism of his nearly ten years as Treasurer, so his lack of enthusiasm is understandable.  Costello has recently sought to enhance his leadership credentials by diversifying the range of issues in which he takes an interest.  Yet it is fairly clear that he has nothing new or interesting to say on any of these issues either.  Costello would be better served tackling the important issues within his own portfolio if he wants to establish his leadership credentials.  At the moment, he shows every sign of being devoid of new policy ideas.

posted on 28 August 2005 by skirchner in Economics

(3) Comments | Permalink | Main

| More

Contrarian Optimism versus the Doomsday Cult: A Fund Manager’s View

This blog’s position of contrarian optimism on the US and Australian economies has made it something of a lone voice amid the rather fevered gloom and doom that characterises many other economic blogs.  Much of this gloom and doom ultimately stems from a curious lack of faith in the most basic market institutions that underpin the success of the Anglo-American economic model. 

I was therefore pleased to read fund manager V. Anantha Nageswaran’s article on The Doomsday Cult, which takes the economics blogging community to task for trafficking in ‘stale conventional wisdom.’  It should be said that Dr V comes at this from what I suspect is a very different position from my own.  My impression is that he has also been somewhat partial to the views he now criticizes. As a fund manager, he has no doubt had to accept that market pricing has been particularly unkind to those who bought into these views by underweighting USD asset markets.  While I don’t necessarily share his argument or analytical framework, he nonetheless reaches some very similar conclusions to my own.

UPDATE:  More silly doomsday cultism, from Clyde Prestowitz.

posted on 27 August 2005 by skirchner in Economics

(1) Comments | Permalink | Main

| More

From Impossible to Inevitable: The End-Game for the Euro

Even Anatole Kaletsky is considering the end-game for the euro:

The most plausible such scenario is Italy withdrawing from the euro, under pressure from mounting unemployment, a weak economy and imploding public finances, exactly the same combination of pressures that forced Italy out of the ERM in 1992. If the possibility of Italian withdrawal were ever taken seriously by the markets, foreign holders of Italy’s €1,500 billion public debt would face enormous losses, since the Italian Government would simply convert its bonds into “new lire” and would legally get away with this conversion…

A break-up of the euro seems highly improbable in the next year or two. But anybody who still believes that such a break-up is impossible should bear in mind the lessons from the break-up of the ERM, the sterling, franc and lira devaluations of the 1960s, the collapse of the dollar-based Bretton Woods system in the early 1970s and the prewar abandonment of the gold standard. In confrontations between politics and financial markets, events can move straight from “impossible” to “inevitable” without ever passing through improbable.

posted on 26 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

The Bubble in Bubble-Talk: A Disconnect from Fundamentals

More evidence of a bubble in bubble-talk:

In June, the term “housing bubble” was used 312 times in American magazines and newspapers. That’s up sixfold from a year earlier.

If bubble-talk rises at a faster rate than the asset price inflation it purports to describe, doesn’t that mean it has no basis in fundamentals?!

posted on 24 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Greenspan’s Legacy

Ken Rogoff on Greenspan’s legacy:

although many people believe that monetary stabilisation policy has been more central than ever under Mr Greenspan, his greatest success may have come from making it less so.

This is true up to a point.  Greenspan’s personal prominence as a central banker has probably led many people to overestimate the importance of monetary policy to macroeconomic outcomes, since people can much more readily identify with the notion of an individual being in personal control of interest rates than the more abstract and complex process by which monetary policy interacts with the economy and asset prices.

Evaluating Greenspan’s legacy on the basis of macroeconomic outcomes distracts attention from his more important institutional legacy.  Greenspan should have done more to ensure that his personal credibility was transferred to the institution of the Fed and formalised in reforms to the governance framework for US monetary policy.  The credibility of US monetary policy should not have to be re-built from scratch with every new Fed Chair.

posted on 23 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Ted Evans on RBA Governance

ABE has not yet posted the text (if any exists) of former Treasury Secretary Ted Evans’ remarks on RBA governance last week.  Doing a quick search for it reminded me of working in financial markets in the 1990s, when speeches by the Treasury Secretary and Treasurer would go up on the Treasury web site days after the event and important documents like the Mid-Year Economic and Fiscal Update would have release dates and times that were not even announced until the last minute, to suit the convenience of the Treasurer.  Treasury was not alone in this.  The RBA did not have a meaningful web site until late 1997!  This made Australia’s homilies on the subject of transparency directed at regional governments during the Asian crisis more than a bit rich.

