Author: John Quiggin

That didn't last long

John Quiggin47 Comments

Two days after the US authorities made much of standing firm against calls for a bailout of Lehman, the Fed has announced an $85 billion rescue of insurance company (and large-scale counterparty in all kinds of derivative markets) AIG. There’s none of the ambiguity surrounding Fannie and Freddie in this deal. AIG is not a federally regulated entity, and the insurance subsidiaries are regulated at the state level to ensure their ability to pay out on claims. This is, purely and simply, a case of a speculative financial enterprise that’s too big to fail.

Having reached this point, it’s hard to see how the US can turn back from a massive extension of financial regulation, starting with the derivative markets where AIG got into so much trouble, notably those for credit default swaps (CDS). Along with winding up the affairs of AIG, Lehman and others, the authorities will need to oversee an orderly unwinding of the transactions in these markets which they are now effectively guaranteeing. More generally, it’s time for a partial or complete reversal of the financialisation of the economy that took place after the breakdown of the Bretton Woods system back in the 1970s.

BTW, if you happen to have cash parked in a US money market fund, you might want to read this. (Insert disclaimer about financial advice)

UpdateBrad Setser has the same reaction.

Nelson out, Turnbull in

John Quiggin24 Comments

Due to the pressures of real life, I haven’t reacted to the change in Liberal leadership with the lightning speed for which the blogosphere is famed. A couple of thoughts on the players and the implications.

For Nelson, this was only a matter of time. He’s a likeable guy (though of course, the job of Opposition leader typically requires some unappealing behavior) and was of fair average quality as a minister in the last government*, but he was not ready for the leadership of a major political party. Costello’s decision to reject the job (while continuing to collect a parliamentary salary for doing nothing except promote his future career plans and book sales) put him up too soon. As leader by default, he’s floundered from one contradiction to the next. On the whole, losing this job is probably a good thing for him, giving him a chance to start again.

As regards Turnbull, he’s obviously one of the more able people Australian politics has seen in my time. I must say, though, that I’ve marked down my estimate of him pretty sharply over the last couple of years. As Environment Minister, although he clearly understood the issues, he achieved nothing in his tenure of the job. In fact, water policy went a long way back thanks to Howard’s National Water Plan, introduced with Turnbull’s acquiescence. And, if he had the capacity to get things done that I expected of him, he would have made the Cabinet see the obvious sense in swallowing its pride and ratifying Kyoto.

As Shadow Treasurer, he’s been similarly unimpressive. He had a good run early while Swan struggled to come to grips with the job, and particularly its Parliamentary aspects. But he hasn’t made any attempt to mount a sustained critique of the government’s approach, let alone offer a constructive alternative. Rather he’s gone along with the generally opportunistic line taken by the Opposition as a whole.

The big question for me is whether Turnbull will bring the Opposition around to supporting legislation for an emissions trading scheme (after extracting various concessions of course). A couple of years ago, I would have been confident of his willingness and ability to do this. Now I doubt it.

* I have to declare a personal interest here. Nelson introduced the Federation Fellowship scheme under which I’m employed.

Crowdsourcing works!

John Quiggin34 Comments

In the comments to my last post, reader Peter Schaeffer provides exactly what I asked for: a breakdown of the discrepancy between 30 per cent growth in US household income over the last 40 years and 117 per cent growth in income per person. In addition to the factors I’d mentioned (falling household size and growing inequality) Schaeffer notes two more: the fact that GDP has grown faster than national income and the fact that prices faced by households (the CPI-U-RS) have risen faster than the GDP deflator. He provides the details to show that this fully explains the discrepancy.

What should we make of this. As far as the situation of the average American is concerned, the only correction we need to make to the household income figures is to correct for changes in household size. That makes the increase over the last 40 years about 63 per cent, or an annual growth rate of 1.2 per cent. By contrast, the 117 per cent growth in GDP per person implies a rate of just under 2.0 per cent. So, changes in GDP per person (let alone changes in total GDP) are essentially irrelevant as a guide to how the average household is doing.

And of course, the poor have done much worse. Household incomes for the bottom quintile have barely moved for decades. Growth in consumption has been driven largely by increasing access to debt, a process that now looks to have run out of road. That would seem to indicate a looming social crisis. But the coming election will still turn on whether Obama called Palin a pig.

Where has US household income gone ?

John Quiggin41 Comments

I was at a seminar the other week on inequality in US household income, and I asked the speaker about something that’s puzzled me for a while. I didn’t really get an answer, so rather than do a lot of work myself, I thought I’d try this crowdsourcing all the cool kids are talking about. Here’s the puzzle.

Over the past 40 years or so, real median US household income has risen by about 30 per cent.

US Household income 1965-2005
US Household income 1965-2005

but real US GDP per person has more than doubled. How can this be ?

