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2007 12

The Opinion Polls Costello Forgot

As Peter Costello steps-up martyrdom operations against John Howard, Greg Sheridan reminds Costello of his culpability in the Coalition’s defeat:

It is very difficult to find an interpretation of the facts over the past few years that does not indicate that Peter Costello was the one who played the wrecking, and the dishonourable, role in the Liberal Party.

At least 30 per cent of the Government’s problems came from Costello and his party supporters repeatedly briefing the press and others against Howard. There are numerous public examples of this, such as the bitter comments Costello made to Howard’s biographers, or the famously leaked dinner with senior Canberra reporters during which Costello detailed how he would destroy Howard.

Similarly, Costello’s party lieutenants for years briefed journalists on leadership challenge timetables and why Howard must go.

All of this had two perverse consequences. First, more than any other factor it crippled Howard as a medium-term leader. It forced him to make the leadership compromise commitment that he would hand over to Costello midway through the next term.

This minimised the government’s freedom to manoeuvre. It diminished Howard and was a drag on the Liberal vote. Two non-political members of my extended family told me they would vote Labor because they didn’t want Costello to become prime minister. Costello, you see, was always unpopular.

If Roy Morgan is to be believed, Costello would have had a devastating impact on the Coalition:

Electors were also asked who they would vote for if Peter Costello or Malcolm Turnbull were Prime Minister: neither Costello nor Turnbull lifted the L-NP vote beyond the result Howard achieved. 

Primary support for the L-NP if Peter Costello were leader is a low 31.5% (down 3.5% from the Howard result), while ALP support rose 4.5% to 52.5%.  The ALP’s two-party preferred lead went from 18% with Howard as leader to 26% with Costello as leader (63% cf. 37%).

Malcolm Turnbull fared better with L-NP primary support remaining at the same level as Howard (35%), while ALP support increased 1.5% to 49.5%.  Turnbull achieved the same two-party preferred lead as Howard (ALP 59%, L-NP 41%).

 

posted on 01 December 2007 by skirchner in Politics

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Peter Coleman’s Martyrdom Operation

Peter Coleman commences martyrdom operations against John Howard on behalf of son-in-law, Peter Costello:

“What was once seen as his gritty determination started to look like an almost animal egomania and he seemed to be blocking progress and regeneration, rather than advancing the cause,” [Coleman] said.

Mr Coleman also says Mr Howard destroyed Mr Costello’s chance to be prime minister.

“There is no doubt that this man of great promise and great ability was blocked by [Mr] Howard’s egomania,” he said.

“I don’t think that can be doubted, in fact his colleagues wanted him to go and extraordinarily he refused to go and more than once.

“And that put an end to a lifelong ambition that this very able fellow Costello had.”

Coleman’s loyalty to family is admirable enough, but there is no reason to believe that Peter Costello could have changed the Coalition’s fortunes.  Costello’s ambition was frustrated because there was never a compelling case for leadership change and never any evidence to suggest that Costello could improve the Coalition’s prospects.  That is Costello’s failing, not John Howard’s.  Whatever political success Peter Costello did enjoy was largely parasitic on John Howard’s.

posted on 28 November 2007 by skirchner in Politics

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Microeconomic Reform Under Rudd

I think the last time I heard an Australian politician mention microeconomic reform was circa 1993.  Now this from our new social-democratic overlord:

KERRY O’BRIEN: You’ve talked about a central role for Treasury, what do you mean by that?

KEVIN RUDD: … I think Treasury by instinct, this goes back to the earlier Labor period, is a reforming department. It actually has a whole bunch of people within it who want to advance the cause of micro-economic reform. I think that reform agenda has not had any political impetus for a long, long time during the latter period of the Howard government and I think there is a lot of enthusiasm there for us embracing a reform agenda because if you cease reforming this economy, you start to strangle long-term productivity growth. We don’t intend to do that.

Who knew?

posted on 28 November 2007 by skirchner in Economics, Politics

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Operation Sunlight

More reasons to welcome our new social-democratic overlords:

INCOMING finance minister Lindsay Tanner is planning far-reaching reform of the budget to improve transparency.  He will overhaul the Charter of Budget Honesty, introduced by Peter Costello in 1996 to govern budget disclosure and Opposition rights to financial information during elections.

