Working Papers

2011 01

The Superbowl Indicator as Swiftian Satire

The market indicator that was meant to be a joke.

posted on 31 January 2011 by skirchner in Economics, Financial Markets

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Falkenstein on Cowen’s Great Stagnation

Eric Falkenstein reviews Tyler Cowen’s Great Stagnation. As usual, Falkenstein crams alot of insight into a single post. Put it in an e-book Eric!

posted on 31 January 2011 by skirchner in Economics

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How the ACCC Doomed ASX

Maurice Newman on a fateful decision:

When, in 1998, the Australian Competition and Consumer Commission rejected ASX’s bid for the Sydney Futures Exchange, it consigned ASX to a non-independent future. In the seven years it took for the ACCC to finally approve the merger, most of the bigger stock exchanges in our region and some outside it had emulated Australia’s aborted lead. This robbed ASX of a significant first mover advantage, depriving it of scale and scope and an unrepeatable regional leadership position.

There can be no doubt that the 2006 merger of ASX and the Sydney Futures Exchange, when it came, was a huge benefit to both markets and to Australian financial services generally, but it came too late to fully leverage this success internationally.

posted on 27 January 2011 by skirchner in Economics, Financial Markets, Foreign Investment

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Seasteading in Style

Forget those abandoned North Sea oil rigs and flak towers. Here’s your luxury extra-national seafaring utopia. Or this.

posted on 22 January 2011 by skirchner in Economics

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Getting the Government Out of US Housing Finance

Government intervention in US housing finance was the cause of the recent financial crisis and yet US policymakers have completely ignored GSE reform in their policy responses. Despite having some of the world’s most sophisticated, deep and liquid capital markets, US policymakers find it hard to conceive a system of housing finance that is not dependent on government support. The AEI has produced a white paper on GSE reform, a theme the AEI has pursued since well before the crisis. Here’s some of what the AEI had to say about the GSEs in 2005:

Congress may be unable to summon the political will necessary for enacting a suitable regulatory framework for these politically powerful entities.  The inability of the political process to cope with the power of the GSEs, even after their demonstrable failings in recent years, should be a matter of concern to all Americans. Either Congress controls the GSEs or the GSEs control Congress.

posted on 20 January 2011 by skirchner in Economics, Financial Markets

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Posen on Monetary Policy Activism and Asset Price Cycles

We have previously linked to Adam Posen’s work critical of suggestions that central banks should adopt an activist approach to managing asset price cycles. Here’s Posen’s talk at last year’s Cato Institute Monetary Policy Conference.

posted on 19 January 2011 by skirchner in Economics, Financial Markets, Monetary Policy

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Five More Years

Peter Martin rounds-up opinion in favour of re-appointing Warwick McKibbin to another five-year term on the Reserve Bank Board, including some supportive comment from me.

As Chris Joye notes, there is no reason why Ross Garnaut could not be appointed to one of the other looming vacancies on the Board, allowing both Warwick and Ross to serve concurrently. That would certainly liven-up Board meetings and move the Board closer to an MPC-style model of decision-making. The government should eventually move to separate monetary policy decision-making from the Board, as I argue in this article.

In the UK, the government was brave enough to appoint an American, Adam Posen, to the BoE’s MPC. The logistics of having a foreigner other than a kiwi attending monthly RBA Board meetings would be difficult, and the local media reaction would be nothing short of hysterical, but there is no reason why foreign talent should not be considered. A foreigner would actually be significantly less conflicted as a monetary policy decision-maker than many of the existing external Board members.

While my first foreign pick would be Don Brash, my guess is he would be unwilling to serve under the existing RBA governance model. All the more reason to change it.

posted on 16 January 2011 by skirchner in Economics, Financial Markets, Monetary Policy

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Peter Thiel Bets on New Zealand

The libertarian entrepreneur and hedgie has a thing for New Zealand. One theory:

Thiel is nothing if not an ambitious, long-term thinker, so what’s the big picture here? What could the famously contrarian investor possibly see in a country of 4 million people whose economy is mostly based on agriculture and tourism?

Here’s a thought: maybe Peter Thiel wants to turn New Zealand into the next Silicon Valley. Or maybe even the libertarian utopia of his dreams.


posted on 15 January 2011 by skirchner in Economics, Financial Markets

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I, Toaster: Home Appliances under Autarchy

Instead of Leonard Read’s classic I, Pencil, I have been using The Toaster Project in teaching as a more contemporary take on the division of labour, specialisation and the gains from trade. Thomas Thwaites gave a presentation on it at TED, which be viewed here. While it is amazing he got as far as he did, it is also a disturbing glimpse into the counter-factual of life under autarky.

posted on 13 January 2011 by skirchner in Economics

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How to Talk to Modern Malthusians

‘You go first’.

posted on 13 January 2011 by skirchner in Economics, Population & Migration

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The Unintended Consequences of Joe Hockey

John Durie highlights the unintended consequences of the government’s capitulation to Joe Hockey’s attack on the banks:

Many don’t realise that the proposed changes would also hit staff on the shop floor—consider rival liquor store employees noting that Dan Murphy is offering Boags beer at cheaper prices.

The proposed changes would make such private conversations illegal.

