Working Papers

2009 03

Bubble Wrap

Reactions to my Bubble Poppers monograph, here and here.

posted on 31 March 2009 by skirchner in Economics, Financial Markets, Monetary Policy

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Political Identity Survey

Andrew Norton is running an on-line survey on political identity, which may produce some interesting results.  Click here to participate.

posted on 30 March 2009 by skirchner in Misc

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Blame it on Rio

John Durie sees straight through Treasurer Wayne Swan:

FEDERAL Treasurer Wayne Swan went to extraordinary lengths not to make a ruling on Chinese investment in Australia’s resources industry by partially knocking back the OZ Minerals deal.

His excuse was as lame as they get: the Chinese rescue could not include the Prominent Hill copper and gold mine because it was too close to the defence facility at Woomera in South Australia.

The mine is 162km from the facility and to define it as being of strategic importance is a stretch of extraordinary proportions.

If China or anyone wanted to spy on Woomera, and few would, all you would need to do would be to log on to Google Earth rather than pay more than $4 billion to buy a gold and copper mine…

For a Government that boasts about its good work in helping the country through the recession, this decision says the exact opposite…

Swan’s non-decision has made an already murky part of Government even murkier.

Apparently, Chinese miners are more of a security risk than the Russians.

posted on 29 March 2009 by skirchner in Economics, Foreign Investment

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Keynes and the G20

Tony Aspromourgos and I debate ‘Should Keynes Have a Seat at the G20 Table’ in today’s AFR.  Text below the fold (may differ slightly from edited AFR version).

As if to help my case about the political imperatives driving fiscal stimulus, the AFR’s Smart Money section includes a feature called ‘The Great Australian Giveaway’:

Everybody loves a freebie, especially when money is tight and there are plenty of rebates, subsidies and handouts available from all levels of government, if you know where to look and what to ask for…

The free-for-all is not restricted to the working families beloved of politicians.

As Bastiat said, ‘government is the great fiction through which everybody endeavors to live at the expense of everybody else.’

continue reading

posted on 28 March 2009 by skirchner in Economics, Fiscal Policy

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Self-Inflicted Chinese Influence Peddling

The ACCC clears an increased Chinalco stake in Rio in terms of section 50 of the Trade Practices Act:

Chinalco and Rio Tinto would be unlikely to have the ability to unilaterally decrease global iron ore prices below competitive levels. Given this conclusion, it was not necessary for the ACCC to reach a determinative view on the extent to which Chinalco could control and influence Rio Tinto.

It is noteworthy that the ACCC’s decision was based on the worst-case assumption that:

Chinalco and various steel makers are subsidiaries of the same parent entity and therefore may have common commercial interests.

As I noted in an earlier op-ed, given its determination in relation to the formerly proposed merger between Rio and BHP, the ACCC could hardly have concluded otherwise. 

Having cleared the competition policy hurdle, the deal must now be cleared in terms of the Foreign Acquisitions and Takeovers Act.  But with the economic issues now settled from a regulatory standpoint, what does the FATA have to add to this process?  The FATA’s only purpose is to serve as a vehicle for ministerial (in this case, Prime Ministerial) discretion over foreign investment. 

Is it any wonder then that the Prime Minister is being lobbied by some of the highest echelons of the Chinese government?  While some see this as sinister, this sort of influence peddling is entirely of our own making, being effectively institutionalised by Australia’s FDI controls.  As I noted in Capital Xenophobia II, these controls are much closer to those used by the Chinese than to those used by comparable countries.  The lesson is, if you don’t want foreign investment policy in Australia being manipulated by the Chinese, then keep Australian politicians out of the process.


posted on 26 March 2009 by skirchner in Economics, Foreign Investment

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My Secret Life as a Crop-Burning New Dealer

Brian Buckley, one-time adviser to former federal Treasurer Sir Philip Lynch, exposes my double-life as a crop-burning New Dealer:

LIKE the French royal House of Bourbon, some contemporary schools of economics have learnt nothing and forgotten everything. Paul Krugman and Stephen Kirchner (BusinessDay, 19/3) provide telling examples. Their nostrums for the world debt crisis are more government spending, or greater volumes of easy credit, or both.

Professor Krugman is a great admirer of Franklin Roosevelt’s New Deal, but he omits to mention that FDR never got unemployment below 14 per cent, and the unemployment figure in the US was 17.2 per cent at the start of World War II.

Like Krugman, Kirchner (and Ben Bernanke), FDR was worried about price deflation — so much that he had farmers’ crops burned to keep prices up. This was in the middle of the 1930s Depression when millions of families were short of food.

posted on 24 March 2009 by skirchner in Economics

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Bubble Poppers: Monetary Policy and the Myth of ‘Bubbles’ in Asset Prices

CIS has released my Policy Monograph, Bubble Poppers: Monetary Policy and the Myth of ‘Bubbles’ in Asset Prices.  The text was finalised before Greenspan published a defence of his record in the WSJ, but takes a similar position to the former Fed Chair.

