Month: October 2008

Meltdown continues at the Oz

John Quiggin70 Comments

The Australian has long since ceased to be a serious newspaper. Its opinion pages are devoted to recycling talking points from the US-centred rightwing parallel universe (some more serious conservatives have described it as the “conservative cocoon”, a term coined by conservative blogger Ross Douthat, recently elaborated here). Its political writers, who straddle the gap between news and commentary have long been in the tank for the conservative parties or for particular conservative politicians. Its war on science (Tim Lambert is now up to instalment XXII and he’s not comprehensive) has long passed beyond the point of absurdity.

Even so, I don’t think I’ve seen a front page headline as brazenly defiant of the facts as today’s. Having claimed, falsely, that the Reserve Bank opposed the government’s deposit guarantee, and been put down, mildly but firmly, by RBA Governor Glenn Stevens, the Oz doubles down and announces a “backflip” on the basis of the marginal adjustments discussed here yesterday.

For the correct story, you have to go the Fin (paywalled unfortunately). While the Fin is just as rightwing as the Oz on most issues, its readership consists primarily of businesspeople who need accurate information, not delusional rightwingers who need their prejudices confirmed. From the Fin it is clear that the Bank pushed for an unlimited guarantee (for much the same reasons as given here) and that it was Treasury that initially wanted the silly $20 000 limit.

The Oz is now essentially worthless as a source of information. Some individual journalists are still pretty good, and articles with their bylines are worth reading. But if their weather report predicted sunshine, I’d pack an umbrella, just in case.

Update The Oz goes for the trifecta, despite their claim that the RBA opposed an unlimited guarantee now being denied outright by both Glenn Stevens and Ken Henry. They have a document showing that the RBA wants to charge wholesale depositors directly for the guarantee and using the term “cap” to describe the amount that would be used to distinguish between wholesale and retail. This kind of ex post tweak is unsurprising, but still news and if the Oz had stuck to that a couple of days ago, they (and the Opposition) would be in less trouble now. Instead they have beaten it up into a full-scale war with the Government, Treasury and RBA which is going to cost them a lot in the long run.

To restate the point, the original announcement said nothing (at least nothing I saw) to indicate that the government guarantee would be free, and deposit insurance schemes normally involve a premium. In due course, I expect that the government will charge the protected institutions for the guarantee. It’s turned out to be necessary to move more quickly at the wholesale level, but this is a step in the right direction. The silly pointscoring of the Opposition (and its representatives in the press) is grossly irresponsible.

Time of Hope?

John Quiggin28 Comments

As the odds shorten on an Obama victory, the undoubted enthusiasm for Obama is tempered by doubts that a new Democratic Administration, even backed up by strong majorities in both houses of Congress, will really change that much.

However, there’s a case for a much more optimistic view. Given a supermajority in the Senate, or even a win that’s near enough, with some RINO support to override Republican filibusters, some widely respected analysts are predicting marvellous things from Obama including:

* Medicare for all
* Serious financial reregulation
* Union rights
* Ending tax cuts for the rich
* A green ‘revolution’
* Voting rights for all, including DC

In the light of the lame record of the last congress, and of the Democratic Congresses in the 90s, this might seem unlikely. But an article I’ve just read points to a string of quite radical measures passed by the House in the last Congress and blocked only by the filibuster. Furthermore, as the writer observes the conversion of Southern Democrats into Republicans since the 90s means that most Democrats will hold the line on issues like health care.

All in all, it’s given me more cause for optimism than anything I’ve read for a while.

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Defining the boundaries

John Quiggin17 Comments

I did a radio interview this morning, in response to a couple of stories about the second-round impacts of the government’s decision to guarantee bank deposits. Both at retail and wholesale levels, the decision has produced a rush to move funds where they can benefit from the guarantee. Those at the losing end, including foreign investment banks and mortgage funds are, unsurprisingly, upset.

This process was in fact underway before the announcement of an explicit guarantee, though the main trend was from smaller banks to the “too big to fail” Big Four. The guarantee benefitted the small banks, but put the pressure onto nonbanks and foreign banks. This was more or less inevitable and raises the question of the next steps.

Two responses are necessary. First, the government has to define the boundaries of its guarantee, making it clear that any investment outside the guarantee will not be bailed out under any circumstances. Second, it has to make it clear that there is a significant price to be paid for the guarantee. The price will include both an insurance premium and restrictions on risk-taking.