Mr Tanner, who held meetings with Finance Department officials yesterday, is expected to take time to implement all of Labor’s proposed budget reforms, but there are likely to be some changes before its first budget in May.

Under the proposals, new government programs that could be influenced by demographic shifts will have to be accompanied by five-year forecasts of their costs.

The International Monetary Fund was critical of the Howard government’s failure to include any long-term assessment of the cost of its decision to make superannuation benefits tax-free for people aged over 60.

Labor intends to include in the budget a statement explaining how welfare, health and education benefits are distributed among different income groups, and the taxes paid by those groups. The idea is to help in the assessment of the merits of government spending and tax levels.

Labor wants the budget papers to contain more information about what individual government departments are spending.

At present, the main budget papers list spending by broad function, so spending on housing might include programs run by the transport and regional services department, defence and family and community services. Although each department publishes its own portfolio budget, these do not include more than one year’s forecasts and do not match the main budget papers.

Labor’s reforms follow an extensive consultation that resulted in the publication of a policy paper, called Operation Sunlight, last year…

The Labor government will expect the Treasury and finance departments to provide continuous disclosure, posting major changes in the budget position on their websites and providing quarterly updates on the size of the surplus. There will be fixed dates for mid-year budget updates and monthly financial reports.

The finance department has not posted a monthly budget report since June.

It may sound like a trivial matter, but the fixed dates for the budget updates will be a great improvement.  Outgoing Treasurer Peter Costello would fling these documents out at his own convenience, often with as little as a few hours notice.  I still shudder at the amount of my time that was wasted trying to find out when these things would be released and obtaining copies of the documentation in a timely manner.

posted on 26 November 2007 by skirchner in Economics, Financial Markets, Politics

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Financial Markets Judge Peter Costello

For all the former government’s claims to superior economic management, financial markets have greeted the change in government with indifference.  The Australian dollar is firmer against the USD this morning, as well as against those currencies with which it is traditionally correlated such as NZD and EUR.  This may partly reflect relief at a decisive election outcome compared to the possibility of a hung parliament or minority government, but firmer commodity prices would also be playing a role.  The NZD had to contend with a wider than expected October trade deficit this morning

December 10-year bond futures are around 6 bp weaker in price, but this largely reflects a similar weakening in US Treasuries Friday.

The S&P/ASX 200 is up 1.4% in early trade, but this reflects similar gains in US stocks Friday and the improvement in commodity prices. 

Financial markets are effectively saying that there is no difference between the Coalition and Labor in terms of Australia’s economic prospects.  This is as much a condemnation of the Coalition as an endorsement of Labor.  Outgoing Treasurer Peter Costello would do well to reflect on the financial market reaction to the dismissal of New Zealand’s reformist Finance Minister, Sir Roger Douglas, in December 1988, when the NZD fell off a cliff.  That is the measure of an effective Treasurer.

Financial markets will be looking to the content of the new Joint Statement on the Conduct of Monetary Policy between the new Treasurer and RBA Governor Stevens.  It is likely the new agreement will be little changed, although there is always the possibility the ALP will surprise us with a more comprehensive attempt at reforming Australia’s monetary policy governance, to bring it into line with world’s best practice after a decade of neglect under Peter Costello.

posted on 25 November 2007 by skirchner in Economics, Financial Markets

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‘I for one welcome our new social-democratic overlords…’

Australia’s federal election has seen a change of government, with the Labor Party set to win 86 seats in the House of Representatives against the incumbent conservative Coalition’s 62 seats.  The Labor Party secured a two-party preferred swing of around 6%, to win its largest two-party preferred vote share in the post-war period of around 54%.  It is likely that incumbent Prime Minister John Howard will lose his seat in parliament.  The Coalition will also lose its majority in the Senate.  The decisive nature of the Labor win should minimise any negative implications for financial markets that might have arisen from the possibility of a hung parliament or minority government.

The change in government opens up a number of possibilities for positive change.  There is a good chance the Labor Party will finally address the Coalition’s legacy of failure in relation to statutory reform of central bank governance, which has left the Reserve Bank of Australia as one of the developed world’s least accountable and transparent central banks.  Outgoing Treasurer Peter Costello cites central bank reform as one of his greatest achievements when it is in fact one of his many failures as Treasurer. 