Ted’s credentials on governance and transparency issues are thus not great, but he did come out with one good suggestion: reducing the frequency of the currently monthly meetings of the RBA Board.  The RBNZ makes official cash rate decisions on a six week cycle and this seems to make an important difference.  The RBNZ almost invariably changes interest rates in consecutive policy moves, which greatly reduces uncertainty and makes NZ monetary policy a much easier call than in Australia. 

Ted also suggested that the RBA should make an official statement after every meeting, regardless of whether there is a change in interest rates, something to which the RBA remains opposed, although the RBNZ manages this just fine.  The RBA and some commentators have tried to argue that the RBA presents more detailed statements when it does change interest rates than other central banks.  This is partly a function of the paucity of RBA communication at other times.  The everything-but-the-kitchen-sink statements that accompany RBA policy actions are in fact symptomatic of a poorly focussed statutory mandate.  The RBA seems determined to summarise every influence on policy when announcing changes in interest rates, which can distract attention from the inflation target, which is the bottom line for policy.  The rather terse statements issued by the Bank of England’s Monetary Policy Committee are preferable in this regard.  This does not preclude making more detailed statements on economic conditions at other times.  The quality of central bank communication is more important than its quantity.  The RBA’s Statements on Monetary Policy are notable mainly for their avoidance of any discussion of the policy outlook.  By contrast, the RBNZ fully endogenises its macro forecasts to a projected path for interest rates.

An important change that has gone largely unremarked in recent years has been the RBA’s increased commitment to making policy announcements at the first post-Board meeting dealing intentions window, which is now recognised by a brief ‘no policy change’ announcement after each Board meeting.  It was only a few years ago that the RBA routinely made unscheduled policy announcements.  The justifications for these unscheduled announcements were weak and imposed entirely needless uncertainty and costs on market participants.

posted on 23 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Pundits Putting Their Money Where Their Mouth Is

Two pundits prepared to put down some serious green on the five year outlook for oil prices, with John Tierney following the advice of the late Julian Simon:

if you find anyone willing to bet that natural resource prices are going up, take him for all you can.

posted on 23 August 2005 by skirchner in Economics

(3) Comments | Permalink | Main

| More

The Next Fed Chair(woman)?

Barron’s profiles some female economists who are plausible candidates for the role of Fed Chair, although most can be ruled out as a Greenspan replacement because of their Democrat sympathies.  The story quotes Alicia Munnell saying:

“A lower percentage of women compared to men are Republicans,” she notes, “which means there’s a smaller pool of women candidates with appropriate political credentials. This is especially true among academic economists, of which the majority, male and female, are Democrats.”

Interestingly enough, the two women that have served on the Bank of Japan policy board in recent years have invariably been the most hawkish in their voting behaviour.

posted on 22 August 2005 by skirchner in Economics

(2) Comments | Permalink | Main

| More

Putting Your Money Where Your Bubble Is

We have previously pointed to HedgeStreet’s house price contracts for major US cities and politely suggested that those who think US house prices are experiencing a bubble might want to put their money where their mouth is.  See the Hedge Street home page for a short clip from a CNBC segment on these contracts, with the bubblicious Jane Wells.  The Hedge Street contracts are small enough that the old ‘the market can remain irrational longer than I can remain solvent’ excuse just doesn’t cut it anymore.

posted on 22 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Bubbles in Everything

This Harry Dent Jr title is surely the best evidence yet that the term ‘bubble’ has become so widely abused as to be meaningless:

Bubble After Bubble in The Ongoing Bubble Boom: Oil Bursts, the Housing Bubble Fades and Now Stocks Emerge Into a Greater Bubble that Finally Ends in 2010.