These are just some of the unintended consequences of the price signalling proposals unveiled by Wayne Swan last month as part of the Treasurer’s bank competition package.

What started as a policy discussion on the definition of an understanding got caught up in the government’s attempts to be seen to be setting the agenda on bank competition.

This issue was last considered back in 2007, when changes suggested by Julian Burnside were rejected. Now ACCC boss Graeme Samuel has cynically attempted to boost his powers by exploiting Swan’s perceived political vulnerability.

On a more generous interpretation, Swan has not realised the sweeping impact of his proposed changes, and simply wants to test public opinion. Having realised that the changes would involve overturning basic legal principles such as the onus of proof, Swan can now back off.

He has, after all, raised the issue for discussion, and can now scrap it, having seen the error of his ways.

Even if you believe the law is deficient, at most it requires some tweaking to bolster the ACCC’s armoury.

Instead, we were presented with a revolutionary version from Graeme “Che Guevera” Samuel.

A range of lawyers and economists have privately slammed the proposals as plain bad policy.

posted on 12 January 2011 by skirchner in Economics, Rule of Law

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The Quant Easing Counter-Factual

Not pretty:

model simulations indicate that the past and projected expansion of the Federal Reserve’s securities holdings since late 2008 will lower the unemployment rate, relative to what it would have been absent the purchases, by 1½ percentage points by 2012.  In addition, we find that the asset purchases have probably prevented the U.S. economy from falling into deflation.

posted on 11 January 2011 by skirchner in Economics, Financial Markets, Monetary Policy

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The RBA Didn’t ‘Lose’ $5bn on its 1997 Gold Sales

Paul Cleary has not done himself any favours beating-up the product of The Australian’s latest FOI request of the Reserve Bank:

The decision to sell 167 tonnes of the bank’s reserves has cost the nation about $5 billion based on today’s soaring price of almost $1400 an ounce…

The RBA’s sales pushed the world gold price down to an 11-year low, returning just $2.4bn for the gold that was sold via a single broker engaged without a tender.

The same amount of gold would be worth about $7.4bn today.

This analysis ignores two inconvenient facts. The gold was sitting on the RBA’s books at the Bretton Woods parity price, so the RBA booked a sizeable profit on the sale even at 1997 prices. The suggested $5 billion ‘loss’ ignores the return on the income producing assets the RBA purchased with the proceeds of the sale. It is likely these assets have underperformed gold recently, but historically, the real returns to gold have been negligible compared to other assets. As one of the world’s biggest producers, Australia is naturally long gold. There is no diversification value in relocating gold from the WA goldfields into vaults under Martin Place.

The 1997 RBA gold sale should give gold bugs pause. As we have noted previously, above ground gold stocks dwarf annual production, so the gold price is best viewed as a stock rather than a flow equilibrium. There is a certain irony in people who fear an over-supply of fiat money taking refuge in an asset in which central banks hold substantial stocks that could be dumped on the market at any time. At least one US think tank has advocated selling the US gold stock of 261.5m ounces to yield a quick and dirty profit for the US Treasury. The RBA was able to offload 167 tonnes without too much difficulty.

posted on 10 January 2011 by skirchner in Economics, Financial Markets, Gold

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Roubini: ‘Don’t Listen to Him’

Joe Keohane on extreme forecasters:

For a prophet, [Roubini’s] wrong an awful lot of the time. In October 2008, he predicted that hundreds of hedge funds were on the verge of failure and that the government would have to close the markets for a week or two in the coming days to cope with the shock. That didn’t happen. In January 2009, he predicted that oil prices would stay below $40 for all of 2009, arguing that car companies should rev up production of gas-guzzling SUVs. By the end of the year, oil was a hair under $80, Hummer was on its way out, and automakers were tripping over themselves to develop electric cars. In March 2009, he predicted the S&P 500 would fall below 600 that year. It closed at over 1,115, up 23.5 percent year over year, the biggest single year gain since 2003.

posted on 10 January 2011 by skirchner in Economics, Financial Markets

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Greenspan Throws Down the Gauntlet: ‘Prove Me Wrong’

posted on 08 January 2011 by skirchner in Economics, Financial Markets, Monetary Policy

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Glenn Stevens at the National Press Club?

It’s good enough for Ben Bernanke:

Mr. Bernanke will speak to reporters at the National Press Club in Washington Feb. 3 , and take questions there…A month ago, Mr. Bernanke appeared on prime-time television on CBS News’ “60 Minutes” for the second time.

As the linked article notes, even Bernanke lags his European and Japanese counter-parts in holding regular press conferences. I make the case for an increased public profile for the RBA Governor here.

posted on 05 January 2011 by skirchner in Economics, Financial Markets, Monetary Policy

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Electric Books

Matt Ruff anticipates the e-reader in his 1997 Sewer, Gas and Electric (The Public Works Trilogy):

Gant pointed at the object tucked under Vanna’s arm, a slim tome with matte black covers. An Electric Book. “What’re you reading these days?” he asked. Vanna read a great deal, but because she was ashamed of her own tastes and more than a little paranoid, she preferred the anonymity of a programmable reading device with no telltale dust jacket.

Didn’t have to wait until 2023 for that one.

posted on 05 January 2011 by skirchner in The Singularity is Near

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