There’s been a lot of discussion of the problems of Greek sovereign debt, its implications for the euro and so on. But I haven’t seen much discussion of what the Greek government should do in dealing with the simultaneous problems of an economic downturn and unsustainable debt (feel free to point me to good discussions).

The course of action being demanded by the bondholders and their advocates, as well as by the EU governments that are likely to bear the costs of a bailout is that of drastic retrenchment on the lines the IMF would normally advocate in cases of this kind. But that is obviously not a desirable policy response when considered in macroeconomic terms. I’m not well informed on the details of Greece’s budget problems, so I’m mostly going to make generic suggestions that are applicable to a case like this.
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Given the Republicans’ success in painting the Democrats as the party of Wall Street, it was inevitable that the Obama Administration would announce some measures aimed at bringing the banking sector under more effective control. But the smart money would have been on a symbolic gesture, such as an ineffectual limit on bankers pay.

The announcement today that banks are to be banned from undertaking proprietary trading operations may have proved the smart money wrong. Certainly the sharp drop on Wall Street suggests that the announcement delivers more than expected for the public, and correspondingly less for the shareholders of big financial institutions.

If it is delivered as described, it would force the reversal of the 2008 move by Goldman Sachs and Morgan Stanley to become bank holding companies, with direct access to support from the Federal Reserve and Federal Deposit Insurance Corporation. More generally, it would be a significant move in the direction of narrow banking, preventing publicly guaranteed banks from engaging in the kind of high risk trading that produced the current financial crisis. As Chris Joye points out, narrow banking has surprisingly broad support among economists.

But will it be carried through? The first problem is the dysfunctional US political process, which prevents just about anything from happening. Obama might be able to wedge the Republicans on this issue, but they will probably find an excuse for voting en bloc against any measure he proposes. Under the current Senate supermajority rules that would be enough to stop any reform.

So, it will probably be necessary to scrap the filibuster and pass legislation with a simple majority. And that’s assuming that Obama can command the support of the numerous Democrats who are beholden to Wall Street, just as the Republicans (hypocritically, given their own position) allege.

Leaving aside the political obstacles to getting legislation passed, there’s the problem of making it effective. Even if banks aren’t allowed to own speculative investment enterprises, they can make big money lending to such operations. Then when things go bad, the failure of one or more big speculators can imperil the system as a whole. That’s what happened in 1998 with LTCM.

What matters here is the political dynamic. If the aim is to get back to business as usual as fast as possible, any reform will be short-lived and ineffectual. On the other hand, if there is a permanent shift in public and political sentiment against an economy dominated by the finance sector, things will work out very differently. Instead of eroding control, the discovery of loopholes will lead to tighter and more systematic regulation ending in a full-scale separation of banking and speculative finance.

One sign for optimism is the progress being made on the related issue of tax havens. Until very recently, moves to control the activities of tax havens were almost entirely ineffectual, at most prompting wealthy tax dodgers (and the banks who hid the money for them) to shift accounts from one jurisdiction to another. But as governments have run short of money and tolerance, the picture has changed. A combination of economic/diplomatic pressure on tax havens and a willingness to make use of whistleblowers within banks has rendered international tax evasion far less viable.

Perhaps this time Wall Street really will be cut down to size. If Obama’s Administration is to recover from its current malaise, he needs to win on this one.

I wrote this for Crikey. It should be appearing there soon, I expect

My article from last Thursday’s Fin, over the fold

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I’ve done this as a press release. See if anyone bites

STATEMENT

The government’s announced plans for privatisation show that Queenslanders are unlikely to get a good deal from the proposed asset sales, according to Professor John Quiggin of the University of Queensland. Professor Quiggin was one of a group of 21 leading Australian economists who stated in November that the government had failed to put forward a serious case for privatisation, and that an informed public debate was urgently needed.

Professor Quiggin stated:

* The use of a 99-year lease rather than an outright sale is a device commonly used by governments seeking to make privatisation palatable, but one that makes no commercial sense for assets of this kind. The public loses the asset just as surely as if it had been sold, but gets a lower price because the buyer does not become an outright owner

* The proposed public float of the QR coal and freight business, with the government retaining a minority shareholding large enough to retain effective control makes sense only on the assumption that no trade buyers were willing to pay an effective price. Purchase of shares in such a float would make sense only if they are offered at a substantial discount, meaning that the people of Queensland will almost certainly receive an inadequate price for this asset. The giveaway of shares to employees is typical of the cosmetics used by governments in packaging unsound and unpopular privatisations.

The entire privatisation scheme should be scrapped, and debate over the the desirability of asset sales, and the way to generate the best value for the public should be started from scratch

That’s the title of my book-in-progress, which is about undead ideas that should have been buried for good after the global financial crisis. But, in most cases, the evidence against these ideas was substantial even before the crisis. Still they wouldn’t die.

