Working Papers

2010 04

The RBA’s Perception Problem

Regardless of whether the RBA still backgrounds journalists on the monetary policy outlook, the perception that it does so remains alive and well in financial markets. Yesterday’s column by Terry McCrann confidently declared that ‘the Reserve Bank is all-but certain to deliver its third successive interest rate increase next Tuesday.’  At the same time, the implied probability of a 25 bp tightening priced into inter-bank futures rose from around 32% Wednesday to around 48% Thursday.  There was a similar increase in the probability of a tightening on iPredict

This suggests that the market doesn’t believe RBA Governor Glenn Stevens’ denial that the RBA leaks, although that denial was couched in very narrow terms. Of course, current pricing also implies that the market doesn’t have complete confidence in Terry McCrann either, but the change in market pricing is still significant.

Chris Joye speculates that this might be part of a RBA sting operation designed to finally put to rest the idea that the RBA leaks. Yet even if the punditocracy is deliberately wrong-footed on this occasion, it may not be enough to change market perceptions.  When I worked in financial markets, I was often asked by clients whether I had ‘contacts’ at the RBA, with the clear implication that anyone who did was more likely to have the inside running on monetary policy. I always thought these clients had a greatly exaggerated view of the extent to which any such contacts might be useful in calling the interest rate outlook and the amount of media and other backgrounding that actually takes place. But that perception, even if exaggerated, is still a problem for the integrity of monetary policy.

UPDATE: Friday’s Reuters poll has the median financial market economist giving a 60% chance to a 25 bp tightening on Tuesday. Not quite the ‘all-but’ certainty expressed by McCrann.

posted on 30 April 2010 by skirchner in Economics, Financial Markets, Monetary Policy

(2) Comments | Permalink | Main

| More

Why the Financial Reform Bill Will Help Rather than Hinder Goldmans

The always insightful Eric Falkenstein:

Blankfein is a crony capitalist, begging for more ‘regulation’ because he knows that a 1300 page bill basically only helps those with connections and extant massive legal infrastructure, and hurts potential competitors who merely have good ideas


posted on 29 April 2010 by skirchner in Economics, Financial Markets, Rule of Law

(0) Comments | Permalink | Main

| More

Three Wasted Years

Former federal Labor minister Gary Johns on three wasted years of government:

a government without purpose roams the stage with nothing to show and looks to pick a fight or blame others, in this case state governments for allegedly choking the hospitals.

The Department of Prime Minister and Cabinet is overwhelmed by constant requests from the Prime Minister’s office for new and better schemes and promotions and photo opportunities. There is no agenda, no priority setting and no point at all except to get Rudd on the front page…

The electoral timidity, the profligacy, the spin, the lack of reason, the internal bullying, the vast waste of money, the interminable photos with children, the transparent use of religion with the photos at church on Sunday, have all embittered his already unimpressed caucus colleagues.

posted on 29 April 2010 by skirchner in Economics, Politics

(0) Comments | Permalink | Main

| More

Don’t Blame Migrants for Home Grown Problems

I had an op-ed in yesterday’s Canberra Times (‘Migrants add to growth hopes’) arguing that politicians are using migrants as scapegoats for the many public policy problems they have been unwilling or unable to tackle themselves. No link, but full text below the fold (text may differ slightly from published version).

The highly readable Chris Berg made similar arguments in a piece for ABC The Drum Unleashed.

continue reading

posted on 27 April 2010 by skirchner in Economics, Population & Migration

(5) Comments | Permalink | Main

| More

The Fix is In

In a previous post, I warned that:

The danger now is that the government implements another of its short-term political fixes ahead of this year’s federal election and re-tightens the rules [on foreign direct investment in residential property] rather than addressing the supply-side constraints besetting Australian residential property.

In the event, we have this:

FEDERAL and state governments have commissioned a working party of officials to hold a no-stone-unturned inquiry into all factors contributing to record house prices, as Labor senses the issue is becoming a political danger.

The inquiry, to deliver its first report within weeks, will examine sensitive areas such as tax breaks for negative gearing, land banking by developers, and whether grants to first home buyers push up house prices.

More wide-ranging than I expected, but also a waste of time, something the government is fast running out of ahead of this year’s federal election.  As Christopher Joye notes, these issues have already been extensively studied and the policy solutions are well-known.  The likely outcome is a short-term political fix designed to serve as a holding action ahead of the election. Do we really need an inquiry into whether grants to first home buyers push up house prices?  Even Steve Keen and I agree on that. Did we really need a review by a former senior public servant to tell us that the home insulation program was a waste?

