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2008 05

US Recession Indicator Index

James Hamilton updates his recession indicator index following the advance Q1 GDP release:

Recent sluggish growth rates bring our recession indicator index for the fourth quarter of 2007 up to 26.9%. That’s its highest value since the 2001 recession, but still well short of the 65% reading that we require in order to make a declaration that the U.S. economy had entered a recession as of 2007:Q4.

The numbers are reminding us that if, for example, the tax rebates were to keep GDP growth positive in the second quarter, we would end up characterizing the most recent experience as a period of slow growth rather than a typical economic contraction.

Fed funds futures now imply a 78% chance the FOMC will leave the Fed funds rate unchanged at its June 25 meeting.

 

posted on 01 May 2008 by skirchner in Economics, Financial Markets

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The US Recession that Isn’t

US Q1 GDP is given a 69% chance of being positive, according to last trade prices on prediction market Intrade (contract expiry is based on the final GDP release, not today’s advance release).  Intrade pricing suggests a better than even chance that US GDP growth will be positive for every quarter in 2008.  The chance of a recession in 2008 is put at 44.9%, with recession defined as two consecutive quarters of negative GDP growth for the purposes of contract expiry.  The absence of recession on this definition would not necessarily preclude a recession being declared based on the NBER Business Cycle Dating Committee’s methodology.

posted on 30 April 2008 by skirchner in Economics, Financial Markets

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Interest Rates & Housing Affordability: Mike Rann’s Blame Shifting

SA Premier Mike Rann writes to RBA Governor Stevens asking him not to raise interest rates in order to ‘maintain housing affordability.’  As RBA Deputy Governor Ric Battellino noted in his recent presentation to the Senate Select Committee on Housing Affordability, mortgage interest rates in Australia are no higher now than in the mid-1990s, when housing affordability was at record highs.  Instead, Battellino suggests another culprit in record low housing affordability:

the rise in house prices has been much faster than that in construction costs, so the implication is that most of the increase in house prices has been due to increases in the price of land.

That would be the responsibility of state governments.

If APM are to be believed, higher interest rates are improving housing affordability as we speak.

 

posted on 30 April 2008 by skirchner in Economics, Financial Markets, Politics

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Once Were Inflation Warriors

Terry McCrann on former inflation hawks Hewson and Jonson:

OK, you drop the 2-3 target and replace it with . . . what exactly?

Hewson’s 3-4 per cent? Maybe 4-6 per cent? Perhaps a return to a 1970s: hey babe, whatever feels good? Or a vague, contradictory and confusing ‘check list’?

Whatever, the clear implication is that we should accept a “little more inflation”.

Apart from the fact that the RBA is already explicitly doing that - something most of the critics either don’t understand, or wilfully ignore.

 

posted on 29 April 2008 by skirchner in Economics, Financial Markets

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Steyn versus Caplan on EU Succession

Mark Steyn accepts Bryan Caplan’s EU succession wager:

If any current EU member with a population over 10 million people in 2007 officially withdraws from the EU before January 1, 2020, I will pay you $100. Otherwise, you owe me $100.

Unfortunately, Caplan has closed his book after three people took him up on the bet.  Perhaps Intrade can be persuaded to make a contract out of it?

Incidentally, while Intrade’s US 2008 recession contract is trading at just over 50%, the contracts for the quarterly GDP outcomes are suggesting a better than 50% chance that growth will be positive for every quarter this year, with the exception of Q2.  Intrade’s definition of recession is two consecutive quarters of negative GDP growth.

 

posted on 28 April 2008 by skirchner in Economics, Financial Markets

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Failing on Inflation? Then Shift the Goal Posts

With inflation in Australia running well above the 2-3% medium-term target range, the usual and even some not so usual suspects are starting to argue against an anti-inflationary monetary policy.  As Alan Wood notes, this argument transcends the usual partisan alignments:

On an unlikely unity ticket, failed prime ministerial aspirant John Hewson and the ACTU’s Sharan Burrow are calling for the RBA’s inflation target band to be widened - with a new ceiling of, say, 4 or 5 per cent…

A second siren song, sung this week by Opposition Treasury spokesman Malcolm Turnbull, is that “while there are inflationary pressures evident in our economy, many of them are beyond our control, such as higher oil and commodity prices”. The implication is that Australian monetary policy can do little about this.

In this context, it is worth pointing out that the RBA’s inflation target is already overly generous by international standards.  The ECB, BoE, BoC and RBNZ all have inflation targets with ceilings or mid-points of 2%.  The Fed has no formal target, but Federal Reserve officials have long stated a preference for inflation not to exceed 2%.  The 2.5% medium-term average that the RBA would deem a policy success would constitute a policy failure by the standards of comparable countries. 

