Working Papers

2009 12

Fairfax Self-Parody Alert

The Sydney Morning Herald runs an op-ed by Fidel Castro, titled ‘The Truth About Copenhagen’.  You can also read it in the Tehran Times.

posted on 23 December 2009 by skirchner in Media

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Pre-Christmas Linkfest

Crowding-out in the face of a rising supply price of foreign capital.

How EMU promotes anarchist violence.

How Kevin Rudd sold Australia down the river in Copenhagen.

International Economy symposium on targeting assets prices with monetary policy. 

My final op-ed for the noughties: (NZ) Labour Should Not Take its Eyes Off the Target.

posted on 22 December 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy

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The Gruen Transfer

Henry Ergas responds to David Gruen’s defence of the indefensible:

Gruen says the infrastructure spending is justified because it adds to productive capacity.

But this is true only if the benefits from that spending exceed its costs. If they don’t (think national broadband network or pink batts), then the community loses twice: from the waste, as scarce capital is diverted from better uses; and from the distortions caused by the higher taxes needed to cover the projects’ costs.

As a result, far from expanding productive capacity, projects such as these cause it to shrink. This used to be part of Treasury religion; it is startling that there is no mention of it in Gruen’s speech.

posted on 19 December 2009 by skirchner in Economics, Fiscal Policy

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(Not So) Outrageous Predictions for 2010

Saxo Bank has released its outrageous predictions for 2010, which are actually not outrageous at all.  But how did they go with their outrageous predictions for 2009?  My comments in square brackets.

1)  There will be severe social unrest in Iran as lower oil prices mean that the government will not be able to uphold the supply of basic necessities. [IE: yes, but not because of oil, half marks]

2)  Crude will trade at $25 as demand slows due to the worst global economic contraction since the great Depression. [IE: WTI bottomed out at $33.22 in mid-January].

3) S&P will hit 500 in 2009 because of falling earnings, vaporizing housing equity and increased cost of funds in the corporate sector. [IE: S&P 500 made lows at the even more ominous sounding level of 666].

4) The EU is likely to crack down on excessive government budget deficits in several member states, and Italy could live up to previous threats and leave the ERM completely. [IE: if only!]

5) The AUDJPY will drop to 40. The decline in the commodities markets will affect the Australian economy. [IE: AUD-JPY actually bottomed in October 2008.  Lows for 2009 were 55.55.  Australian economy outperformed ROW]

6)  EURUSD will fall to 0.95 and then go to 1.30 as European bank balances are under tremendous pressure because of exposure to the faltering Eastern European markets and intra‐European economic tensions. [IE: EUR-USD made lows at 1.2459 and highs at 1.5144 YTD, but half marks for European bank stress].

7) Chinese GDP growth drops to zero. The export driven sectors in the Chinese economy will be hurt significantly by the free‐fall economic activity in the Global Trade and especially of the US. [IE: growth forecast wrong, no marks for stating the obvious implications of global recession already in evidence]

8)  Pre‐In’s First Out. Several of the Eastern European currencies currently pegged or semi‐pegged to the EUR will be under increasing pressure due to capital outflows in 2009. [IE: Full marks, although fixed exchange rates spell macro trouble by definition]

9)  Reuters/ Jefferies CRB Index to drop to 30% to 150. The Commodity bubble is bursting, with speculative excesses so large they have skewed the demand and supply statistics. [IE: see comments on Australia]

10)  2009 will see the first Asian currencies to be pegged to CNY. Asian economies will increasingly look towards China to find new trade partners and scale down their hitherto US‐centric agenda. [IE: wrong on first part, second part hardly unique to 2009]

So score 2/10 for Saxo in 2009, which is a whole lot better than Nouriel Roubini.

posted on 18 December 2009 by skirchner in Economics, Financial Markets

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3.75 is the New 4.75

So says Deputy Governor Ric Battellino of the RBA’s official cash rate.  Battellino’s speech once again highlights the fact that the RBA calibrates changes in the official cash rate to changes in actual borrowing rates.  Battellino also notes that:

The margin on variable housing loans is much the same today as it was at the start of the crisis.

All this makes the whole political pantomime of bank-bashing rather pointless.  It is also the case that the RBA will probably discount the implications of tighter bank capital regulation for retail borrowing rates in its future setting of the official cash rate.  The equilibrium official cash rate may shift even lower as a result.

posted on 16 December 2009 by skirchner in Economics, Financial Markets, Monetary Policy

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Big Government Fails Treasury’s ‘Wellbeing’ Test

I have an op-ed in today’s Australian taking Treasury Secretary Ken Henry to task for resigning Australia to a permanent expansion in the size of government.  I argue that the expansion in the size of government since Gough Whitlam fails the criteria set by the Treasury’s ‘wellbeing’ framework for public policy.