Read More »

October the 1st is too late?

John Quiggin17 Comments

That’s when credit default swaps (CDSs) with a notional value somewhere between $500 billion and $1.4 trillion will have to be settled as a result of the (re)nationalization of Freddie Mac and Fannie Mae, which has been deemed to constitute a default event on their bonds. Paradoxically though because the government guarantee of the bonds is now explicit, they are actually safer than before which means that the net payments required in settlement will be very small, and sometimes go to the party who offered protection against default. Don’t worry too much if none of this makes sense, the main point doesn’t depend on it, but you can read a bit more from The Economist.

As The Economist notes, most participants are expecting all this to go smoothly. But one thing about the longrunning credit squeeze is that unexpected (bad) things tend to happen. So what could go wrong?
Read More »

Costello cashes in his chips

John Quiggin16 Comments

Assuming that he was pursuing a consistent plan at all, Peter Costello’s months of coyness about possible leadership aspirations now appear to have been designed to ensure a big splash for his memoirs. Presumably, his departure from Parliament won’t be long delayed and (while you should never say never) it seems that his political career is over.

Unlike with Howard, I’ve never really rated Costello. Undoubtedly he’s a sharp debater and has the good lawyer’s capacity to get on top of a brief, but in his twelve years or so as Treasurer, I didn’t see anything to suggest that he really understood economics or thought much about economic policy. His near-silence since losing office, despite repeated Labor attacks on his legacy seems to me to confirm this. Without the backup of Treasury and staffers, he doesn’t seem able to mount an effective argument (or maybe he just can’t be bothered). Perhaps his book will tell a different story though – I certainly expect it to sell pretty well given the promised bagging of so many colleagues.

The voters speak

John Quiggin19 Comments

The outcome of the Western Australian election remains undecided. Labor could hold on to power either by winning enough seats to govern with the support of independents or by making a deal with the Nationals. Conversely, the Libs need to win the seats in which they are currently ahead, and then cut a deal with the Nationals.

Apart from being a reminder of the folly of snap elections designed to capitalize on transitory political circumstances, this close result reminds me of something I’ve observed over time. Whichever of these two even-money chances is realised, we’ll come to think of it as inevitable. Consider for example Bush’s win in 2000, Howard’s in 1998 or Hawke’s in 1990. In each case, the vagaries of the electoral system turned a loss (admittedly narrow) on the votes into a winning outcome.

Yet with the possible exception of Bush, this fact is forgotten when we come to assess the electoral appeal of the winners and even more of the losers. Peacock, Beazley and Gore could all have reached the top if a few electoral dice had fallen differently. But they go down in history as failures while Bush’s two terms and Howard and Hawke’s four mark them as winners, at least until their luck ran out.

The end of neoliberalism?

John Quiggin157 Comments

Measured by the dollar amount involved, the nationalisation of the mortgage guarantors Fannie Mae and Freddie Mac, announced today by the Bush Administration, is the largest in history. No less than $5 trillion of assets and obligations have been taken over by the US government in one hit.

Of course, that debt had long been regarded as having an implicit government guarantee and the companies involved were quangos (in the original sense of quasi-NGOs) rather than genuine private firms. Fannie was a government agency privatised in the 1960s, and Freddie was created to provide competiion for Fannie. So even though the US government will now guarantee virtually all new mortgages, this is more an admission of existing reality than a big step towards socialism.

While the quasi-governmental status of Fannie and Freddie was always problematic, this wasn’t the reason for their failure. Rather, they were pushed to accept increasingly bad loans made by the private sector. And when their difficulties became acute, the most satisfactory solution, under normal conditions, would have been to formalise the government guarantee of the existing loan book, then put them into run-off mode, writing no new business. But given the failure of the private sector, that would, mean, in effect, making it impossible for anyone to write a mortgage contract.

The fact that the credit crisis has reached this point marks the failure of the central claim of the neoliberal program, namely that private capital markets, free from intrusive government regulation, can enable individuals and households to handle the risks they face more flexibly and efficiently than a social-democratic welfare state.

In the boom that created this crisis, every part of the financial system (retail banks and mortgage businesses, major Wall Street banks, the financial engineers who designed new securitisation assets, investment funds, ratings agencies and bond insurers) had a major role to play. All have failed miserably, even though most will get to keep the rich rewards they received when things were going well.

Further update As various commentators point out, the failure here is one of actually existing neoliberalism. The “unknown ideal” of a perfect free market system remains pure and unsullied by empirical experience.

More seriously, the significance of the event is not in the marginal change in the status of Fannie and Freddie from quasi-private to quasi-public, but in the abandonment of the pretence that the normal operations of financial markets are capable of cleaning up the mess they have created, even with the liberal helpings of public money that have already been dished out.