The RBA’s 2-3% medium-term inflation target means that Australia’s policymakers have already institutionalised a higher rate of inflation than would be considered acceptable in comparable countries.  While short-run inflation outcomes are subject to external shocks, medium-term inflation outcomes are a matter of policy choice.

posted on 26 April 2008 by skirchner in Economics, Financial Markets

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Business Spectator Column

This week’s Business Spectator column.  If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list.  Email info at institutional-economics dot com.

posted on 24 April 2008 by skirchner in Economics, Financial Markets

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US Monetary Policy & the Financial Crisis of 2007-8

A useful primer on the financial crisis and the US monetary policy response, from Stephen Cecchetti and the Centre for Economic Policy Research.  As Cecchetti notes:

By lending both cash and securities, based on collateral of questionable value, the Fed has tried to bring some order back to the market. And the amounts are massive. By the end of March 2008, the Fed had committed more than half of their nearly $1 trillion balance sheet to these new programs.

posted on 24 April 2008 by skirchner in Economics, Financial Markets

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Australia 2020 or 1930

Henry Ergas finds little new in the 2020 summit:

This reliance on government, which sets the tone for the summit outcomes, is hardly “new thinking”. Rather, it brings eerily to mind W. K. Hancock’s great work Australia, published more than 70 years ago, where he noted the tendency among Australians to “look upon the state as a vast public utility, whose duty it is to provide the greatest happiness to the greatest number”. Though “generally matter-of-fact people who distrust fine phrases and understand hard realities”, Australians are, he concluded, “in politics, incurable romantics” who, out of intellectual laziness and profligacy born of the country’s wealth, “constantly confuse ends and means (and are) reluctant to refuse favours, to count the cost, to discipline the policies which they have launched”.

History shows all too clearly where that path leads: not to the glorious future the summiteers have in mind, but to waste and inefficiency, disappointed hopes and dashed expectations. If that is the best we can come up with, the road ahead will be painful indeed.

 

posted on 22 April 2008 by skirchner in Economics, Politics

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Ideas So Big, they Fit on Post-It Notes

Big ideas from the 2020 Summit:

Other “big ideas” on tax, captured on Post-it notes included:

? Reduce the number of taxes;
? Eliminate payroll tax and stamp duty.

Like no one ever thought of that before!  There has never been a shortage of ideas in relation to tax reform – just a shortage of governments willing to implement them.

At least Andrew Norton dissented from the final standing ovation.

posted on 21 April 2008 by skirchner in Economics, Politics

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Business Spectator Column

This week’s Business Spectator column.  If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list.  Email info at institutional-economics dot com.

posted on 20 April 2008 by skirchner in Economics, Financial Markets

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Don’t Blame the Fed

Why Arnold Kling is not an Austrian:

over the past year the shocks to financial markets in the United States have sent signals to entrepreneurs and workers to leave the housing construction industry and instead to get into, say, export industries or import-competing industries. This is easier said than done, so in the meantime unemployment rises and output falls short of potential.

I believe that shocks to the financial system often are market-generated. In contrast, an Austrian would insist that the Fed is responsible for all bad things, such as the subprime mortgage market boom and bust.

Attributing every financial distortion to Fed behavior can be almost tautological if one is not careful. Here, the Austrian bias against empiricism gives me trouble. I would like the hypothesis that all economy-wide shocks are caused by the Fed to be falsifiable.

To the extent that Austrians make predictions that sound falsifiable, they tend to be like Paul Krugman (who is not an Austrian), repeating a mantra “bad times are coming, bad times are coming” every year. Then, when bad times come they can say, “See, I told you so.” It would be more interesting if every once in a while they predicted good times.

 

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

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More Monetary Policy Central Planning from the AEI

The AEI’s John Makin wants the Fed to print money and centrally plan asset prices:

The monetary easing I’m recommending can occur by having the Fed print money to purchase mortgages directly, or purchase Treasury securities directly…

The postbubble period has yielded some very unattractive policy alternatives.  They clearly underscore the rationale for having the Fed target asset prices – in a world where asset markets affect the real economy more than the real economy affects asset markets.

Makin’s argument is that this is preferable to a nationalisation of the mortgage industry.  In fact, a temporary nationalisation of the mortgage market to facilitate an orderly work out would be relatively harmless in comparison.  In any event, there is no guarantee that one policy option would prevent the other.