Note that the Oz has an unfortunate habit of leaving out quotation marks.  There should be quote marks around ‘25 per cent as the maximum tolerable proportion of taxation’.  The quote is from a letter Keynes wrote to Colin Clark.

posted on 16 December 2009 by skirchner in Economics, Fiscal Policy

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Crowding-Out in a Small Open Economy (That Would Be Us!)

Tony Makin makes the case for a crowding-out effect from fiscal stimulus via the exchange rate and net exports.  Last week’s September quarter balance of payments implied a 1.8 percentage point subtraction from growth on the part of net exports, which is consistent with this story.  Indeed, despite a positive contribution in the first half of 2009, export volumes made no contribution to measured GDP growth for the year-ended in June.  A 13.1% decline in import volumes, by contrast, made a 3.3 percentage point contribution to growth over the same period. 

Remarkably, the Australian dollar-US dollar exchange rate bottomed out in October 2008, the same month as the first stimulus package, before rising 57% from its lows around 0.6000 to its recent highs around 0.9400. 

I made a similar case for crowding-out via the exchange rate and net exports in this op-ed following the May Budget.

posted on 15 December 2009 by skirchner in Economics, Financial Markets, Fiscal Policy

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How the US Government Funds Mortgage Fraud

The Centre for Public Integrity and the Washington Post investigate Ginnie Mae:

The trouble signs surrounding Lend America had been building for years. A top executive was convicted of mortgage fraud but still helped run the company. Home loans made by its headquarters were defaulting at an extremely high rate. Federal prosecutors alleged in a civil suit that the company falsified loan documents and committed fraud.

Yet despite these red flags, a little-known federal agency continued giving its blessing to Lend America, allowing it to do business in the name of the U.S. government. The Government National Mortgage Association, known as Ginnie Mae, authorized the firm to bundle its mortgages into securities and sell them to investors around the world—all backed by U.S. taxpayer money.


posted on 14 December 2009 by skirchner in Economics, Financial Markets

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Markets in Everything: Autographed P J O’Rourke Promotional Banners

CIS is auctioning three 3m x 1.5m promotional banners autographed by P J O’Rourke as part of his Australia and New Zealand tour earlier this year.  Images of the banners and bidding instructions can be found here.

UPDATE (14 December 16:35 AEDT):

The highest bids received to date for the personally autographed PJ O’Rourke banners are as follows:

Banner 2 $300.00 “Government does not cause affluence. Citizens of totalitarian countries have plenty of government and nothing of anything else.”

Banner 3 $120.00 “The free market is a bathroom scale. You may hate what you see when you step on the scale. ‘Jeeze, 230 pounds!’ But you can’t pass a law making yourself weigh 185.”

No bids have been received for banner 1 as yet. “Bringing the government in to run Wall Street is like saying, ‘Dad burned the dinner, let’s get the dog to cook.’”

If you would like to place a bid, please visit the link below and follow the instructions.  Note: If you are outbid, you will receive notification so that you have the opportunity to place a counter-bid.

posted on 11 December 2009 by skirchner in CIS

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Will Australian FDI Policy Be Any More Comprehensible in Chinese?

Treasurer Wayne Swan has announced an expansion of the Foreign Investment Review Board and a review of the communication of FDI policy in a speech to the Global Foundation.  The government’s first initiative will be to:

release an easy-to-read version of the foreign investment review framework for prospective investors, which will be made available in other languages, including Chinese, Japanese and Bahasa.

One would of thought that such documentation already existed.  The problem is that Australian FDI policy is not going to be any less confusing in a foreign language than it already is in English.  No amount of explanation can eliminate the fundamental source of confusion and uncertainty, which is the sweeping discretion available to the Minister and FIRB under the Foreign Acquisitions and Takeovers Act. 

The debacle of the Patrick Colmer speech demonstrated that the basic communication problem stems from the government’s lack of a clear policy framework for the exercise of this discretion.  Foreign investors cannot be expected to understand a policy that the government itself cannot articulate.

UPDATE:The Patrick Colmer saga continues:


Do you endorse the guidelines put out by Colmer from the FIRB two weeks ago?


Mr Colmer didn’t put out any guidelines two weeks ago, and you know that.