Costello’s other great failing as Treasurer was to withhold the benefits of national prosperity from the Australian people, by hoarding Commonwealth revenue on an unprecedented scale.  Rather than continuing to nationalise private equity capital and other assets via the Future Fund, it is to be hoped that the ALP will lower the record federal tax burden Peter Costello inflicted on the Australian people.

Malcolm Turnbull has held on to the seat of Wentworth against the odds, almost securing a majority in his own right on the primary vote.  The anti-pulp mill left were repudiated, despite a massive campaign against Turnbull.  The Labor Party’s George Newhouse was literally bitch-slapped.  The result gives Turnbull ample authority to contest the leadership of the federal parliamentary Liberal Party.  Turnbull is the Liberal Party’s best chance for renewal.

Perhaps the worst aspect of the federal election is that the balance of power in the Senate will be held either by anti-gaming wowser Nick Xenophon in combination with Family First’s Steve Fielding or the Greens.  It is hard to know which of these two possibilities is least friendly to our liberties.

UPDATE:  As we predicted back in June, Costello does not have the stomach to lead.

UPDATE II: Turnbull declares!

posted on 25 November 2007 by skirchner in Economics, Financial Markets, Politics

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‘Beyond Insane’

Terry McCrann continues to do battle with those who favour more Commonwealth revenue hoarding:

Imagine if Costello was handing Swan a $60 billion annual surplus—close to a quarter of a trillion dollars over the next four years. The same Swan who is absolutely dedicated to keeping “downward pressure on interest rates”.

Now, of course, we cannot assume either the Mandate of Heaven or the dollars it bestows are already “in the bank” for even the next four years. Further, we still face the fundamental uncertainty of whatever comes out of the US over the next year or so.

This, though, does not validate the depressingly ubiquitous demand from too many economists that such surpluses should be “banked” to allow the “automatic budget stabilisers” to work and/or to target lower or stable interest rates.

The idea of running a “flexible fiscal policy” to target a stable interest rate is beyond insane. And which rate would be appropriate? An official rate of 7 per cent, 6 per cent, 5 per cent?

When we have experienced a structural (upward) shift in budget revenues, the money has to be spent. The only question is whether in tax cuts or in service delivery or infrastructure…

The increases in official rates over the past few years have only succeeded in getting rates back to a sensible level, commensurate with an economy growing at 7 per cent-plus in nominal terms.

 

posted on 24 November 2007 by skirchner in Economics, Financial Markets

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Election Eve Round-Up

David Uren blames Paul Romer for Ruddonomics:

Rudd is influenced by the new growth theory of Californian economist Paul Romer. Where traditional economics says economic growth results from the forces of labour and capital coming together, assisted by the fortuitous development of new technology, Romer argues that investment in knowledge is a measurable input and part of the growth process. New technology doesn’t appear like manna from heaven but requires investment in education.

Labor’s take on Romer’s work is that investment in education will produce long-term dividends in economic growth. Its election promises such as the tax rebate for education equipment and funds for school computers are tokens of its new approach and could be expected to be followed, if elected, by a more substantial shift of budget priorities towards education.

Econtalk has a superb interview with Paul Romer, in which Romer is very careful to disassociate himself from some of the many abuses of endogenous growth theory.

Sinclair Davidson and Alex Robson calculate the tax cuts that could have been financed out of the election spending promises of Labor and the Coalition:

According to the Coalition’s own calculations of the size of its and Labor’s tax cut and spending commitments, the average taxpayer earning approximately $60,000 per annum would receive a benefit after four years of $65 per week under the Coalition’s plans and $52 per week under the ALP’s plans—if each party’s tax policy was implemented and if the amount each party promised in new spending was instead devoted to tax cuts. If the Sunday Telegraph’s calculations were used these figures would be $58 per week under the Coalition’s plans and $47 per week under the ALP’s plan. Using the estimates of The Age/SMH and The Australian after four years the average taxpayer would be $94 per week better off under the Coalition, and $66 per week better off under Labor.

It can be said therefore, that regardless of who’s figures are believed the average taxpayer would be better off after four years by at least $58 per week under the Coalition and $47 per week under Labor, Labor, if tax cuts were delivered instead of spending increases.

The Intrade federal election contract is giving an 88% chance to a Labor win, although there is actually more market depth on the short-side of the Labor contract, suggesting that at least some people are looking to take advantage of Labor being over-priced.