As we have noted previously, John Makin and Desmond Lachman have consistently positioned the AEI as one of the most interventionist think-tanks in Washington on macro policy issues.  By way of contrast, the Peterson Institute’s Adam Posen has argued cogently against the dangers of asset price targeting on the part of central banks.  As Posen notes, if we live in ‘a world where asset markets affect the real economy more than the real economy affects asset markets,’ then only by engineering massive booms and busts in the real economy could central banks hope to manage asset prices.

posted on 14 April 2008 by skirchner in Economics, Financial Markets

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Business Spectator Column

This week’s Business Spectator column.  If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list.  Email info at institutional-economics dot com.

posted on 12 April 2008 by skirchner in Economics, Financial Markets

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Glenn vs Glenn

Alan Wood defends one Glenn against tabloid populism, while rejecting the claims of another Glenn who should know better:

I cannot recall a previous occasion where there has been such a scurrilous personal attack on the governor of the bank as the one on Glenn Stevens in Sydney’s The Daily Telegraph on Saturday, when he was labelled the most useless man in Australia for simply stating the facts about rising bank interest rates. This economically illiterate piece of populism is offensive but, fortunately, irrelevant in the broader debate on monetary policy…

However, what is disturbing is Glenn Milne’s report in his column on this page on Monday that Stevens “in the view of Canberra’s economic and governance elite is at a tipping point in personal, presentational and policy terms”. Milne also said there was a view at the most senior levels of the Rudd Government that Stevens needed to urgently improve his presentation, not least because he had spectacularly contradicted Treasurer Wayne Swan’s narrative that independent rate rises by Australia’s banks were not always justified….

According to Milne, Stevens has few friends in Canberra. If the view that the Rudd Government has lost confidence in the central bank governor became widespread, it could have dangerously destabilising effects on already unstable financial markets. Is it true? Having spoken to a few of Canberra’s “economic and governance elite”, I haven’t detected any loss of confidence in Stevens, with one government source describing his Friday remarks as spot-on.

Terry McCrann adds:

So the chairman of a group which had led one of those boom-time private equity - meaning, loaded with debt - buyouts of the Myer stores doesn’t like rising rates which cut consumer discretionary spending.

Now that’s a surprise. And an obvious lesson. We must immediately hand interest rate decisions to Bill Wavish.

McCrann is being ironic, but the fact is that we do allow retailers to sit on the RBA Board.

 

posted on 09 April 2008 by skirchner in Economics, Financial Markets, Politics

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Greenspan Defends His Legacy

Former Fed Chair Greenspan defends his legacy in an interview with the WSJ:

Mr. Greenspan now admits he was wrong about the improbability of a housing bubble. Yet he has long maintained that bubbles are an unavoidable feature of a dynamic economy. He pulls out a 1999 speech and shows, underlined in green marker, passages in which he warned of recurring but unpredictable patterns of overconfidence followed by investor panic. He does not share some foreign central bankers’ belief that their job is to defend against excessive asset-price inflation: No sensible policy, he maintains, could have prevented the housing bubble.

“I am reasonably certain that I am right here,” Mr. Greenspan says. If proved wrong, he says, “I will change. I do not have a vested interest in holding wrong ideas.”…

Unable to find out how many homes are bought with subprime mortgages, Mr. Greenspan spent several months designing his own data system. Some of what he has learned is going into a new chapter for the paperback edition of his book, to be released Aug. 26. It will explain events after last June, when he finished writing the original.

The biggest question mark over Mr. Greenspan’s record is his decision to slash interest rates to 1% in 2003 and wait to raise them until 2004, and then only slowly.…

To prevent deflation, the Fed spurred growth by keeping interest rates low. At the time, he notes, the only dissenting votes on the Fed policy committee were those who wanted to set rates even lower. The Fed, he said, initially raised rates gradually to give businesses and investors time to prepare. In 2004 and 2005, it raised rates faster than private economists expected…

In Mr. Greenspan’s view, if the Fed’s policies were to blame, the housing bubble would have been mostly limited to the U.S. Yet, he argued, many other countries had housing bubbles, too. A better culprit, he suggested, was the glut of savings globally.

posted on 08 April 2008 by skirchner in Economics, Financial Markets

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Nelson, Swan and RBA Independence

Treasurer Wayne Swan, responding to opposition leader Brendan Nelson’s view that the RBA has gone too far in raising interest rates, says that:

The fact that Dr Nelson and the Liberals can’t decide whether they still support the independence of the Reserve Bank or not shows just how badly the Liberals have lost their way on the economy.

This is a common misunderstanding of what it means for the RBA to be independent of government.  At its most basic, RBA independence means that it is free to set interest rates without the approval of the Treasurer.  The RBA enjoys what is often called ‘operational independence.’

This is no sense precludes the government or opposition from taking a different view on monetary policy to the RBA or being publicly critical of central bank policy actions.  The RBA has been made progressively more independent of government precisely in order to facilitate differences of opinion with government.  Divided authority in relation to monetary and fiscal policy is a valuable institutional protection against macroeconomic policy mistakes.  Under the Reserve Bank Amendment (Enhanced Independence) Bill, the RBA Governor will enjoy such a high level of statutory independence that public criticism could hardly be viewed as a threat to the Governor’s position.

