Working Papers

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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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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Who Would Want to Own an ETS?

Michael Stutchbury quotes Warwick McKibbin on the likely consequences of Labor’s emissions trading scheme:

Economist and Reserve Bank of Australia board member Warwick McKibbin warns the Carbon Pollution Reduction Scheme is “fundamentally unstable”, the price of permits will be “inherently volatile” and the Copenhagen agenda is in “total disarray”. “The political fallout from this is going to lead to changes,” he says.

The Coalition should let Kevin Rudd have full ownership of the fallout.

posted on 28 November 2009 by skirchner in Economics, Financial Markets, Politics

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Tony Abbott Offers Support for a Carbon Tax

Tony Abbott offers support for a carbon tax as an alternative to an ETS in today’s Australian:

many respected economists think a carbon tax would be more certain, less complex and far less open to manipulation than traded carbon permits.

In government, Malcolm Turnbull showed considerable interest in Warwick McKibbin’s proposal for a hybrid ETS-carbon tax.  This story from February 2007 (’Turnbull gives tick to McKibbin carbon trading model’) quotes McKibbin as saying that Turnbull ‘understands it completely’, which makes Turnbull’s subsequent support for Labor’s ETS all the more inexcusable.

The Liberals who support Labor’s ETS do so largely because they are too lazy to argue for the alternative policy approaches they know to be better.  I have heard several Liberal frontbenchers maintain that any policy with the word ‘tax’ in it won’t gain political support.  They support an ETS only because they want to neutralise climate change as a political issue, not because they believe it to be the best policy.  This is a monumental failure of leadership.

An obvious way forward for the Liberal Party, and for the Coalition, would be to commission McKibbin to design a hybrid scheme to take to the next election as an alternative to Labor’s ETS.

UPDATE: Joe Hockey goes begging for ideas on Twitter:

Hey team re The ETS. Give me your views please on the policy and political debate. I really want your feedback.

As David Cameron once said, too many tweets make a twat.

posted on 27 November 2009 by skirchner in Economics, Financial Markets, Politics

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Tens of Billions Lost

RBA Board member Warwick McKibbin, on the resource cost of fiscal stimulus:

RESERVE Bank director Warwick McKibbin has publicly questioned whether the Rudd government dumped him from the Prime Minister’s science council as payback for saying its fiscal stimulus package was “too big”.

Speaking yesterday after Wayne Swan said the RBA was “entirely comfortable with our fiscal policy”, Professor McKibbin said he had no doubt history would show that the Rudd government had overdone the stimulus.

Professor McKibbin also revealed that part of the motivation behind establishing a new council of eminent economists to debate policy issues was to encourage academics to speak out.

“I think when people look through the entrails of this, they will find billions, if not tens of billions, that was just lost,” he told The Australian.

A few weeks after he suggested that the second part of the stimulus package was too large while giving evidence at a Senate inquiry in May, he was dumped from a government advisory role on the Prime Minister’s Science and Innovation Council, Professor McKibbin said.

posted on 09 November 2009 by skirchner in Economics, Financial Markets, Fiscal Policy, Politics

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‘I Have Been Corrupted, A Little’: How Spin-Resistant Are Economics Bloggers?

The US Treasury has been running high level briefing sessions for economic bloggers.  Officialdom has obviously recognised that bloggers are an influential voice and need to be managed like old media.  Fortunately, economics bloggers are proving a little more spin-resistant than Treasury perhaps expected.  Here is what Naked Capitalism thought about the briefing:

It wasn’t obvious what the objective of the meeting was (aside the obvious idea that if they were nice to us we might reciprocate. Unfortunately, some of us are not housebroken).

And Steve Waldman:

The second thing I’d like to discuss is corruption. Not, I hasten to add, the corruption of senior Treasury officials, but my own. As a slime mold with a cable modem, it was very flattering to be invited to a meeting at the US Treasury. A tour guide came through with two visitors before the meeting began, and chattily announced that the table I was sitting at had belonged to FDR. It very clearly was not the purpose of the meeting for policymakers to pick our brains. The e-mail invitation we received came from the Treasury’s department of Public Affairs. Treasury’s goal in meeting with us was to inform the public discussion of their past and continuing policies. (Note that I use the word “inform” in the sense outlined in a previous post. It is not about true or false, but about shaping behavior.)