In the long run, this should lead to the kind of narrow banking model I’ve long advocated, in which publicly guaranteed banks stick to a tightly regulated range of well understood activities. This allows for a completely separate set of financial institutions, of which stock markets are the exemplar, where government guarantees are ruled out in advance*. These would offer higher returns but no possibility of transferring risk to the public.

The ultimate losers from the process are likely to be the Big Four, which previously got the benefit of “too big to fail” status at zero costs.

* It’s probably impossible to preclude emergency rescues of firms seen as vital, like Chrysler in the US or Rolls-Royce in the UK. But, where such rescues are unavoidable, they should be done on terms that wipe out the great bulk of shareholder equity and require a substantial haircut for bondholders as well.

Asset price bubbles

John Quiggin30 Comments

As the various asset price bubbles of the past decades or so inflated, and in some cases burst, there was vigorous debate about what, if anything should be done about them. The two main camps were those who advocated doing nothing, on the grounds that monetary policy should be focused solely on inflation, and those who thought that the settings of monetary policy should take asset prices into account. The first group won the debate at the time, at least as far as actual policy was concerned, with consequences we can all see. Most proponents of the do-nothing viewpoint have conceded defeat

In a paper in the (institutionalist) Journal of Economic Issues, which came out in 2006, Stephen Bell and I took a different view of the debate. We argued that there was little scope to respond to asset bubbles by changing the settings of existing monetary policy instruments, and that “any serious attempt to stabilize financial market outcomes must involve at least a partial reversal of deregulation.” Among other things, we pointed out the fact that given a presumption in favour of financial innovation, asset prices bubbles were inevitable, and that ‘In the absence of a severe failure in the financial system of the United States, it seems unlikely that ideas of a ‘new global financial architecture’ will ever be much more than ideas.’

You can read the full paper
Bell, S. and Quiggin, J. (2006), ‘Asset price instability and policy responses: The legacy of liberalization’, Journal of Economic Issues, XL(3), 629-49.

here

Quick take on fiscal stimulus package

John Quiggin62 Comments

I’ve been responding to quite a few media questions about the government’s fiscal stimulus package and I haven’t had time to formulate more than a dot-point response. So here goes
* The size of the package is about right and it makes sense to announce it now
* The help for pensioners and low-income households is well-targeted to meet both policy objectives and the need to bolster demand
* I’m less impressed by the increase in the First Homeowners grant. In the long run, this scheme has been part of the problem of high housing costs, not part of the solution. Maybe the government has information suggesting the possibility of a rapid collapse in the housing sector, in which case some sort of emergency stimulus might be necessary. But the medium term direction of house prices has to be down

I don’t think that differs much from the par response from economists, but I’d be interested in readers’ thoughts

Update 19/10More on this from Tristan Ewins

Krugman wins Economics Nobel

John Quiggin86 Comments

Paul Krugman has been awarded the 2008 Nobel prize for economics[1]. The rules of the prize, honoured more in the breach than in the observance in economics, say that it is supposed to be given for a specific discovery, and Krugman is cited for his groundbreaking work in the economics of location done from the late 1970s to the early 1990s.

The reality, though, is that economics prizes are awarded for careers. Krugman’s early work put him on the list of likely Nobelists, but his career took an unusual turn around the time of the 2000 election campaign. While he has still been active in academic research, Krugman’s career for the last eight years or more has been dominated by his struggle (initially a very lonely one) against the lies of the Bush Administration, its supporters and enablers. Undoubtedly, the award of the prize in this of all years, reflects an appreciation of this work on behalf of truth in economics and politics more generally.[2]

The crew at Crooked Timber, of which I’m part, have a more parochial reason for cheering this outcome. Paul has generously agreed to take a part in a CT seminar on the work of Charles Stross, which should be published in the next month or so. Without giving too much away, there are some Nobel-related insights in his contribution.

fn1. Strictly speaking, the Bank of Sweden prize in Economic Sciences in honour of Alfred Nobel, or something like that.
fn2. Doubtless, Republicans will complain about being implicitly identified, yet again, as enemies of science and of truth. But they’ve made their bed and must lie in it (in both senses of the word).