This title sells for 49 cents, which is 25 times the two cents this sort of opinion usually sells for.  A Greater Bubble indeed.

posted on 22 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Howard-Peacock Rivalry

As a veteran of the Howard-Peacock wars of the 1980s and 1990s, I could not help but notice the juxtaposition of these two stories:

PRIME Minister John Howard tonight becomes the first Australian to receive a prestigious American public service award.

It will be the first time anyone outside North America or Europe receives the Woodrow Wilson Award for Public Service.

* * *

Former federal Liberal Party leader and ambassador to the United States, Andrew Peacock, has been charged with drink driving after a crash in Sydney.

Police were called to a service station on New South Head Road in Rushcutters Bay, in Sydney’s east, about 1.30am Sunday after a 2005 model Mercedes Benz hit a power pole.

Mr Peacock, 66, of Double Bay, was charged with mid-range PCA after a breath analysis allegedly showed a 0.08 blood-alcohol content.

He was released on bail and his licence suspended.

Mr Peacock will face Waverley Local Court on September 13.

posted on 21 August 2005 by skirchner in Economics

(1) Comments | Permalink | Main

| More

Fundamentals of House Price Inflation: ‘Bubbles’ as Rational Ignorance

For all the talk of a housing ‘bubble,’ very few seem willing to put this proposition to the test.  An exception is Craig Depken over at Division of Labour, who has some interesting empirical results relating housing ‘overvaluation’ to a few simple fundamentals for the US.

The IMF’s 2003 Article IV consultation with Australia was notable for hedging its bets on whether Australia was experiencing a house price ‘bubble.’  A look at the accompanying Selected Issues paper suggested why.  IMF staff modelling showed only a small deviation in the relative price of housing compared to that implied by a simple fundamental model.

Most ‘bubble’ talk is based on casual observation and the failure of observed valuations to conform with people’s prior beliefs and prejudices.  An obvious explanation for this is that most people are rationally ignorant about the underlying fundamentals (how many people could tell you the net inbound migration stats for Sydney over the last 12 months, for example).  The cost of acquiring this information exceeds its value for all but a handful of people.  Behavioural finance theories are often invoked to explain bubbles, but it is just as likely that the widespread belief in ‘bubbles’ is itself a behavioural finance phenomenon.  This is harmless enough in the hands of most people, but dangerous when it becomes the basis for public policy.

posted on 20 August 2005 by skirchner in Economics

(3) Comments | Permalink | Main

| More

The Rise and Fall of Monetary Targeting: A Postscript

A postscript to my review of Simon Guttmann’s The Rise and Fall of Monetary Targeting in Australia.  Apparently, the publisher has withdrawn the book on legal grounds, which will make what was always going to be an inaccessible title even more so.  Given Australia’s draconian defamation laws, the withdrawal and pulping of books is not uncommon, although one would have thought that publishers would be sufficiently alert to these risks by now to avoid this sort of outcome.

As I indicated in my review, I don’t think Guttmann properly acknowledged the role played by the post-war revival of monetarist thought and the monetary targeting experiments of the 1970s and 80s in the evolution of contemporary monetary policy theory and practice.  For a work of both intellectual and economic history, this is a serious flaw.  Other readers evidently had their own, more personal, objections to Guttmann’s version of history. 

Who said monetary targeting had to be dull!

posted on 18 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

It’s a Kirchner Thing

When it comes to cleaning-up central banking, a Kirchner’s work is never done:

…Kirchner Fires Central Banker…

posted on 18 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Deflating Australia’s Housing ‘Bubble:’  Lessons for the Fed

Another article in the global press noting Australia’s experience with house price inflation, this time by Bloomberg columnist William Pesek in the IHT, who credits Australia’s ‘soft landing’ with deft monetary policy action by the RBA.  The emerging conventional wisdom is that the RBA has successfully deflated a housing ‘bubble’ through some well timed increases in interest rates.  The current tightening cycle, which began back in mid-2002, has in fact been remarkably restrained compared to previous cycles, leaving the official cash rate 75 bps below its previous cycle peak and not far from what is widely regarded as a neutral setting for the official cash rate.  So policy settings remain accommodative relative to the standards of previous cycles in Australia, partly because the increase in the net debtor status of the household sector has made monetary policy more potent relative to previous cycles.

