Working Papers

Don’t Blame Ben

Charlie Gasparino defends Ben Bernanke:

what’s happening to Bernanke now isn’t accountability, it’s a feeding frenzy. And for the good of the country, it should stop.

Classical liberal and conservative critics of Bernanke would do well to read this speech, in which Bernanke pays tribute to Milton Friedman:

Friedman’s monetary framework has been so influential that, in its broad outlines at least, it has nearly become identical with modern monetary theory and practice.

posted on 18 November 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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Profitable Banks, Unprofitable Politics

I have an op-ed in today’s WSJ arguing that the government and opposition’s attacks on the banks are a pointless diversion. Saul Eslake makes similar arguments in today’s Age. After yesterday’s RBA Board minutes destroyed the politicians’ case against the banks, the best Joe Hockey can come up with is this:

Mr Hockey said the minutes had contemplated the banks going further than the official rise but didn’t contemplate the banks going as far as they did.

UPDATE: I have another op-ed in the Business section of The Australian.


posted on 17 November 2010 by skirchner in Economics, Monetary Policy, Politics

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Maybe the Banks Just Don’t Want Your Business

The big four banks have now set their post-November RBA tightening mortgage interest rates. Amid the shameful public vilification of the banks by politicians and others who should know better, almost no one has considered the possibility that, at least at the margin, the banks probably don’t want our business. People in the banking industry tell me that Westpac and CBA in particular have full mortgage books and don’t want to take on additional exposure to housing. Not surprisingly, they have the highest mortgage rates on offer. Notice too how ANZ and NAB are much more aggressive in their advertising? In any other business, using price signals to manage excess demand would be viewed as completely unexceptional.

Far from being greedy, the banks are being prudent, while the government tries to induce them into taking on additional risk. Of course, we could always go back to the days of regulated interest rates and non-price credit rationing, when getting money from the bank was a beauty contest that saw housing credit go only to the rich.

posted on 12 November 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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A Daily CPI

Never mind a monthly CPI. How about a daily one:

Economists Roberto Rigobon and Alberto Cavallo at the Massachusetts Institute of Technology’s Sloan School of Management have come up with a method to scour the Internet for online prices on millions of items and then use them to calculate inflation statistics for a dozen countries on a daily basis. The two have been collecting data for the project for more than three years, but only made their results public this week…

Two days after the September 2008 collapse of Lehman Brothers, for example, the economists’ price index for the U.S. started to fall, and by the end of the month it was down a full percentage point, as desperate companies slashed prices amid slowing sales. It wasn’t until mid-November—when the Labor Department released its average monthly consumer price figures for October—that government data began to catch up.

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

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What Would Friedman Do II?

Allan Meltzer claims Friedman would not support QE, but undermines his argument when he says:

Friedman made an exception to his rule about steady-state monetary policy in case of deflation. When prices fell, as they had during the Great Depression or in Japan in the 1990s, he urged the central bank to increase money growth. I served as one of two honorary advisers to the Bank of Japan in the 1990s. With short-term rates close to zero, I gave the same advice, urging the bank several times to buy long-term bonds or foreign exchange to increase money growth until deflation ended.

All this is not relevant now, since there is no sign of deflation in the United States. The Fed’s claim that there is a risk of deflation should embarrass it.

That last paragraph is unavoidably a judgement call. Meltzer may be right in his judgement, but he has all but conceded the point that if deflation is a significant risk, then QE is the right response. Here are my reasons for thinking that it is.


posted on 04 November 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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Political Thuggery and the Banks

Saul Eslake notes the long history of ministerial thuggery directed at the banks, not to mention bureaucratic intimidation by the ACCC. As Saul reminds us:

the whole debate about whether the banks have some obligation to tie the timing and magnitude of movements in their lending rates to changes in the RBA’s cash rate entirely misses the crucial point that the RBA is now targeting the interest rates that borrowers actually pay when it sets the cash rate, and thus takes into account any change in the spread between the cash rate and the rates that borrowers pay.

If banks raised lending rates by an average of, say, 50 basis points, following yesterday’s 25-basis point rise in the cash rate, the RBA would remove one of the series of further 25-basis point increases in the cash rate it is clearly contemplating between now and the peak of the current mining boom.

