Working Papers

2011 06

Chinese Perspectives on Investing in Australia

With Sinosteel pulling the plug on a $2bn iron ore mine, the Lowy Institute has come out with a timely survey of Chinese Perspectives on Investing in Australia. The Lowy analysis highlights the role of government policy in causing confusion among Chinese investors. It singles out what it calls ‘public (but undocumented) comments in 2009 by a FIRB official.’ I assume the author means these comments, which are now on the public record following an FOI request.

The Lowy analysis is disappointing in arguing that if the FIRB did not exist, we would have to invent it. It even suggests setting up a FIRB presence in China. Given that the Treasurer has sought to regulate Australian FDI in China through some of the conditionality imposed on Chinese acquisitions in Australia, that would be perversely appropriate.  It seems that geography is no boundary to the Treasurer’s discretion. Australia’s dysfunctional regulatory regime for FDI is a problem not only for Chinese investors, but for anyone engaged in cross-border acquisitions of Australian equity capital.

posted on 24 June 2011 by skirchner in Economics, Foreign Investment

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All Their Own Work

FRANKLIN D. RAINES, chief executive of Fannie Mae, May 16, 2000:

It was Congress that chartered Fannie Mae and later Freddie Mac as private shareholder-owned corporations, so Congress deserves the lion’s share of the credit for the successes of the secondary market and the housing finance system today. What Congress did turned out to be absolutely brilliant—it created a system that harnesses private enterprise and private capital to deliver the public benefit of home ownership. And it maximizes this public benefit while minimizing the public risk, and without spending a nickel of public funds.

From Morgenson and Rosner’s Reckless Endangerment.

posted on 13 June 2011 by skirchner in Economics, Financial Markets

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Joe Stiglitz and Fannie Mae

From Morgenson and Rosner’s Reckless Endangerment:

Fannie Mae also published its own series of studies on housing, known as Fannie Mae Papers. In these reports, Fannie would ask prominent academics to discuss topics near and dear to the company’s heart. In March 2002 Joseph Stiglitz, a Nobel Prize winner, and Peter Orszag, who would later become the head of the Congressional Budget Office under Obama, along with Jonathan Orszag, published a paper entitled “Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard.” The noted academics pushed back against the companies’ critics who argued that both Fannie and Freddie posed significant risks to the taxpayer. For example, their paper concluded that even though Fannie and Freddie held much smaller capital cushions than other financial institutions, these would never have to be used. “The probability of a shock as severe as embodied in the risk-based capital standard is substantially less than one in 500,000—and may be smaller than one in three million,” the authors wrote. “If the probability of the stress test conditions occurring is less than one in 500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is less than $2 million.”

Not even close.

Fannie Mae’s financing of academic research on such a large scale meant that few housing experts were left to argue the other side of any debate involving the company. Any discussion involving Fannie Mae in these papers was designed to defend the status quo. One bank lobbyist was interested in hiring academics to write papers that might take a different point of view on housing issues. But most of the experts in the area had been co-opted by Fannie Mae. “I tried to find academics that would do research on these issues and Fannie had bought off all the academics in housing,” the lobbyist said. “I had people say to me are you going to give me stipends for the next 20 years like Fannie will?” The answer was no. The discussion was over.

posted on 12 June 2011 by skirchner in Economics, Financial Markets

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Is There a Free Market Economist in the House?

In this week’s Ideas@TheCentre, I anticipate the results of a survey of the policy views of the members of the Economics Society of Australia, drawing on similar surveys of US economists by Dan Klein, Charlotta Stern and Robert Whaples.

posted on 10 June 2011 by skirchner in Classical Liberalism, Economics

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We’re Too Busy to be Transparent: FIRB

FIRB chairman John Phillips on the rejection of the SGX-ASX merger:

“I couldn’t understand why anyone would support it—unless they had a vested interest.”

John ignores the possibility that some people might support the merger by taking the view that it was none of their business what ownership structure ASX management chose to pursue. Unfortunately, many in government and the media see their role as being back-seat drivers of other people’s business decisions.

John also complains about the FIRB’s time being taken up responding to FOI requests:

Mr Phillips said the FIRB was currently subject to many Freedom of Information requests which were taking up the time of its staff.

“We are getting so many requests from (journalists) and others under the FOI Act which is unfortunate in a way because it is taking up the time of people who ought to be dealing with applications,” he said.

Mr Phillips said he was “not sure how much more transparency there can be”.

I can think of one less FOI application the FIRB would have had to deal with if they had taken the time to put their public speeches on their web site. It is the FIRB that wastes everyone else’s time by denying access to information that should be on the public record as a matter of course.

posted on 09 June 2011 by skirchner in Economics, Foreign Investment, Rule of Law

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MNI-Deutsche Börse Economic Forecasting Competition – May Round

I came second in the May round of the MNI-Deutsche Börse Economic Forecasting Competition, having come third in the April round:

NEW YORK, NY, June 8, 2011 – Market News International has announced the May winners of the MNI Forecast Competition, a free online contest in predicting US economic indicators.