Nevertheless, vanity outshines reason, and I could not help but hope that someone in the bowels of power had read my effluent and decided I should be part of the brain trust. The mere invitation made me more favorably disposed to policymakers. Further, sitting across a table transforms a television talking head into a human being, and cordial conversation with a human being creates a relationship. Most corrupt acts don’t take the form of clearly immoral choices. People fight those. Corruption thrives where there is a tension between institutional and interpersonal ethics. There is “the right thing” in abstract, but there are also very human impulses towards empathy, kindness, and reciprocity that result from relationships with flesh and blood people. That, aside from “cognitive capture”, is why we should be wary of senior Treasury officials spending too much time with Jamie Dimon. It is also why bloggers might think twice about sharing a conference table with masters of the universe, public or private. Although the format of our meeting did not lend itself to forging deep relationships, I was flattered and grateful for the meeting and left with more sympathy for the people I spoke to than I came in with. In other words, I have been corrupted, a little.

In Australia, it is worth noting that most of the running on the issue of RBA media backgrounding has been from new media like Business Spectator and bloggers, although old media have since picked-up the story too.  Spin control becomes a lot more difficult when dealing with a proliferation of unregulated media with no stake in the status quo.

posted on 06 November 2009 by skirchner in Economics, Financial Markets, Politics

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The Revenge of the Three Amigos

An insight into how Australia is perceived abroad, care of Holman Jenkins in the WSJ:

What most infuriated their hosts, though, was Telstra’s abandonment of its traditional deference to policy makers. The company took regulators to court over mandates requiring it to lease its network to competitors at knockdown rates. Mr. Burgess bashed civil servants and politicians by name, in a fashion apparently deemed unbecoming a corporate citizen in Australia…

Australia lacks America’s bottomless think-tank and K Street resources for publicizing policy differences. Its parliamentary government puts all the policy levers, including a ready resort to secrecy, in the ruling party’s hands. Australia is a small nation, with a small elite that tends to place limits on burn-the-bridges debate.

posted on 04 November 2009 by skirchner in Economics, Politics

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The Integrity of Postal Voting

Peter van Onselen on Australia’s internationally anomalous system of postal voting and why you should never use the postal voting forms sent out by politicians:

Political parties operate sophisticated databases that track voters, recording their voting intentions and issues of interest. They are a central element of the professionalisation of politics in this country.

The Labor database carries the sinister-sounding name Electrac. The Liberal database is called Feedback.

When postal vote forms come in - and in complete violation of the principle of the secret ballot - the name of the voter is checked into the database and if they have had their voting intention previously identified (through doorknocking or telephone canvassing), the party knows how diligently it may be in looking to forward the form to the AEC.

Kelly writes in his paper: “It is conceivable that a party might delay forwarding a completed postal voting application to the AEC if the elector is identified as a non-supporter.” He casts his concerns more broadly: “While political parties continue to be allowed to be involved in the postal voting process, the integrity of Australia’s ‘independent’ electoral administration is undermined.” …

At the very least the privacy of voters is under siege when party operatives are using databases to cross-check voting intentions of postal voting electors. If political parties had not exempted themselves from the Privacy Act (our legislators in action) they would not be allowed to operate the postal voting system as they do.

posted on 18 October 2009 by skirchner in Politics

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‘You Will Not Ask Me Any Questions’

Academics speaking truth to Doug Cameron at the Senate Economics References Committee:

Senator CAMERON—Who would want an academic running the economy? I said that this morning and the more I hear from academic economists the more I believe that it would be a fatal mistake.

Prof. Makin—Ben Bernanke is an ex-academic economist and he seems to be getting a lot of credit for what he has done.

* * *

Senator CAMERON—Do you believe the government has made any positive economic decisions since it has come to power?

Prof. Davidson—Yes. The government delivered on the tax cuts that were promised by the Howard government.

Senator CAMERON—Is there anything else?

Prof. Davidson—The government scrapped the Fuelwatch scheme.

Senator CAMERON—Is there anything else?

Prof. Davidson—The government scrapped the GroceryWatch scheme.

* * *

Senator CAMERON—Are you seriously putting to this inquiry that the federal government should play no role in investing in the nation’s road infrastructure?