About the 15, 50 per cent and the…


Mr Colmer was asked a theoretical question to which he gave a theoretical answer, which I believe has been taken out of context.

Maybe the Chinese translation will be clearer.

posted on 10 December 2009 by skirchner in Economics, Foreign Investment

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Why Do Banks Pay Political Protection Money?

With the government, the opposition and the media all heavily engaged in gratuitous bank-bashing, few people have given much attention to the implications of tighter capital adequacy regulation for the cost of borrowing to consumers.  RBA Governor Glenn Stevens was remarkably frank about the implications of increased regulation in a speech this week:

on the assumption that most of these regulatory changes go ahead, one effect will presumably be to make the process of financial intermediation more costly. The intention, after all, is that lenders will operate with more capital against the risks they are taking. But capital is not free; shareholders have to be induced to supply it, and it will have to be paid for. High-quality liquid assets typically carry lower yields too, so mandating higher liquidity will have some (modest) cost as well.  Admittedly it can be argued that shareholders of financial institutions will have a less risky investment and so should be prepared to accept lower returns. But customers of financial institutions – depositors and borrowers – will also pay via higher spreads between what lenders pay for funds and what they charge for loans. That is, they will pay more ex ante to use a safer financial system, as opposed to taxpayers having to pay large costs ex post to re-capitalise a riskier system that runs into trouble.

Stevens’ posited trade-off between a safer financial system that is more expensive and one that is cheaper and riskier may only hold up to a point.  His assumption that a more tightly regulated financial system is less likely to be bailed-out by taxpayers may not hold at all.  As Stevens notes, careful attention needs to be given to whether the additional costs imposed by increased regulation will yield the desired benefits.

The increase in funding costs being passed on by the banks to their borrowers as a result of the financial crisis is not something we can do much about ex post, especially given that Australia is a price-taker in global capital markets.  But we can do something about the future of bank capital regulation.  Bashing the banks, while giving the government a free pass to tighten the regulation of capital without due attention to costs and benefits is perverse. 

Perhaps even more perverse is the way the banks continue to fund the politicians who are actively seeking to damage their franchise.  The AEC’s web site shows that the big four banks are all major donors to political parties (see, eg, Westpac’s return).  No doubt the banks fear things would be even worse if they didn’t pay their political protection money, but it’s hard to see how.


posted on 10 December 2009 by skirchner in Economics, Financial Markets, Politics

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How to Reduce the Budget Deficit, Without Really Trying

The Australian economy just got bigger, thanks to the adoption of the new national accounting standard SNA08.  The revised data raise the level of nominal GDP by 4.4% for 2007-08.  As the government was quick to point out, this reduces the estimated budget deficit for 2009-10 from 4.7% to 4.5% of GDP, as well as the expected net debt to GDP ratio.

posted on 09 December 2009 by skirchner in Economics, Fiscal Policy

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Clive Hamilton as Reactionary Conservative

True socialists don’t support reactionary conservatives like Clive Hamilton:

it’s a sign of the decline of Left politics that a reactionary, pro-censorship sexual moraliser who hates the idea of working people enjoying a higher material standard of living could ever be considered left-wing…

It’s time that left-wingers stood up for their beliefs, rejected reactionaries like Hamilton and once again proudly said that we support industrial civilisation, the modern world, and more freedom and more material wealth for the working class. Any left-winger voting in the Higgins by-election this Saturday would do well to put Hamilton where he belongs: at the bottom of their preferences.


posted on 04 December 2009 by skirchner in Politics

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Abbott and McKibbin Need to Talk

Michael Stutchbury makes the case for Liberal leader Tony Abbott to adopt Warwick McKibbin’s hybrid ETS-cabon tax as a counter to Labor’s ETS.  Former opposition leader Malcolm Turnbull was once sold on the McKibbin model when in government, but couldn’t be bothered making the case from opposition.

posted on 04 December 2009 by skirchner in Economics, Politics

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Once a Leaker, Always a Leaker

The following observation from a London-based hedge fund trader is perhaps representative of offshore perceptions of monetary policy in Australia:

The RBA hiked rates again overnight, in line with leaks yesterday but contrary to some speculation at the height of the Dubai panic.

I don’t think there were any leaks on this occasion.  Friday’s Reuters poll had all but one respondent expecting a 25 bp tightening, despite Dubai.  But it shows that the perception that the RBA is a leaker is well entrenched in financial markets.


posted on 02 December 2009 by skirchner in Economics, Financial Markets, Monetary Policy

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