Year: 2008

Free-market responses to the crisis?

John Quiggin43 Comments

I’m working on questions of a new financial architecture in the wake of the financial crisis and the various bailouts, and I’m interested in whether there is a well-worked out free market alternative to the policies we’ve seen so far.

To be clear, I’m not interested, at this point, in arguments about whether free markets are to blame for the crisis. I’m also not interested in criticism of the bailout unless it’s presented as part of a reasonably detailed argument that doing nothing, or doing something different, would produce a better outcome. Finally, I’m not interested in responses based on fringe economic theories, for example, anything based on gold or the ideas of Ron Paul[1]. That is, I’m interested in work by mainstream economists putting forward a more free-market alternative to the policy of partial nationalisation adopted so far.

fn1. I’ll post on this later, but in this thread, I will terminate with prejudice anything of this kind, and similarly for meta-comments that Paul is not really a fringe figure or that someones right to free speech is being censored here.

A farewell to Surfdom

John Quiggin6 Comments

Tim Dunlop has announced the closure of the Road to Surfdom blog. It’s been a gradual process. Tim moved to the News.com blogocracy site a couple of years ago, and recently announced his retirement from blogging there.

Tim was one of the pioneers of Australian blogging. He started Surfdom in May 2002, at a time when the dominant voices in blogging where those of the US-centric warbloggers, beating the drum for war with Iraq. Tim joined Rob Corr and a handful of others putting forward more an alternative view.

I started blogging a few weeks after Tim and in those long-gone days, we found we thought very much alike, not only sharing the same views, but often writing almost identical posts, to the extent that we seemed to be blogtwins.

That was when the Iraq war and the merits or otherwise of the Bush administration were matters of lively debate, and much of the news was viewed through that prism. Bloggers had something to prove, particularly given the acquiescence of the mainstream media in the spurious case for war. Most of the pioneers from that time have proved their point and moved on, but the space they helped to create has been filled by millions more blogs, including dozens (maybe hundreds, I don’t keep up as well as I should) of Australian political blogs.

Blogging is going to be very different now in all sorts of ways, and Tim is taking a new direction, with plans to write a book. I wish him all the best.

Plea for help

John Quiggin11 Comments

You guessed it, it’s a bleg(gh!). To improved the performance of this site, I need to move the blog from its current shared hosting to a different accelerated server. This involves various bits of SQL database magic that are beyond my skills. If someone can help, I’ll be happy to reward them with a post on a topic of their choosing or (if professional skills are needed) with a reasonable monetary return for their time.

The Sandlot rip

Bad models or bad modellers

John Quiggin19 Comments

The idea that bad mathematical models used to evaluate investments are at least partially to blame for the financial crisis has plenty of appeal, and perhaps some validity, but it doesn’t justify a lot of the anti-intellectual responses we are seeing. That includes this NY Times headline In Modeling Risk, the Human Factor Was Left Out Laserblast movie download . What becomes clear from the story is that a model that left human factors out would have worked quite well. The elements of the required model are
(i) in the long run, house prices move in line with employment, incomes and migration patterns
(ii) if prices move more than 20 per cent out of line with long run value they will in due course fall at least 20 per cent
(iii) when this happens, large classes of financial assets will go into default either directly or because they are derived from assets that will default in the event of a 20 per decline in house prices

It was the attempt to second-guess human behavioral responses to a period of rising prices, so as to reproduce the behavior of housing markets in the bubble period, that led many to disaster. A more naive version of the same error is to assume that particular observed behavior (say, not defaulting on home loans) will be sustained even when the conditions that made that behavior sensible no longer apply.

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Australia at risk?

John Quiggin27 Comments

According to FT Alphaville, former investment bank Merrill Lynch has done an analysis of country credit risk which, alarmingly if unsurprisingly, given the factors considered, lists Australia as the riskiest country in the world. The analysis uses seven measures “current account financing gap, FX reserves/short-term external debt ratio, exports to-GDP ratio, private credit-to-GDP ratio, private credit growth, loans-to deposits ratio and banks capital-to-assets ratio”, and you don’t need to look up the figures to know that Australia is at risk on all of these measures.

OTOH, our strong points such as large and positive public sector net worth don’t get measured here. And, given that the top 10 low-risk country list is headed by Nigeria, and includes Colombia, Indonesia and Russia, it’s obvious that this is not an index of economic health. Still, our chronic current account deficits represent a real vulnerability, a point I got tired of making during the years of easy money (Hat-tip: Felix Salmon).

I won’t get time to blog on the Mid-Year Economic Forecast for a while, but I’ll note one of the few pieces of good news. The silly idea of announcing “aspirational” tax cuts for the government’s next term has been abandoned.

A tough road ahead

John Quiggin26 Comments

Over the fold, is my piece from today’s Fin on the task facing Obama. The original version started “Following his convincing election victory, Barack Obama can look forward to taking office under the most challenging conditions facing any incoming president since Franklin Roosevelt’s inauguration in 1933,”, but another columnist came in with an almost identical lead, so I changed mine. But the great thing about a blog is that you can choose which version you like best (or dislike least). The original opening paras are at the end of the post.

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A new hope

John Quiggin18 Comments

With the networks calling Ohio for Obama, the only question remaining for today is the size of the win. I have to work on my Fin column, so I’ll throw it open to you to discuss the implications.

The big one

John Quiggin42 Comments

Barring an unforeseen catastrophe, Barack Obama will be elected president of the United States tomorrow. Barring an unforeseen miracle, by the time he is inaugurated, the US (and much of the rest of the world) will be in the deepest recession for decades. This is going to be a huge challenge, and two months of drift certainly won’t help. Paul Krugman is calling (not sure how seriously) for an interim government of national unity. It seems highly unlikely, though, even in the face of a failure as complete as that of any Administration since Hoover’s (or maybe Buchanan’s) that Bush will be willing to cede even one day of power to the incoming Democrats.

The situation when Obama takes over will be one of huge challenges and huge opportunities. The challenges are obvious: the economy in a gigantic mess, a string of foreign policy disasters and military misadventures and a deeply divided country. Only changes that are both radical and well designed will fix these problems, and this is a difficult combination to pull off.

The opportunities are the flip side of this. Not only does Obama seem likely to come in with big Democratic majorities in both Houses of Congress and a big popular mandate*, but the severity of the crisis has undermined what seemed like unalterable political taboos. The Republican Administration has just nationalised a large chunk of the banking system, and has long since abandoned any adherence to notions like balanced budgets. In these circumstances, the idea that policies of expanded government intervention are too radical for Americans to contemplate seem only marginally less silly than a literal acceptance of the McCain clam that Obama’s victory would constitute a referendum in favour of socialism.

Looking at what Obama needs to do, the big items are bringing the financial system back under control, rebalancing the tax system while substantially increasing tax revenue in the long term and completing the New Deal, particularly with respect to health care. More on all these items soon.

* In this context, I don’t think it’s critical that the Dems win the 60 Senate seats required to stop a filibuster under the Senate’s arcane procedural rules. It’s usually possible to peel off a few moderate votes. And, in any case, it’s just a procedural rule that can be abolished by simple majority. The threat of that happening will probably be enough to prevent overuse of this device.