Prof. Davidson—I am putting it to you that if you wanted to build roads that you would give the money to the states and allow the state governments to make decisions as to what roads they wish to build.

Senator CAMERON—That is an interesting point of view!

Prof. Davidson—We have a constitution that actually has states that make decisions about these things. You do represent the states, don’t you?

Senator CAMERON—I am here to ask the questions, not you.

Prof. Davidson—Actually, I am a taxpayer. I will ask questions too.

Senator CAMERON—You will not ask me any questions.

posted on 25 September 2009 by skirchner in Economics, Fiscal Policy, Politics

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Vindicating Fightback

I join the history wars with an op-ed in today’s Australian taking issue with Paul Kelly’s claim that ‘the defeat of Dr Hewson’s policy [of Reserve Bank reform] laid the basis for the successful monetary policy of the Keating-Howard era.’  I make the case that:

Far from being a repudiation of Fightback, as Kelly suggests, subsequent developments have largely vindicated its vision for monetary policy reform.


continue reading

posted on 15 September 2009 by skirchner in Economics, Financial Markets, Monetary Policy, Politics

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Open Australia

Open Australia is providing a useful service making information about federal parliament available on-line.  This volunteer effort often provides better information than parliament itself, as this story notes. 

Most notably, the volunteers have scanned the 1500-odd pages of the Register of Members’ Interests and made them available on-line.  Previously, this information was available only in hard copy in binders kept in Parliament House, Canberra, making it a costly exercise for members of the public to examine the Register.  It says a lot about the willingness of politicians to subject themselves to the same levels of disclosure and transparency they routinely demand of the private sector.

Unfortunately, the Register does not contain enough information to perform a study like this, showing how US Senators’ shareholdings significantly outperform the market. 

posted on 30 July 2009 by skirchner in Economics, Financial Markets, Politics

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Lu Kewen Thought ‘Shallow and Crude’

A Chinese economist rejects Lu Kewen Thought:

KEVIN Rudd has been accused by a leading Chinese economist of being “either short of economic knowledge or misleading his readers” in his famous essay attacking neoliberalism.

In a scathing assessment, Xu Xaonian, economics professor at China Europe International Business School in Shanghai, lambasts the essay, now translated and published in China, as “shallow and crude”.

Dr Xu says “Lu Kewen” - Mr Rudd’s Chinese name - made a “big, big mistake” in forming his “confident opinions” based on “the observation that the crisis came as a result of neoliberalism and the absence of supervision”.

Dr Xu, one of China’s leading liberal economists, has savaged the Rudd essay in the weekly Chinese newspaper The Economic Observer after the Prime Minister’s work was translated and reprinted in China’s leading business magazine, Caijing.

Dr Xu, who has a doctorate from the University of California and was formerly managing director of the country’s biggest investment bank, says it is not time to resurrect Keynesianism, as Mr Rudd proposes.

“Instead, it’s time to announce Keynesianism’s failure, time to announce the emperor Lord Keynes has no clothes.”

He says the Prime Minister “has used electioneering-style tactics to brand neoliberalism as dogmatic, to paint a clownish portrait of it, seeking to pioneer popular antipathy to this artificial enemy, casting a moral verdict without seeming to care about truth or logic”.

posted on 19 June 2009 by skirchner in Economics, Politics

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Breathtaking Hyperbole

David Burchell reads Peter Hartcher’s purple prose, so you don’t have to:

At times the prose reaches for the clouds and we are treated to extended literary metaphors, such as the credulity-stretching parable of John Howard as Herman Melville’s Ahab, forlornly chasing the White Whale of political immortality…

Indeed, a good deal of what Hartcher presents as grand political drama is simply over-cooked. The description of Howard’s secret offer to resign in the face of disastrous polling as “a breathtakingly grand example of subterfuge” is simply florid, while the accompanying accusations of disingenuousness and “breathtaking chutzpah” become emptily repetitious.

posted on 17 June 2009 by skirchner in Politics

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Wisdom of Crowds: Budget Edition

Only 30% of Newspoll respondents believe the federal budget will be back in surplus within six years.  There is a sharp partisan divide on this issue, although surplus skepticism increases with age and income.  It is interesting that the most well received federal budget since 1993 was also the Howard government’s last.

posted on 19 May 2009 by skirchner in Economics, Fiscal Policy, Politics

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