The monograph is partly devoted to debunking the concept of a ‘bubble’ in asset prices.  It argues that if the idea of ‘bubbles’ in asset prices cannot be given analytical or empirical substance, then monetary policy should not attempt to actively manage asset price cycles.

There is a shorter version in the latest issue of Policy and an even shorter version in today’s Age.

posted on 19 March 2009 by skirchner in Economics, Financial Markets, Monetary Policy

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All Praise Lu Kewen Thought!

The over-stretched Department of Foreign Affairs and Trade makes the thought of the legendary Lu Kewen available to the benighted masses of G20 nations:

KEVIN Rudd believes in spreading the good word - particularly his own good words on the evils of greedy neo-liberals - and doesn’t mind using the Department of Foreign Affairs and Trade as a worldwide publishing agent.

The Prime Minister decided his 7700-word essay on the origins of the global financial crisis deserved a world audience before the G20 financial summit in London next month.

The essay, which argues for more global regulation of financial markets and says capitalism is “cannibalising itself”, is being distributed around the world through Australian embassies and high commissions…

Mr Rudd’s essay is now intended for world publication before the crisis meeting of the world’s top 20 economies in London on April 2.

posted on 18 March 2009 by skirchner in Economics, Politics

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Arbitraging Congress

The Congressional Effect Fund takes advantage of an interesting violation of the efficient markets hypothesis – the S&P 500 outperforms when Congress is not in session:

The Congressional Effect Fund seeks to capture the historically higher returns on Congressional out of session days by primarily having exposure to price moves of the broad market as measured by the S&P 500 index on vacation days. The Fund does not try to capture the dividends of stocks in the index. Instead, it invests in interest bearing instruments including, without limitation, treasury bills, other government obligations and bonds, collateralized repurchase contracts, money market instruments and money market funds.

The Congressional effect holds on average over 43 years of data.  The fund has outperformed since its inception in 2008.  However, as the fund manager readily concedes, a sitting Congress isn’t all bad, all of the time:

in 1997, Congress enacted significant tax cuts, including a cut in capital gains taxes generally. In that year, the annualized average price increase on the days when Congress was in session was 59.5% (an average daily gain of 0.18% or 18 basis points) as compared to an annualized average price loss of -4.6% (an average daily loss of -0.02% or 2 basis points) when Congress was out of session.

It is exceptions like this that perhaps explains the persistence of this apparent anomaly in market pricing.

posted on 17 March 2009 by skirchner in Economics, Financial Markets

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Greenspan versus Taylor

Former Federal Reserve Chairman Alan Greenspan defends the Fed’s record against criticism from John Taylor:

However, starting in mid-2007, history began to be rewritten, in large part by my good friend and former colleague, Stanford University Professor John Taylor, with whom I have rarely disagreed. Yet writing in these pages last month, Mr. Taylor unequivocally claimed that had the Federal Reserve from 2003-2005 kept short-term interest rates at the levels implied by his “Taylor Rule,” “it would have prevented this housing boom and bust. “This notion has been cited and repeated so often that it has taken on the aura of conventional wisdom.

Aside from the inappropriate use of short-term rates to explain the value of long-term assets, his statistical indictment of Federal Reserve policy in the period 2003-2005 fails to address the aforementioned extraordinary structural developments in the global economy. His statistical analysis carries empirical relationships of earlier decades into the most recent period where they no longer apply.

Moreover, while I believe the “Taylor Rule” is a useful first approximation to the path of monetary policy, its parameters and predictions derive from model structures that have been consistently unable to anticipate the onset of recessions or financial crises. Counterfactuals from such flawed structures cannot form the sole basis for successful policy analysis or advice, with or without the benefit of hindsight.

Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have “prevented” the housing bubble. All things considered, I personally prefer Milton Friedman’s performance appraisal of the Federal Reserve. In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: “There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind.”

Proving that great minds think alike, I will shortly be releasing a CIS policy monograph making much the same argument in the context of a broader discussion of the relationship between monetary policy and asset prices. I discussed the issue with John Taylor at the New York MPS meeting, but could not bring him around to my point of view.


posted on 12 March 2009 by skirchner in Economics, Financial Markets, Monetary Policy

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Educating Rudd

The Lion Rock Institute sends Prime Minister Kevin Rudd a Chinese translation of Hayek’s Road to Serfdom:

A couple of years ago our institute published a revised version of Hayek’s The Road to Serfdom in Chinese. We use it regularly when speaking to high school students in Hong Kong and have come informally to refer to such talks as the Children of Hayek lectures after one of Rudd’s earlier journalistic ventures a few years back. The Prime Minister will be pleased to know that we have popped a signed copy in the post to him. We sincerely hope he spends some time reading it over his next summer holidays.


posted on 12 March 2009 by skirchner in Economics

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Disaster Tourism: New York City 2009

Have just returned from Freddie and Fannie-ravaged America.  John Green provides a perspective on the special MPS meeting in New York in the Business Spectator

While I was away, I had an op-ed in The Australian on the proposed increase in Chinalco’s stake in Rio.  I was also interviewed on the same subject by the Chinese-language 21st Century Business Herald.

posted on 11 March 2009 by skirchner in Economics

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