While the Prime Minister has an underserved reputation as a policy wonk, the reality is that he is what former Prime Minister Paul Keating would call a ‘policy bum’.


posted on 23 April 2010 by skirchner in Economics, House Prices

(4) Comments | Permalink | Main

| More

Goldman Sachs and Gangster Government

Michael Barone highlights the real lesson from the fraud case brought against Goldman Sachs:

Republicans have been accurately attacking the Dodd bill for authorizing bailouts of big Wall Street firms and giving them unfair advantages over small competitors. They might want to add that it authorizes Gangster Government—the channeling of vast sums from the politically unprotected to the politically connected.

That can boomerang even against the latter. Goldman Sachs employees gave nearly $1 million to the Obama campaign and $4.5 million to Democrats in 2008. That didn’t prevent the Goldman from being shoved under the SEC bus. Gangster Government may look good to those currently in favor, but, as some of Al Capone’s confederates found out, that status is not permanent, and there is always more room under the bus.

Eric Falkenstein asks whether investments banks are committing fraud by selling State of California debt:

I bet all of the major investment banks are facilitating debt issuance by the State of California and its various agencies, counties, and municipalities. I bet also there is a small but spirited set of shorts, trying to make money off of the inevitable bankruptcy. With hindsight it will be obvious, and everyone currently buying California-related debt will develop amnesia and claim they never liked California debt, and were hoodwinked by greedy bankers.

At that point, should all the investment banks be liable? If so, is every bank facilitating California debt issuance committing fraud right now?

posted on 22 April 2010 by skirchner in Economics, Financial Markets, Rule of Law

(0) Comments | Permalink | Main

| More

The SEC’s Long Bias

Holman Jenkins on the SEC’s prosecution of those who shorted housing:

you can’t go wrong betting on the media’s unwillingness to unwrap itself from the errors of hindsight bias—that bet by the SEC has paid off. But there are bigger fish being fried. For more than a year, certain knowledgeable bloggers and investigative reporters have argued that such deals—Goldman’s was hardly unique—exacerbated the bubble, with special focus on the activities of a Chicago hedge fund called Magnetar.

It’s true that such deals gave housing bulls an additional way to lose money. But to blame shorts for making the bubble worse comes close to saying salvation for the markets is to exclude participants who are bearish…

The SEC certainly understands the need for a rapid route to rehabilitation for itself if it hopes for a share of the power and budget up for grabs in the Senate debate over financial reform. If you don’t think this played a role in the suit it sprang on Goldman last week, we have a CDO to sell you.

Goldman will have to decide for itself if its business model can be defended in the court of public opinion. But let’s admit there’s an implicit long bias to the SEC’s case. Nobody would give a hoot if Mr. Paulson were the party who lost money. The SEC would never have gone on its hunt for something, anything, to hang a fraud case on.

posted on 21 April 2010 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

| More

The Real Giant Vampire Squid

Sucking up $381 billion and counting, according to the CBO. Pete Wallison lays responsibility firmly at the feet of Barack Obama:

It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee’s bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.

Why was there no action in the full Senate? As most Americans know today, it takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. To close debate and proceed to the enactment of the committee-passed bill, the Republicans needed five Democrats to vote with them. But in a 45 member Democratic caucus that included Barack Obama and the current Senate Banking Chairman Christopher Dodd (D., Conn.), these votes could not be found.

Recently, President Obama has taken to accusing others of representing “special interests.” In an April radio address he stated that his financial regulatory proposals were struggling in the Senate because “the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis.”

He should know. As a senator, he was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry.

posted on 20 April 2010 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

| More

True Confessions of Steve Keen on the Road to Mt. Kosciuszko

The Business Spectator’s Rob Burgess, who has joined Steve Keen’s housing doomsday cult, reveals the real story behind Keen’s highly publicised decision to sell his unit in Surry Hills:

It turns out that Steve has a cunning get-rich-quick plan. In late 2008, just after Lehman Brothers crashed and a month after he’d made the house-price bet with Rory Robertson, Keen sold his house, taking large capital gains out of the market. Now, if he can only crash the housing market, he’ll make a killing! (Cue fiendish laughter from evil Dr Keen.)

It is, of course, absurd to think that even a cash-strapped academic would manipulate the market to extract relatively small sums of money (in fact, says Keen, the sale was divorce-related).

posted on 20 April 2010 by skirchner in Economics, House Prices

(0) Comments | Permalink | Main

| More

Sticking it Up the Wrong People

Steve Keen’s housing doomsday cult is wending its way up Mt Kosciuszko with an ETA of 23 April. By my count, only ten people turned up to see him off from Canberra, but Keen is quoted as saying:

’‘This has actually garnered me support,’’ he said. ‘‘People are saying, thank god someone is sticking it up the property industry.’‘

A theme of Keen’s housing doomsday cult is that hapless home buyers are being manipulated into buying property, resulting in a ‘housing mania.’  Like many of his fellow travelers, Keen sees housing affordability as a demand-side rather than a supply-side problem. 