What is not widely appreciated is that the RBA has generally disavowed the practice of directly targeting asset prices with monetary policy.  For example, this is what RBA Governor Macfarlane had to say last year in relation to housing-related credit growth:

In essence, monetary policy has one instrument – it can set the path of short-term interest rates. Over the past dozen years or so, it has set a path which has achieved the outcomes for inflation, growth and employment which I have just outlined.

What would have happened if, instead, we had aimed our monetary policy at one of the other objectives put forward, say a substantially lower growth of credit. I am not sure whether we would have been able to achieve this, but I do know that the attempt to do so would have required setting a path of interest rates which was significantly higher than the one we did. This, in turn, would have meant that the outcomes for inflation and economic growth would have been lower than we actually achieved. I do not think this would have been a good economic result, and it certainly would have violated the letter and the spirit of our agreement on accountability. As I said earlier, a central bank cannot be accountable for everything, and our monetary regime recognises this, while at the same time choosing the right objective to be accountable for.

While the RBA deserves considerable credit for its handling of monetary policy, it has conducted interest rate policy in an entirely conventional way.  The lesson from Australia’s experience is not that monetary policy should target house prices (which as Macfarlane notes, would not be consistent with its mandate), but that a well formulated inflation targeting regime is a good general framework for policy.  This is the lesson the Fed should take away from Australia’s experience.

posted on 18 August 2005 by skirchner in Economics

(1) Comments | Permalink | Main

| More

Does the Composition of Foreign Securities Purchases Really Matter?

Every month, we see certain economics bloggers pouring over the data on net foreign securities purchases for the US, trying to discern implications for strength or otherwise in the financing of the US current account deficit.  In fact, the current account deficit must be financed by definition, so the absolute amount of financing is never in question, yet many analysts persist in approaching these data as though the financial account tail wags the current account dog.

For a given domestic saving-investment imbalance, asset prices adjust to ensure that the resulting current account deficit is financed.  Shifts in the asset composition of the financial account are likely to reflect changes in relative asset prices, but the absolute value of this financing is essentially pre-determined for a given current account deficit.  Only the prices these assets trade at is in question, and these reflect the influence of all market participants, not just those foreigners looking to recycle surplus USD receipts because of systemic problems in their own domestic capital markets, which renders their funding of the US current account deficit non-discretionary.  US asset pricing has of course remained remarkably robust throughout the recent deterioration in the current account, as many US bond and dollar bears have discovered at great cost.

As RBA Governor Macfarlane has argued persuasively before a Chinese audience, countries with open capital markets and floating exchange rates do not face an external financing constraint.  Countries with managed exchange rate regimes and closed capital markets have the bigger problem.

posted on 17 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Skilled Migrants or Guest Workers?

The Federal government has launched a campaign to fill 20,000 new places in the skilled migration program.  This comes after Federal Treasurer Peter Costello ruled out the use of ‘guest workers’ as being ‘inconsistent with Australian values,’ despite being an obvious way of meeting both skilled and unskilled labour shortages and an effective form of development assistance for source countries.  Of course, we already have a de facto guest worker scheme in the form of European backpackers on working holiday visas, so a new guest worker visa category is not such a great leap.

What surprises me is that very few people see the guest worker concept as also being an obvious solution to the high cost of child care and the work-family balance issue.  Creating a special visa category for live-in amahs from South East Asia could dramatically lower the cost of child care and domestic help and promote higher labour force participation rates.

posted on 15 August 2005 by skirchner in Economics

(1) Comments | Permalink | Main

| More

GetUp!: ‘We Know Where You Live’

Glenn Milne notes some interesting parallels between the corporate governance practices of the latte left and the nativist right:

There is an eerie similarity between GetUp!‘s company structure and One Nation - a structure that could have allowed Pauline Hanson and her fellow company directors to walk away with millions in donations from supporters. And there are questions about the level of personal detail required by GetUp! from new members - detail that involves financial information and profiling tailor-made to establish a database for use in direct-mail campaigns during elections. Or for commercial purposes…

Much of the site is devoted to how to make a donation, starting with $10 and with no upper limit. Money is also an issue if you choose to become a member of GetUp! But while the up-front pitch is all about political enthusiasm, the company’s actual constitution is much tougher when it comes to the question of money and membership.