 

posted on 23 November 2007 by skirchner in Economics, Financial Markets, Politics

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The Dow Theory Sell Signal

Financial newsletter tracker Mark Hulbert notes that the Dow Theorists are selling:

the DJIA seesawed all day Wednesday above and below its August closing low of 12,846. In fact, it wasn’t until the final few minutes of trading that it became clear that it would close below that level, and thereby trigger a Dow Theory sell signal.

The Dow Theory’s popularity should trigger additional selling when investors currently on vacation return from their Thanksgiving holidays, either on Friday, or more likely this coming Monday.

Barry Ritholtz quotes Richard Russell of Dow Theory Letters:

People don’t understand the significance of the ‘bear market signal’ of November 21. I stated on Wednesday’s site (Nov. 21) that the breakdown of the Industrials signaled THE EXISTENCE of a primary bear market. It didn’t signal the beginning of a bear market, Wednesday’s action gave us the final word via Dow Theory that a primary bear market was in force.

... A precept of Dow Theory is that neither the duration nor the extent of a bull or a bear market can be predicted in advance. It is far easier to IDENTIFY the end of a bull or bear market than it is to predict their end. Bull markets tend to build extended and often deceptive tops while bear markets tend to build more definite and identifiable and faster bottoms. Therefore, it’s usually easier to identify the bottom of a bear market than it is to identify a bull market top.

... I expect a lot of wild and confusing movements from the stock market in the days ahead. But I remind subscribers that a rally here, even a powerful rally, will not mean that the bull market has suddenly been reborn. This bear market will not end in four months. But any rally here will allow subscribers to ‘trim their sails’.

posted on 22 November 2007 by skirchner in Financial Markets

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That 1969 Feeling

Matthew Johnson argues that financial markets should be getting nervous ahead of this weekend’s federal election in Australia:

It’s starting to feel a little bit like Florida 2000 to me. It’s perfectly possible for the Coalition to win in court (Newhouse’s invalid nomination) and to do so with a minority of the vote. Given this risk, I’d sooner not go home long AUD or Aussie equities on Friday – no decision creates complications in all sorts of places (FIRB for example), and it’d be a clear ‘sell Australia’ signal.

Instead, I would suggest it is starting to feel like 1969, when the Labor Party secured its largest post-war two-party preferred swing of 7.1% and a majority of the national two-party preferred vote, yet failed to secure a majority in the House of Representatives.  Indeed, 21% of post-war elections have been won on a minority of the two-party preferred vote (1954, 1961, 1969, 1990 and 1998).

Amid broad-based USD weakness, the Australian dollar has been a notable underperformer in the run-up to the election.  Recent AUD weakness reflects flight from currencies with negative net international investment positions in favour of the Japanese yen.  But the AUD has also underperformed those currencies with which it is traditionally highly correlated.  AUD-EUR has broken below multi-year trendline support from the October 1998 monthly lows.  AUD is also underperforming its commodity bloc peers NZD and CAD, with AUD-NZD slipping to lows of 1.1529, levels not seen since late August, while AUD-CAD fell to a low of 0.8540, below the highs for the year at 0.9512.  Weakness in base metals prices is the most likely explanation for the underperformance of AUD.  But this weekend’s federal election and the risk of a hung parliament may also be playing a role.

 

posted on 21 November 2007 by skirchner in Economics, Financial Markets, Politics

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The Dynamic Benefits of Tax Cuts

Alan Wood, on why fiscal policy should not be used for demand management:

fiscal policy has a higher purpose than keeping interest rates at politically comfortable levels. Would we really be better off, as the Government’s critics suggest, with budget surpluses of 3 per cent, 4 per cent, or 5 per cent of gross domestic product and lower interest rates?

The answer is no. The appropriate role of fiscal policy is to redistribute the revenue windfall from the China boom in economically productive ways, and tax cuts meet this criterion admirably. If this leads to higher interest rates than otherwise, so what?

At worst the contribution is marginal compared with the other forces at work on the economic cycle, and the dynamic economic benefits exceed the costs. For most of the past five years, according to the RBA, fiscal policy has had no impact on monetary policy.

And according to analysis by IPAC’s Johnson, even under the extreme assumption that the tax cuts were entirely responsible for the interest rate rises that did take place, the economy-wide benefits exceeded the cost by several billion dollars.