Preventing banks raising their rates by more than the cash rate would not result in borrowers paying lower interest rates. All it would do is alter the distribution of the stream of interest payments made by borrowers between bank shareholders, bank depositors, and other sources of bank funds. And why that should be the subject of government intervention - especially by those who generally favour less rather than more government intervention in business decision-making - continues to elude me.

What eludes me is why the banks make donations to political parties that are actively seeking to damage their franchise (see, eg, CBA’s donations). These donations are clearly not buying the banks much in terms of influence. Shareholders should demand that the banks stop paying political protection money, sending a message to politicians that their shameless populism has consequences.

posted on 03 November 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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US T-Bills Versus Tuna

James Hamilton on the implications of negative real interest rates:

You’re better off storing a can of tuna for a year than messing with T-bills at the moment. But there’s only so much tuna you can use, and many expenditures you might want to save for can’t really be stored in your closet for the next year. It’s perfectly plausible from the point of view of more realistic economic models that we could see negative real interest rates, at least for a while.

Even so, within those models, there’s an incentive to buy and hold those goods that are storable. And in terms of the historical experience, episodes of negative real interest rates have usually been associated with rapidly rising commodity prices.


posted on 28 October 2010 by skirchner in Commodity Prices, Economics, Financial Markets, Monetary Policy

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Sell the Gold Stock, Burn the Gold Bugs

Ed Truman makes the case for the US Treasury to follow the IMF and offload its gold stock:

the US Treasury holds 261.5 million fine troy ounces of gold. The government has been sitting on that gold since the Great Depression, receiving no return. At the current market price of $1,300 per ounce, the US gold stock is worth $340 billion. The Treasury secretary, with the approval of the president, has the power to sell (and buy) gold on terms that the secretary considers most beneficial to the public interest. Revenues from sales must be used to reduce the national debt.

If the United States were to sell its entire gold stock at the current market price, it would reduce the gross government debt by 2.25 percent of gross domestic product. Based on the average interest cost from 2005 to 2008, this reduction in debt would trim the budget deficit by $15 billion annually. Thus, the Obama administration would be doing something about the US fiscal debt and deficit without reducing near-term support for the ailing economy.

This would of course be incredibly lazy public policy, but should nonetheless give gold bugs pause. As I have noted previously, there is a certain irony in people who fear an over-supply of money taking refuge in an asset in which governments hold substantial stocks and for which the price is arguably in a stock rather than a flow equilibrium.


posted on 22 October 2010 by skirchner in Economics, Financial Markets, Fiscal Policy, Gold, Monetary Policy

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What Would Friedman Do? Support Ben Bernanke

David Beckworth and William Ruger argue that Friedman would support Ben Bernanke. I often point to this op-ed, in which Friedman argued in favour of quantitative easing for Japan in the late 1990s in circumstances not unlike those in the US today. While I doubt Friedman would see quantitative easing as a panacea (it certainly wasn’t for Japan from 2001-2006), he would surely argue that monetary policy should be as accommodating as possible.

In the classical liberal circles in which I travel, mindless criticism of quantitative easing is all too common, but this only highlights the lack of knowledge of the classical liberal tradition in monetary economics among many people who should know better.

posted on 22 October 2010 by skirchner in Economics, Monetary Policy

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Part-Time Work at the RBA Board

The so-called part-time members of the RBA Board were even more part-time than usual in October:

The minutes of the October board meeting, released yesterday, reveal that only three of the six independent board members attended the meeting, with the key voices on the health of retailing, manufacturing and the global economy absent. It was the lowest board meeting attendance in the four years that the Reserve Bank has been releasing its minutes.

The chairman of Bluescope Steel and Brambles, Graham Kraehe, former Woolworths chief executive Roger Corbett, who is also a director of US retailer Walmart and chairman of Fairfax, and the board’s resident academic economist, Warwick McKibbin, all had other commitments.

It only takes five of the nine members to form a quorum.

posted on 20 October 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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The Perception that Will Not Die

The RBA wrong-footed the market and commentariat with Tuesday’s steady rates decision, although not quite as comprehensively as a similar decision back in February. The February decision provided a rather convenient backdrop for RBA Governor Glenn Stevens’ appearance before the House Economics Committee later that month, where he was questioned about RBA media backgrounding and said that ‘people do not leak the outcome’.