It says: “By applying for membership the member agrees to pay the dues, fees, levies and other assessments imposed by the board and be charged interest at 10 per cent on any late payment, plus any expense incurred by the company because of failure to pay or late payment.” Its constitution also states: “The directors are entitled to the aggregate amount of remuneration that the general meeting determines from time to time.”

When you make a donation to the group you’re asked to provide not only your name and address, but your email address and your credit card number. When you become a member you’re also asked for an email picture of yourself plus a brief explanation of why you joined.

In political terms, this sort of information is an election campaign goldmine. While GetUp! states that it won’t “sell, trade or exchange your information without your permission”, it adds, “your information may be used to identify your location (electorate, state) and provide targeted and relevant opportunities for you to be part of our activities”.

...and a free set of steak knives.  In any other context, the left would be deeply suspicious.

posted on 14 August 2005 by skirchner in Politics

(0) Comments | Permalink | Main

| More

The Fed Succession: When Supply-Siders Attack

The WSJ surveys US economists on their preferred replacement for Alan Greenspan, with CEA Chair Ben Bernanke commanding a plurality of support at 30%.  Bernanke is also still the favourite on Intrade, although the Bernanke contract has suffered recently in the wake of a Lawrence Lindsay rally (dare I suggest ‘bubble’?) on the strength of a favourable mention in another WSJ story.  Perhaps the biggest uncertainty about each of the candidates is whether they actually want the job.  Bernanke would make a fine Fed Chairman, although I think Martin Feldstein is the stronger prospect.

We previously noted Bryan Caplan’s defence of Bernanke against the attack of the fever swamp Austrians.  Leading free banking theorist Larry White also offers a partial defence of Bernanke against a rather strange and ill-considered attack from the National Review’s knee-jerk supply-siders.  As someone who is also partial to free banking (albeit of the Yeager-Greenfield BFH variety), I have very few reservations about Bernanke.  Indeed, some of Bernanke’s recent work is consistent with the views of pre-rational expectations, old school monetarism, a departure from the neo-Wicksellian paradigm that dominates contemporary thinking about monetary policy. 

The WSJ story quotes at least one analyst saying:

financial markets have become overly complacent about the succession question. He says any successor, no matter how sound, will be selected at some cost to the markets.

“Nobody can replace Greenspan’s reputation,” Mr. Harris says. “His reputation helps keep low risk premiums in the markets. That will be lost on the day he retires. It can be re-earned by the next chairman, but there will be some loss.”

One of the costs associated with the highly discretionary approach to monetary policy personified by Alan Greenspan is the failure to institutionalise the Fed’s credibility.  Hopefully, the next Fed Chair will begin the task of formalising an inflation targeting framework for US monetary policy.

posted on 13 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

RBA Governor Macfarlane: Economic Myth Buster

RBA Governor Macfarlane’s appearances before the House Economics Committee see some woeful displays of economic ignorance and ham-fisted attempts at political point-scoring on the part of Committee members.  Most of their questions consist of wildly partisan statements with which they then invite the Governor to agree, as if Macfarlane is not smart enough to see them coming.  In what is invariably a very classy performance, Macfarlane and his senior officers patiently listen to these questions and elevate the proceedings by turning them into some much needed education for Committee members and the public. 

Particularly interesting were Deputy Governor Stevens’ remarks on the results of the RBA’s current research into home equity withdrawal.  Stevens said that the early results point to something this blog has been arguing for some time, that very little of this is going into consumption, but instead into other financial assets.  As Stevens pointed out, if home equity withdrawal had all been going into consumption, we would have already seen a massive boom and bust in consumption and this is not remotely supported by the data.  When this research is finally published, it will almost certainly make a lot of commentary on this subject look very silly.