Howard and Costello’s mistake has not been their tax cuts, but the fact they didn’t deliver more vigorous tax reform earlier in the economic cycle, before the economy ran up against capacity constraints.

As we noted at the beginning of the election campaign, Federal government revenue hoarding has also been bad political strategy.  The government’s campaign promises in relation to further tax cuts would have been much more credible had they been announced in the May Budget and legislated ahead of the election campaign.  As things stand, the tax cuts were a one day wonder, long since forgotten amid all the election campaign trivia.

posted on 20 November 2007 by skirchner in Economics, Financial Markets, Politics

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China’s Credit Crunch

The Chinese authorities are resorting to administrative window guidance in order to control the inflationary implications of the exchange rate peg to the US dollar, according to the WSJ:

In recent weeks, regulators have quietly ordered China’s commercial banks to freeze lending through the end of the year, according to bankers in several cities. The bankers say that to comply, they are canceling loans and credit lines with businesses and individuals.

A China Banking Regulatory Commission official here confirmed that local and Chinese subsidiaries of foreign banks have been asked to ensure that loans at the end of the year don’t exceed the total outstanding on Oct. 31. The official described the request as “guidance aimed at supporting the macro-control measures being implemented.”…

Bankers say they will honor the lending edict, partly because it comes with threats of financial penalties for noncompliance. “Which commercial bank would dare not obey this?” says Liu Haibin, chairman of the supervisory committee of Shanghai Pudong Development Bank Co.

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

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Australian Expat Voting

Australian expats intending to vote in this weekend’s federal election are being reminded that voting closes at the same time as the polling booths in Western Australia:

VOTING queues have begun to build at Australian diplomatic missions around the world as party campaigners worry that thousands of people will miss out on the chance to vote because of a mix-up over time differences.

Voting booths around the world close at the same time as the last booth in Western Australia on election day, with the time difference meaning the last votes need to be cast by Friday evening in places such as London.

Large crowds usually turn up at the Australian High Commission in London on the Saturday of the election only to find that voting has already finished.

posted on 19 November 2007 by skirchner in Politics

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Ron Paul’s Oath

John Fortier calls on US Presidential candidate Ron Paul to uphold his oath of office:

Last week the media found it remarkable that Ron Paul raised $4.3 million in one day. But even more remarkable was the way that it was raised. Groups of Paul supporters scheduled a mass Internet fundraiser on Guy Fawkes Day.

Guy Fawkes was the chief plotter in an effort to blow up the British Houses of Parliament and kill the king on Nov. 5, 1606. Nov. 5 also figures prominently in last year’s movie “V for Vendetta,” about a modern Guy Fawkes-inspired rebel who fights against a fascist British government. The fundraising website was ThisNovember5th.com, which includes clips of Paul warning of a descent into military government. The not-so-subtle message is that America is close to a dictatorship and that extreme and violent measures are needed to combat the government.

A Paul spokesman backed off the most egregious rhetoric by noting that he did not favor blowing up government buildings. Instead, Paul “wants to demolish things like the Department of Education, but we can do that very peacefully, in a constructive manner.” These words are a welcome corrective, but Paul still pocketed the money.

Ron Paul is a fringe presidential candidate, but he is also a sitting member of Congress who has sworn an oath to uphold the Constitution and the institution of Congress. Trafficking with those who hint at the violent overthrow of Congress is no way to honor that oath. Give the money back.

 

posted on 16 November 2007 by skirchner in Politics

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US Dollar Down, or Euro Up?

Alan Reynolds notes that there are two sides to any exchange rate:

Is the dollar down or is the euro up? It is the same thing viewed from different sides, of course. Yet the topic is too often viewed from just one side. Looking at the dollar alone, many economists blame the Fed for lowering interest rates. Viewed from the other side, however, one might wonder why other central banks have not lowered their interest rates.