By the same token, the RBA would not be compromising its independence by speaking out on issues relating to its statutory responsibilities, provided it does so in a non-partisan fashion.  Former RBNZ Governor Don Brash would frequently lecture the New Zealand government on structural issues, because monetary policy is necessarily conditioned on structural factors over which the central bank has no direct control.  Brash would frequently point out that if politicians want strong growth, together with low inflation and low interest rates, then various structural measures outside the scope of monetary policy could assist in this task.  When he was Chairman of Federal Reserve, Alan Greenspan would also publicly canvass a wide-range of economic policy issues beyond the immediate scope of monetary policy.

In Australia, by contrast, mistaken notions of RBA independence are used to suppress public debate over economic policy.

 

posted on 08 April 2008 by skirchner in Economics, Financial Markets, Politics

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Glenn Milne’s Thinly Disguised Class Warfare

Glenn Milne joins the tabloid attack on Glenn Stevens, complaining that the RBA Governor is not phoney enough:

Central bankers might argue that they’re not meant to behave like politicians. But the reality of public life is that if you are the individual who is seen to have the power to decide whether people keep a roof over their heads, you must behave in an accountable fashion, or at least pretend to.

Stevens is not behaving in this way.

The whole point of having an independent central bank is to have economic policymakers who will tell it like it is and not give in to economic populism.  Milne says that ‘Stevens now has few friends in Canberra.’  That is how it should be.  A more adversarial relationship between the RBA and politicians would strengthen, not weaken, public accountability in the conduct of economic policy.

Then there is this bizarre and nonsensical bit of parochialism:

Stevens, with his Teutonic lustre and mid-Atlantic conference accent, comes from nowhere recognisable in the Australian suburban landscape…

Glenn Stevens can do no more about his appearance than Glenn Milne.  Stevens actually looks and sounds more authentically Australian to me than Milne, but what of it?  Milne is indulging in thinly disguised class warfare.

The unfortunate consequence of these tabloid attacks is that it will make the RBA’s senior officers even less willing to maintain a public profile, weakening the very accountability Milne says he is in favour of.

posted on 07 April 2008 by skirchner in Economics, Financial Markets, Politics

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Upstaged by a Teenage Economist

The first appearance by RBA Governor Stevens before the House Economics Committee since last year’s federal election saw very little change in the dynamics of these hearings.  Rather than seeking to hold the Governor accountable for inflation outcomes, Committee members continue to treat the Governor as an oracle whose main role is to adjudicate in their partisan disputes.  Instead of criticising the Bank’s conduct of monetary policy, Coalition members tried to enlist the Governor into their inflation denialism.  Both government and opposition members continued to ask questions that are simply outside the Governor’s statutory responsibilities.

Committee members were then well and truly upstaged by one of the high school students invited to submit questions to the RBA Governor:

Ardi Astarto—Good morning. In an article published in the American Economic Review in 1995 the economist Carl Walsh argued that governments should impose a personal financial penalty on their central bank governors if they failed to meet their set inflation targets and that the further the actual inflation rate is from the target the greater the penalty should be. This idea is supported in principle by the current governor of the US Federal Reserve, Ben Bernanke. Do you support or are you opposed to being made accountable for your decisions in this way?

Mr Stevens—That is an interesting proposition. To my knowledge no country has actually implemented it—that could be because central bank governors cannot actually control inflation exactly over short periods; there are other things that impinge on it. It could also be that you do not actually want the governor to try to control inflation too closely over a very short period; otherwise you may find that the rest of the economy is swung around more than it needs to be.  So that is why our system is actually for a flexible target that lets us bring inflation back on course gradually so that we do not do too much damage to other things in the process. As for my own remuneration, that is set by my board, and I gratefully accept whatever they choose to give me.

It says a lot about the politics of monetary policy in Australia that the only person who knows what they’re doing in these hearings is still in high school.

Deputy Governor Ric Battellino did a good job laying to rest the myth of mass mortgage stress:

Over the past couple of decades, as Glenn has mentioned, we have moved to a system where finance is readily available in the community. That is in marked contrast to where we were in the 1970s, where basically the average person had a great deal of difficulty getting money from a bank. In the current system the onus is more now on the individuals to be careful about accessing finance. Thirty years ago, basically it was less likely that people got themselves into trouble, because money was not available. I have seen the program. It is hard to draw general conclusions from a program like that, because, in the end, there were very few people on that program. There is no doubt that in a community of 20 million people there are going to be some people in trouble. But looking across the whole economy the figures show—I think our calculations are—there are 15,000 people in the whole of Australia who are running 90 days overdue on their housing loans. The aggregate figure is not a lot of people and, as Glenn said, recently it has been coming down again.

More in this week’s Business Spectator column.

posted on 05 April 2008 by skirchner in Economics, Financial Markets

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