Macfarlane noted that the boom and subsequent correction in Sydney house prices closely matched what was happening with population growth in NSW and suggested that the recent decline in house prices was attributable to net emigration from the state, which in turn is driven by housing affordability.  In other words, there are some sound fundamental reasons for the observed behaviour of Sydney house prices, with feedback from house prices to population growth as falling housing affordability drives people out of the state.  Macfarlane did lapse into using the term ‘bubble,’ but I think this was just a concession to popular usage that is belied by what he had to say on the subject.

Macfarlane also agued, consistent with the consenting adults view, that none of us can know what the ‘right’ net foreign debt to GDP or private debt ratios should be, and also noted that fiscal policy has not had a major impact on monetary policy in the last seven years. 

Perhaps the funniest moment was when a Committee member tried to argue against the privatisation of Telstra, on the grounds that consumption would suffer as people bought newly issued Telstra stock.  Deputy Governor Stevens suggested that the impact on consumption would be zero ‘as a first approximation.’  The member in question probably still does not realise how stupid this made him look.

The Hansard transcript of proceedings should eventually appear on the RBA web site, for those who are interested.

posted on 12 August 2005 by skirchner in Economics

(2) Comments | Permalink | Main

| More

Economics Blogs Lead Wall Street

The WSJ profiles economic blogs:

While many investors continue to take their cues from traditional outlets, the real news junkies—including those who aim to get a trading idea before they hear about it from their broker—have bookmarked the blogs, or Web logs. Even Wall Street itself is paying heed.

“It’s all about the ‘memes,’ ” says Stan Jonas, head of interest rate strategy at Fimat USA in New York, employing a word that describes ideas that spread quickly by word of mouth—or Web. “Those guys say it and about a week or two later, the guys on Wall Street pick it up.”

posted on 11 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Bubble Triple Jump

Glenn Rudebusch suggests a few hurdles that need to be satisfied before monetary policy responds to ‘bubbles:’

The decision tree for choosing a Bubble Policy poses a daunting triple jump. For example, consider the run-up in the stock market in 1999 and 2000, when there was widespread suspicion that an equity price bubble existed and people worried that it could result in capital misallocation and financial instability. Still, those worries did not spur a Bubble Policy, in large part because it appeared unlikely that monetary policy could have deflated the equity price bubble without substantial costs to the economy. After the fact, of course, the macroeconomic consequences from the apparent boom and bust in equity prices arguably have been manageable.

However, the decision tree does not provide a blanket prohibition on bubble reduction, and as yet, there is no bottom line on the appropriate policy response to asset price bubbles. Those who oppose a Bubble Policy stress the steep informational prerequisites for success, while those who favor it note that policymakers often must act on the basis of incomplete knowledge.

posted on 10 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Stalked by the ‘Bubble’ Brigade

Housing ‘bubble’ stalkers.

posted on 10 August 2005 by skirchner in Economics

(1) Comments | Permalink | Main

| More

Allan Fels as Next OECD Secretary-General?

Place your bets here.

posted on 10 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Review of Bubble Man: Alan Greenspan & the Missing 7 Trillion Dollars

My review of Peter Hartcher’s (2005) Bubble Man:  Alan Greenspan & the Missing 7 Trillion Dollars.  Black Inc: Melbourne.

continue reading

posted on 09 August 2005 by skirchner in Economics

(1) Comments | Permalink | Main

| More

Australian House Price Developments

The RBA’s quarterly Statement on Monetary Policy includes a useful discussion of recent house price developments.  One of the major problems with existing house price data is that the majority of the measured variation is attributable to compositional distortions, so the RBA has developed an index which adjusts for these shifts, giving a more reliable and less volatile series for house prices.