This was brought to mind the other day when I got a call from Radio New Zealand asking me to discuss a new report on how NZ could close the (very large) gap in wages and productivity with Australia. That’s an important question, but I realised it was unlikely to get much of an answer when I was told the committee that produced the report was headed by Don Brash, former head of the Reserve Bank of NZ in the 1990s who resigned and immediately went into politics, becoming leader of the then National Party Opposition. Other members included David Caygill, one of Roger Douglas’ offsiders in the 1980s Labour government that implemented ‘Rogernomics’ and Australian free-market economist Judith Sloan.

From this team, about the best suggestion would be that crack NZ scientists should invent a time machine which would go back in time to ensure that the parents of Brash, Caygill and, even more importantly, Roger Douglas were prevented from ever meeting.

Update: For a more carefully stated presentation of my views on NZ, a few years old now, but not requiring any updating, you can read this paper.
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I’ll be on ABC radio 612 at 0905 this morning, debating (Qld) State Treasurer Andrew Fraser on the government’s case for asset sales.

Update 12/12: This was initially posted here and emailed to QIC on the morning of 10 November. As yet, no response. And, apart from a snark by Andrew Fraser, no public response to my piece in last week’s Fin pointing out that the government’s case for privatisation was entirely spurious

Dear Doug,

As you may be aware, I have been very critical of the “Myths vs Facts” booklet which is, as far as I know, the only document released by the Queensland government to present its case for sales of public assets. In today’s ABC News, you are quoted as supporting the sales and saying

It can curtail its spending on its infrastructure program and let service quality deteriorate, it can raise taxes to pay for the interest bill that’s building up, or it can rearrange its balance sheet – sell those assets which don’t have a particular need to be in Government hands and own assets that should be,

This statement appears to endorse the government’s claims that investment in non-income generating assets can be financed by the sale of income-generating assets, with no need for additional revenue to service the associated debt. In my view, these claims are obviously fallacious, and I would appreciate clarification on a number of questions. I think these questions admit an unequivocal “Yes” or “No” answer, with supporting argument if desired.

1. Do you believe that the “Facts and Myths” booklet presents a fair statement of the arguments for and against privatisation, offering Queenslanders sufficient information on which to make an informed judgement?

2. Do you endorse the statement that ‘Keeping these businesses would cost the Government $12 billion over the next five years. That’s $12 billion spent on new coal trains and new wharves that can«t be spent on roads, schools or hospitals.?

3. Do you regard the statement that “The total return from all five businesses in 2008-09 was approximately $320 million … When the sale process is completed, it is anticipated the Government will save $1.8 billion every year in interest payments” as providing a fair basis for assessing the fiscal costs and benefits of privatisation?

With my regards,
John Quiggin

Note: A previous version was addressed to Bernie Fraser, but Doug McTaggart’s comments appear more directly relevant.

I managed to get something of a response from the Queensland Treasurer, Andrew Fraser to my critique of the case for privatisation put forward by the government. Fraser says

The global financial crisis has ripped a $15 billion hole in the state budget. There is no evidence to suggest the state is about to see that hole repaired despite the marginal turnaround in the economy.

“The fact is, Queensland will be better off.

“The myth is that John Quiggin represents the view of mainstream economists.

“The Government is not undertaking this process for the fun of it.”

A couple of responses.

First, the sale of $15 billion of assets does not in any way resolve a $15 billion shortfall in income (the “hole” in Fraser’s statement). The sale value of $15 billion (assuming it’s realised) represents the private sector valuation of the earnings from the assets. Perhaps (though this hasn’t been shown) the value in continued public ownership is less than $15 billion, but it can’t be much less. The coincidence between the two numbers is, intentionally or otherwise, deceptive.

Second, if Fraser is right, it ought to be easy to find mainstream economists to agree that his comparison between last years dividends to general government and the $1.8 billion interest saved (mostly by the GOCs) themselves if the assets are sold and $12 billion of investment is foregone. Any takers?

Finally, it’s worth asking why the government is doing this. My guess is that they place much more weight than they should on the AAA rating, and that Treasury is still pursuing the ideological goals of the 1980s and 1990s.

I’ve been very critical of the Queensland government’s proposed asset sales, which, I think, will worsen the fiscal position of the state in the long term. But, the combination of economic downturn associated with the global recession and continuing needs for infrastructure expenditure mean that the government is right to point out the problems and to state the need for politically unpalatable responses. I don’t have the resources of the Treasury, which means, among other things, that I can’t tell how big the problem is now, given that there has been a substantial recovery since the budget in June. So, I’ll just list some possible responses, some of which can be undertaken unilaterally, others requiring co-operation among the states, and, last but not least, action required from the Commonwealth government.

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