Yet it should be obvious that it is in the interests of the property industry to promote housing affordability so that it can sell more houses.  The industry’s lobby groups and industry associations consistently argue for an easing of the tax burden on housing, development restrictions and other supply-side constraints on the provision of new homes.  The property industry’s interest in building and selling more homes is aligned with the consumer interest in making housing more affordable.  Keen is sticking it to the wrong people.  Like any industry, it has its share of spruikers and shonks, but the property industry in general is the solution and not the problem.

posted on 17 April 2010 by skirchner in Economics, House Prices

(9) Comments | Permalink | Main

| More

Cash Will Ease Your Pain

Behavioural economics to which I can relate.

posted on 16 April 2010 by skirchner in Economics

(0) Comments | Permalink | Main

| More

Constitutional Challenge to the Bailout of Greece

Law professors’ constitutional challenge to EU plunder:

Dr Karl Albrecht Schachtschneider, law professor at Nuremberg and author of the complaint, told The Daily Telegraph that he will be ready to file within days and will ask the court for an expedited procedure. A ruling could occur within a week, but may take as long as six months.

The complaint will argue that the rescue contains an illegal rate subsidy, threatens monetary stability as encoded in the Maastricht Treaty, and breaches the ‘no bail-out’ clause. Greece is clearly responsible for its own mess.

“It is a question of law. The duty of the court to defend the German constitution. They have no choice other than reaching a lawful decision. This may cause a great crisis in Europe but we already have a crisis,” he said.

He will ask the court to freeze rescue aid while the case is pending. There is a precedent for this. It ordered Berlin to halt implementation of the Lisbon Treaty while it reviewed the treaty last year. Such a move would cause havoc on Europe’s bond markets.

“This court hearing is going to be very dangerous,” said Hans Redeker, currency chief at BNP Paribas. “It could lead to Germany itself being catapulted out of the currency union. Once investors begin to fear this, there will not be single euro in further financing for the EMU periphery.”

Sounds like a plan!

posted on 16 April 2010 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

| More

Robert Barro’s Great Depression Reading List

Robert Barro’s reading list on the economics of the Great Depression.  I would add that there is a shorter version of Friedman and Schwartz’s A Monetary History of the United States dealing specifically with the Depression: The Great Contraction, 1929-33, recently re-published by PUP.

Barro on stimulus:

There’s a strong tendency for the economy to recover on its own, as long as it’s not subject to further new shocks, so a likely scenario is that that is what will happen today as well. And then the Obama administration will say that it’s because of our policy that things recovered, and there won’t be any way to prove whether that’s right or wrong.


posted on 16 April 2010 by skirchner in Economics, Fiscal Policy, Monetary Policy

(0) Comments | Permalink | Main

| More

The Contradictions of Behavioural Economics

Andrew Ferguson on behavioural economics:

You can see how useful the notion of irrational man is to a would-be regulator. It is less helpful to the rest of us, because it runs counter to every intuition a person has about himself. Nobody sees himself always as a boob, constantly misunderstanding his place in the world and the effect he has upon it. Surely the behavioral economists don’t see themselves that way. Only rational people can police the irrationality of others according to the principles of an advanced scientific discipline. If the behavioralists were boobs too, their entire edifice would collapse from its own contradictions. Somebody’s got to be smart enough to see how silly the rest of us are.

I make related arguments in my review essay ‘Authoritarian Economics’.


posted on 14 April 2010 by skirchner in Economics, Financial Markets

(0) Comments | Permalink | Main

| More

Bond Market Vigilantes No Check on Fiscal Excess

I have an op-ed in today’s SMH questioning whether higher inflation and interest rates are the most likely outcome from the fiscal policy excesses that have followed the global financial crisis.  Classical liberals fret about rising inflation and interest rates, but this is not entirely consistent with their view that the expansion of the state is bad for long-run growth prospects, which could be expected to depress both.  This is not necessarily good news for bonds, as it points to an environment of depressed returns across all asset classes.

The latest unsolicited review copy to cross my desk is Accelerating out of the Great Recession: How to Win in a Slow-Growth Economy, by two partners at the Boston Consulting Group.  Like many business books, it is useful mainly for what it tells us about the zeitgeist.  The sub-title says a lot about current expectations for future growth, but I was also struck by this recommendation from the authors:

Prepare for government intervention and changes in the external environment, which will likely include a reduction in consumers’ disposable income and restrictions in free trade.