The RBA seems to have come around to a rather benign view of the role of recent house price developments in the economy, consistent with the view I have been arguing for some time:

The correction in the housing market appears so far to have proceeded reasonably smoothly, and the prospect of an excessive and unwelcome slowing in domestic demand has been reduced by the boost to national incomes coming from the favourable terms of trade.

posted on 08 August 2005 by skirchner in Economics

(7) Comments | Permalink | Main

| More

Australia-Japan Economic Outlook Conference

Manuel Panagiotopoulos of Australian-Japan Economic Intelligence has once again staged an excellent Australia-Japan Economic Outlook Conference.  HSBC chief economist John Edwards gave a presentation on the Australian economy, which ran through a host of macroeconomic indicators showing their best performance in 30 to 50 years and a housing downturn that is shaping up as the most modest in 20 years.  Proving that there is no market for good news, this had at least one conference participant demanding to know when it would all end.  While nobody is arguing that the business cycle has been abolished, the many who predicted disaster on the back of the downturn in house prices have been thoroughly discredited.  John Edwards has been one of the few to have argued consistently against this view.  US pundits, take note!

There was also some impromptu ridicule heaped on The Economist magazine (and with absolutely no prompting from me!)  Edwards said that he found The Economist ‘unnecessarily somber,’ a more polite version of the critique of the magazine we have been running here.  While there was also some positive comment about the magazine’s recent coverage of oil prices, this was presented as the exception rather than the rule.  As The Economist’s circulation breaks new records, it seems to be taken less and less seriously in circles where it once commanded considerable respect. 

posted on 04 August 2005 by skirchner in Economics

(2) Comments | Permalink | Main

| More

Implausible Headline of the Week

Nationals Put Sense into VSU.’

posted on 02 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Forbes on Economics Blogs, Mark II

Forbes has updated its story on economics blogs from March 2003 and rather kindly suggests that ‘the depth of Kirchner’s discussions…isn’t matched in many other blogs.’  However, the author of the story concludes that ‘if you don’t know the difference between demand-pull inflation and dividend imputation, this probably isn’t the blog for you.’  One of the main motivations behind this blog has been my disappointment at the dumbing-down of economics and financial market reporting in the mainstream press.  There seems to be a working assumption, even in the ‘quality’ press, that you should avoid challenging your readers.  If this blog were not challenging, then I would be wasting my time writing it and there would be no point in you reading it. 

The Forbes story also suggests that the blog’s ‘worst feature’ is being ‘Aussie-centric.’  The author of the story is perhaps unaware that one of the other eight economics bloggers profiled is a former resident of Australia.  My other objective in writing this blog has in fact been to challenge the parochialism that sometimes afflicts discussion of public policy issues.  An excellent example of this has been the attempt to frame debates about the US and Australian current account deficits and house price inflation in country-specific terms.  Yet clearly there is a much bigger story here involving changes in the saving-investment preferences and financial technology of the Anglo-American economies.  The cross-national perspective offered in this blog is hopefully a useful corrective to the more parochial perspective often found in the mainstream media, which still depends on a predominately local rather than global audience.

posted on 02 August 2005 by skirchner in Economics

(2) Comments | Permalink | Main

| More

Foreign Official Sector Asset Purchases and Bond Markets

Brad Setser asks ‘Can China add close to $300 b to its reserves a year and have no impact on the bond market?’  I think the answer to this question is yes, although I would agree with him that the small size of the RMB revaluation means that it is not a good test of this proposition one way or the other.  It is generally agreed that central bank intervention in foreign exchange markets is ineffective, because the size of these interventions are trivial in relation to the multi-trillion dollar daily turnover in these markets.  Yes, central banks can peg their exchange rate below its equilibrium level, because there is no theoretical limit on the ability of a central bank to devalue its own currency by issuing more of its own liabilities, but as China has found, the sustainability of such a policy is limited in practice.  Pegging the exchange rate above its equilibrium value is even more problematic because, as many countries have found, foreign exchange reserves can be quickly exhausted in attempts to defend fixed exchange rates against the weight of the market.

I would suggest that the same argument can be made in relation to central bank purchases of debt securities.  It is very difficult to determine total turnover in global bond markets, because of the lack of centralisation in bond trading compared to foreign exchange markets.  However, even the relatively small Australian bond market had an annual turnover of AUD 1 trillion in the mid-1990s.  The totality of East Asian central bank purchases of USD denominated assets would have at best a marginal impact on markets with the depth and liquidity of US Treasuries and the US dollar.

posted on 02 August 2005 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Follow insteconomics on Twitter