April’s highest forecasters in descending order are:
•  Jos Theelen, University of Amsterdam
•  Dr. Stephen Kirchner, UTS Business School
•  Mike Moran, Dawai Capital Markets America

Until June 30, contestants are competing for the title of Best Overall Forecaster and a prize of $1,500 by forecasting ten economic data releases: Non-farm Payrolls, Retail Sales, CPI, PPI, Industrial Production, ISM Manufacturing Index, Housing Starts, Durable Goods Orders, International Trade Balance, and New Home Sales.

The competition would appear to be mine to lose. The pressure!

posted on 09 June 2011 by skirchner in Economics, Financial Markets

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CIS End of Financial Year Appeal

You know what to do.

posted on 06 June 2011 by skirchner in Classical Liberalism

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Another Corrective to the Conventional Crisis Narrative

I recently reviewed the outstanding Guaranteed to Fail, perhaps the best book written about the financial crisis. In the WSJ, James Freeman reviews Reckless Endangerment by Pulitzer Prize-winning journalist Gretchen Morgenson and analyst Joshua Rosner. It reinforces the argument I made in my review of Guaranteed to Fail that the conventional crisis narrative is a (largely successful) attempt on the part of officialdom to divert attention from their culpability for the crisis:

In Ms. Morgenson and Mr. Rosner’s book, a bipartisan parade of famous Washington movers-and-shakers appear in cameos to do some disservice (now largely forgotten) to taxpayers. There is Newt Gingrich lauding Fannie Mae at a corporate event. There is Larry Summers bullying his Treasury staff to water down a report critical of Fannie. There is current World Bank President Robert Zoellick as a Fannie executive in the 1990s lobbying on Capitol Hill.

Look at Rep. Barney Frank, responding in 2005 to the question of whether the government’s push to increase home-ownership rates might result in people buying more home than they could afford and putting themselves in dire straits. The authors report: “Frank brushed off the questioner. ‘We’ll deal with that problem if it happens,’ he barked.”

It happened all right, and perhaps the most amazing part of this tale is that so many of those responsible for the disaster remain in power.

A catastrophic failure of democratic accountability.

posted on 03 June 2011 by skirchner in Economics, Financial Markets

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How New Zealand Turned Away IKEA

In contrast to the Australian Treasury, the Acting Secretary of the New Zealand Treasury injects some sense into the debate over foreign direct investment:

Acting Secretary to the Treasury Gabriel Makhlouf has hit out at critics of foreign investment in New Zealand, saying Treasury has consistently recommended removing all screening.

The British civil servant who arrived in this country 15 months ago told the New Zealand Institute of International Affairs that lowering foreign investment would be counter-productive to growth ambitions.

Small, high productivity economies relied heavily on international connections of people, capital, trade and ideas, he said.

He advocated the reduction of costs and distortions associated with capital inflows, particularly tax.

“If we are to continue to screen foreign investment, and Treasury has consistently recommended removing all screening, it needs to be kept to a minimum and under constant review,” he said.

“Some of you might have followed the story of the big Swedish furniture outlet called IKEA, and its attempts to find a site for a store in the North Island,” Mr Makhlouf said.

The company ran into so many obstacles that it eventually abandoned its plans to establish a New Zealand branch. Domestic policy settings relating to roading infrastructure, the Environment Court process and the approach of the local council managed to sink IKEA’s plans.

The UK has one of the world’s most liberal FDI regimes, so the New Zealand regime must have come as a surprise to Makhlouf.

posted on 02 June 2011 by skirchner in Economics, Foreign Investment

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In Defence of Fractional Reserve Banking

George Selgin defends fractional reserve banking against the fever swamp Austrians:

Free bankers have tried responding to this argument by noting how fractional reserve banking has prevailed under every sort of bank regulatory regime, from the earliest beginnings of banking, not excepting regimes that involved very little regulation, like those of Scotland, Canada, and Sweden, and that lacked even a trace of government guarantees or other sorts of artificial support.  But since some 100-percenters seem unmoved by this approach, I here take a different tack, which consists of pointing out that every significant 100-percent bank known to history was a government-sponsored enterprise, which depended for its existence on some combination of direct government subsidies, compulsory patronage, or laws suppressing rival (fractional reserve) institutions. Yet despite the special support they enjoyed, and their solemn commitments to refrain from lending coin deposited with them, they all eventually came a cropper. What’s more, it was these government-sponsored full-reserve banks, rather than their private-market fractional reserve counterparts, that were the progenitors of later central banks, starting with the Bank of England.

posted on 01 June 2011 by skirchner in Economics, Monetary Policy

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