If this is what sells business books, then we have a problem and it’s not higher interest rates.


posted on 13 April 2010 by skirchner in Economics, Financial Markets

(2) Comments | Permalink | Main

| More

Data are the More than Just the Plural of Anecdote

The debate over foreign investment in Australian property is being fuelled by anecdote rather than data, largely because the available data on the subject is so limited.  In today’s Australian, Natasha Bita reports her experiences trying to extract information from the FIRB (an all too familiar story):

The Australian provided the FIRB with a list of questions, including whether it is monitoring the impact on the property market of its relaxed rules, which richocheted for three days between FIRB and the Treasury.

Eventually, a spokesman for Sherry failed to say if, or how, the impact was being monitored.

A request for a copy of FIRB’s advice to Treasury to change the foreign investment rules also was ignored.

Asked to provide up-to-date data on the sale of residential property to foreigners and temporary residents, the minister’s spokesman replied: “FIRB approvals for temporary residents to buy established houses as a percentage of the total number of transfers of established housing that occurred in the eight capital cities were at a level of approximately between 1.5 per cent and 2 per cent in recent times. Data are not available after 31 March 2009 given that temporary residents were exempted from FIRB notification requirements.”

Even the Reserve Bank, which claims to be monitoring the situation, is having trouble getting any meaningful data from FIRB.

Its only analysis is a two-page internal briefing note, based on statistics from FIRB’s 2007-08 annual report and temporary resident numbers.

“For analysis you would try to get hard data on this but there is in fact no hard data,” the Reserve Bank’s head of domestic markets, John Broadbent, says.

“The Treasury were the ones who decided to cease collecting some of the data sets on the basis they were looking to reduce the administrative burden.”

Broadbent says an analysis of “older data” from the FIRB shows the share of foreign buyers of residential properties has risen from 0.4 per cent of properties in the late 90s to 1 per cent in 2008.

This is a very good illustration of how the FIRB’s lack of transparency undermines support for foreign investment in Australia.  The publication of more detailed and timely data on the subject would go a long way to dispelling popular fears about foreign investment.  That said, I also have some sympathy for the Treasury position.  It is unrealistic to expect FIRB to monitor and enforce compliance with the rules in relation to thousands of property transactions.  Indeed, it is doubtful whether FIRB even has the resources to monitor compliance with the many conditions it has been piling on to some of the more high profile cross-border M&A transactions.  The government’s appetite for regulation in this area greatly exceeds its administrative capacity.  Much of the liberalisation of foreign investment rules undertaken by the Rudd government has been an attempt to ease the administrative burden on the FIRB.

If the anecdotes are to be believed, then the liberalisation of foreign investment rules in relation to property has been a success.  If there is a policy failure, it is in the inability of the supply-side of the market to respond flexibly to both foreign and domestic demand.  The danger now is that the government implements another of its short-term political fixes ahead of this year’s federal election and re-tightens the rules rather than addressing the supply-side constraints besetting Australian residential property.

posted on 12 April 2010 by skirchner in Economics, Foreign Investment, House Prices

(0) Comments | Permalink | Main

| More

ASIC Shuts Down Betting on RBA Board Meetings and the ASX 200

ASIC is seeking to prevent Centrebet from offering betting markets on the outcome of RBA Board meetings and the ASX 200 index, on the grounds that the bets are derivatives within the meaning of the Corporations Act.  Sinclair Davidson and Ian Ramsay both suspect regulatory protectionism is at work:

Professor Ramsay said ASIC may have turned its attention to the bookmaker following a complaint from a competitor after it set up a market on the ASX200 share price index in March.

This will simply divert betting interest to offshore markets like iPredict, which enjoys the support of the Reserve Bank of New Zealand.


posted on 11 April 2010 by skirchner in Economics, Financial Markets, Monetary Policy

(0) Comments | Permalink | Main

| More

Break Up the States

Former NSW Treasury Secretary Percy Allan argues for breaking up the states into 15 to 25 smaller governments.  It is a refreshing alternative to the kneejerk centralisation that characterises the political response to most problems.  Increased jurisdictional competition and regulatory arbitrage would go a long way to solving a host of problems.  Handing more power to Canberra just compounds these problems by making decision-making even more remote from the localised and often tacit knowledge needed to address them.

posted on 06 April 2010 by skirchner in Economics, Politics

(0) Comments | Permalink | Main

| More

Follow insteconomics on Twitter