Rising currencies are not necessarily a sign of strength. The U.S. dollar rose sharply before and during the recession of 2001. The trade-weighted index of the dollar’s value against 26 currencies rose 10.5% from March 2000 to January 2002, as the stock market and economy tumbled…

The euro’s recent rise involved betting on the expectation that the Fed will soon cut interest rates again, but also that the ECB will not follow suit. Yet the ECB has always followed the Fed’s interest-rate moves, albeit quite slowly. The ECB did not begin reducing rates until May 2001—five months later than the Fed. And the ECB did not put rates above 2% until December 2005—a year later than the Fed.

posted on 15 November 2007 by skirchner in Economics, Financial Markets

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The Cato Institute’s 25th Annual Monetary Conference

The Cato Institute held its 25th Annual Monetary Conference yesterday.  Fed Chair Ben Bernanke used the occasion to announce some important enhancements in the transparency of the Federal Reserve’s economic forecasts.  The WSJ’s RTE blog has a round-up of reactions to the changes.

posted on 15 November 2007 by skirchner in Economics, Financial Markets

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‘A Society Like Sweden’

As the government and opposition compete to see who can add the most complexity to the federal tax-spending churn, Rupert Murdoch suggests an alternative approach:

Mr Murdoch, the chairman and chief executive of News Corporation, owner of The Australian, said: “We are very lucky in Australia, there are no huge economic challenges. But taking a macro view, all political parties seem to be making an effort to become a society like Sweden, to create a dependency mentality as against an aspirational one.”

Mr Murdoch, in an interview with The Australian in Melbourne ahead of a News shareholder briefing in Adelaide today, declined to answer any questions on the election campaign.

He said he was not close enough to it. “I don’t want to say anything remotely close to Australian politics,” Mr Murdoch said.

However, he noted that “all governments are raking in indecent amounts of tax, which they should do something with, either by investing in infrastructure or handing it all back to the people”.

“Australia should certainly slash the capital gains tax,” he said. “There are people who hold shares for 20 years and won’t sell because they will lose it in tax. When the US cut its tax to 15 per cent, revenue doubled and people did something with it.”

He praised the more aspirational nature of American society, “where people want to change and do something about it, accelerating change with innovation”.

posted on 13 November 2007 by skirchner in Economics, Politics

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The Liberty & Democracy Party

They may have a name that sounds like a Latin American populist front, but the Liberty and Democracy Party is the first organised libertarian political party in Australia since John Singleton and Bob Howard’s ironically named Workers’ Party in the 1970s.  John Humphreys laid out on the rationale for the LDP in the Autumn 2007 issue of Policy.

It would seem unlikely that a libertarian political party could ever enjoy much success in Australia.  US political culture is much more friendly to libertarian ideas, yet it has not been able to sustain an electorally-successful libertarian political movement.  The only identifiably libertarian candidate for the presidency in 2008 is Republican Ron Paul, an Old Right isolationist crank.

Still, small parties can have an influence on political debate that is unrelated to electoral success.  Milton Friedman once pointed to the official platform of the Socialist Party in the United States, which never enjoyed much electoral success, and yet managed to see many elements of its political platform adopted.

I particularly liked the LDP’s response to the candidate questionnaire from the Australian Christian Lobby.  Needless to say, the answers ACL got are probably not the ones they wanted to hear.  The ACL opportunistically seize upon a junk report from the Australia Institute to argue for increased censorship of advertising ‘to protect childhood.’  The LDP’s response:

• The Australia Institute is a socialist organisation.
• Raising a child is the job of parents, not the government.

The LDP is preferencing against sitting members, with the exception of Wentworth, where it is preferencing Malcolm Turnbull as a reward for his support (sincere or otherwise) for the Tasmanian pulp mill.  In the absence of foot soldiers to hand-out how-to-vote cards, the LDP’s Reps preferences probably won’t matter much.  In the Senate, they are alternating their preferences between the Coalition and Labor and putting the Greens last.

posted on 09 November 2007 by skirchner in Politics

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Peter Costello and Interest Rates

A remarkable story, if true:

Jon Faine on ABC 774 in Melbourne has revealed yet another extraordinarily ill advised conversation between a leading politician and a journalist.

The Treasurer, Peter Costello, was in Faine’s studios in late September and during a break for the news, Faine said to him: “I can’t believe you haven’t called the election to get it out of the way before the cup day interest rate rise.

“He looked me in the eye. He put his thumb down as he sat there in the chair and he said, ‘There will not be a rate rise in November. Take it from me.’

“I said : ‘You might be right, you might be wrong, but you’re prepared to punt on it.’

“And he said : ‘There will not be a rate rise in November.’…

How is it that the Treasurer of the country could so misread the mood of the Reserve Bank Board when virtually every analyst in the country was predicting the opposite?

posted on 08 November 2007 by skirchner in Economics, Financial Markets, Politics

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Blame Martin Place III

The statement accompanying today’s increase in official interest rates on the part of Reserve Bank confirms what was already effectively implied by the Q3 CPI outcome:

By the March quarter of next year, both headline and underlying measures of inflation are likely to be above 3 per cent.