Despite the wrong-footing of the commentariat, most notably Terry McCrann, this has still not laid to rest financial market perceptions that the RBA engages in media backgrounding of selected journalists. Chris Joye quotes Kieran Davies:

note that the surprise decision today potentially signals a change in communication strategy by the Reserve Bank. In the past, the Bank has been fond of guiding the market via indirect signalling via the media. That hasn’t been the case this month, but it is not clear whether the Bank has permanently closed this channel.

Governor Stevens’ denial before the House Economics Committee and the wrong-footing of the commentariat has yet to convince those in financial markets. Having played favourites with the media for so long, it will be hard for the Bank to finally put this perception to rest.

For the record, here is what a former RBA official had to say in the AFR Magazine in 2001:

The Bank uses newspapers to manage expectations.  It’s a game the Bank manages very well.  Senior people talk to a small handful of the economics writers from the major papers on a strictly non-attributable basis.  I think it’s right to do this from the bank’s point of view, but not necessarily from a public policy view: accountability and a critical press are very important in this system.

posted on 06 October 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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The CPI Pulse that Goes Dead Two Months in Three

HSBC chief economist for Australia and New Zealand, Paul Bloxham, makes the case for a monthly CPI. I made related arguments in this op-ed in The Canberra Times in March.

posted on 04 October 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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You Know You’ve Got a Perception Problem…

When hedgies write satirical songs about RBA leaks:

Hong Kong specs buy it
London’s hedge funds will buy it
We could be a CTA
Run a model like the RBA
With the boys from the Darwin and the Swan and Murray
But there’s no danger
It’s a professional career
Though it could be arranged
With just a word in Mr. McCrann’s ear.
If you’re out of work or out of luck
We really couldn’t give a f*ck

posted on 28 September 2010 by skirchner in Economics, Financial Markets, Monetary Policy

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Charts You Won’t See from the RBA

Scandie central banks show how it should be done.

posted on 28 September 2010 by skirchner in Economics, Monetary Policy

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The RBA Did Not Prick a ‘Housing Bubble’

The Reserve Bank of Australia has released a research discussion paper that is aimed at ‘describing the Australian experience of a cycle in house prices and credit from 2002 to 2004 and discussing the role played by various policies during this episode.’ This period is widely misunderstood and the RBA seeks to set the record straight by noting that:

During the period, monetary policy continued to be set on the basis of medium-term prospects for inflation and output and the Bank was not targeting housing prices or credit growth.

Not that this will stop numerous observers, particularly from offshore, from continuing to maintain the contrary. The RBA’s approach during this episode is often used as a foil to support Fed-bashing of one kind or another. The fact is that the RBA’s approach was textbook inflation targeting, but one augmented by open mouth operations aimed at moderating growth in housing and credit markets, which the RBA then deemed to be experiencing speculative excess.

Of course, the RBA has been understandably reluctant to offer too much by way of objection to the suggestion that Australia’s economic outperformance in recent years has been due to the deft handling of monetary and other policy instruments. The authors of the paper no doubt see the Australian experience as a successful episode of managing an asset price cycle and at least one of the authors, Chris Kent, has been a long-standing advocate of a more activist approach to managing innovations in asset prices.

However, the paper’s review of the RBA’s past statements on housing and credit growth undermines the case for a more activist approach to asset prices. Any prospective home buyer or investor with a time horizon of more than a few years who actually heeded the RBA’s warnings would have almost certainly been left worse off in view of subsequent developments in the housing market. The RBA’s warnings about ‘overheating’ in the housing market during 2002-04 now look quaint in view of the chronic undersupply that has emerged in recent years. Indeed, it is frightening to contemplate what the current supply situation would look like in the absence of the boom in housing investment during this period. To the extent that the RBA successfully deterred housing investment during 2002-2004, it may have even contributed to the subsequent supply problems that have put upward pressure on rents, CPI inflation and house prices. The RBA can’t have it both ways. To complain about ‘overheating’ in 2002-2004 and then ‘serious supply-side constraints’ in 2009 suggests that the RBA’s jaw-boning efforts may well have been pro-cyclical.

Milton Friedman showed the disastrous consequences of a central bank becoming an ‘arbiter of security speculation and value’. The RBA’s review of its own record suggests that it is no better at calling future developments in the housing market than anyone else. Statements such as ‘the very prominent role of investors in the housing market also suggested a strong speculative element’ (p. 24 of the RDP) belong in the mouths of politicians and taxi drivers and not central bankers.

posted on 24 September 2010 by skirchner in Economics, House Prices, Monetary Policy

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