This forecast presumably includes the anticipated impact of today’s tightening.  The RBA will be unable to publish a target-consistent inflation forecast in its November Statement on Monetary Policy. The RBA is effectively admitting to a monetary policy mistake.  It is Governor Stevens rather than John Howard who should be in the dock. 

The question that has to be asked now is, what path will official interest rates have to follow to bring the inflation forecast back into the 2-3% target range?  On this, the RBA was characteristically silent.  There is really no excuse for the RBA failing to spell this out in today’s statement or next week’s quarterly Statement on Monetary Policy.  The RBA continues to short-change the public with its lack of transparency in relation to its future policy intentions.  The Bank is only making its job harder, by robbing itself of the ability to let market-determined interest rates do some of the required tightening work.  Interbank futures are still giving less than a 40% chance to a follow-up tightening in December.

posted on 07 November 2007 by skirchner in Economics, Financial Markets, Politics

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Who’s to Blame for Higher Interest Rates?

Andrew Norton notes a Gallaxy poll on interest rates:

‘If interest rates rise again in the near future, which of the following do you believe is mainly to blame?’

The political answer, John Howard, received blame from only 12% of respondents - 17% of Labor voters and 3% of Coalition voters. The other responses were ‘international factors’ (37%), the Australian economy (30%), and the Reserve Bank (14%).

‘International factors’ and the ‘Australian economy’ happen to be the most correct answers.  It suggests that the electorate are actually much less parochial than the commentariat and also understand the endogeneity of interest rates to economic conditions.  If the electorate can grasp these basics, what’s the commentariat’s excuse?

 

posted on 05 November 2007 by skirchner in Economics, Financial Markets, Politics

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Equines and Equities: The Cup Day Effect

Alan Wood considers the Melbourne Cup Day effect:

Worthington applies econometric techniques to isolate the impact of the Cup from the other stock market anomalies, such as the day-of-the-week effect, mentioned earlier. He studies closing prices on the

Australian Stock Exchange over the 45 years from January 3, 1961 to December 30, 2005 - 11,327 trading days. And what does he find? Stock market returns on Melbourne Cup day are not only significantly higher than on any other Tuesday in November, but also higher than on any other Tuesday of the year.

They are also higher than Monday, Wednesday, Thursday and Friday returns throughout the year, and less volatile.

In short, the Melbourne Cup is associated with abnormally high returns on the Australian stock exchange. On Melbourne Cup day in 2005 alone, the Cup was associated with abnormal gains of more than $2 billion.

posted on 05 November 2007 by skirchner in Economics, Financial Markets

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State Capitalism: The Rise of Sovereign Wealth Funds

Alan Wood discusses some of the issues around the emergence of sovereign wealth funds, including Australia’s Future Fund:

An emerging theme in international discussion is the return of state capitalism. After decades of privatisation and the retreat of government from state ownership of enterprises, sovereign governments are becoming a major force in global asset markets…

Although most Australians don’t realise it, Peter Costello’s Future Fund, perhaps soon to become Kevin Rudd’s plaything, is a sovereign wealth fund. And in a world where the lack of transparency and accountability of sovereign wealth funds is a major concern, it is open to criticism…

Their assets are already larger than hedge funds ($US1 trillion to $US1.5 trillion) and private equity funds ($US700 billion to $US1.1 trillion).

And their assets are growing rapidly.

Standard Chartered estimates they could total $US13.4 trillion in a decade. They already hold over 1 per cent of the world’s total stock of equities, bonds and bank deposits and could hold 5 per cent or more of the global stock of financial assets in a decade.

posted on 03 November 2007 by skirchner in Economics, Financial Markets

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More Hints of Possible RBA Reform

More hints of possible RBA reform under Governor Stevens:

Reserve Bank governor Glenn Stevens has refused to rule out changing the RBA’s current policy of not publishing board minutes.

At a speech in Sydney on Wednesday night, Mr Stevens said he had an open mind on the publication of minutes, but would want any policy change to ensure that the robustness of boardroom debate was not crimped.

 

posted on 01 November 2007 by skirchner in Economics, Financial Markets

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