A year or so ago, Henry Ergas and I had a bit of debate about this paper

on ‘The Risk Society: social democracy in an uncertain world’.

The world has got a bit more uncertain over the past year and Henry has agreed to another round, this time live at the Customs House in Brisbane for an event organised by the UQ Economics Alumni. It’s on Tuesday 5 May, 5:30 to 7:30.

Important update In posting the notice above, I forgot to say (or rather, didn’t realise) that it’s not free and registration is essential. Members of the Alumni association pay $32, Non Members $38 and Students $25 and there will be a group student discount available. There are drinks and canapes, so you can estimate the net cost of the debate yourself.

Debate poster Wuthering Heights divx

I wrote a piece for the Centre for Policy Development on Public Private Partnerships which was also picked up by the Canberra Times. My favorite bit

The British government, which has nationalised or bailed out large parts of the banking sector is now suggesting that banks may be forced to lend to private investors in public projects under the Private Finance Initiative. In effect, the government will be lending money to itself, while paying the costs of a series of complex transactions (some of them highly vulnerable to exploitation) along the way.

I couldn’t go past this neat headline on a piece by Michael West in the Age . The central point is that the impending failure of both financier Babcock and Brown and bond insurer FGIC will leave the Vic government holding the risk on a PPP hospital project. Money quote

Maybe the Government ought to have issued its own bonds, with a state guarantee and consequent cheap funding cost, because this now looks like a PPP that lost two of its Ps.

That’s what I thought at the time.

My article in yesterday’s Fin, over the fold was about the need to prepare for rising unemployment

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I’m attaching my presentation to the BrisScience lecture series on The Financial Crisis and what it means for you(2.7 Mb PDF). It incorporates part of a cartoon exposition that circulated early in the year, in the style of (but apparently not by) xkcd. I left a fair bit out, partly because I only give PG-rated talks and the cartoon was NSFW (coarse language), but you can read the whole thing at BoingBoing.

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.

Here’s a piece I did for the Australian Institute of Company Directors in 2006 (actually, in 2005, but it came out later). I think it covered most of the main points that have arisen in the debate over deposit guarantees.

Embarrassment alert Thanks to a system failure, the link wasn’t saved but reader Tintin found it here. Before that, SJ found a piece from 2002 which has (ahem) a bit of overlap with what I published in 2006. The second piece does have some refinements, notably explicit support for narrow banking, but I didn’t learn an awful lot on this topic in the intervening four years.

This story about the IMF rescue package for Ukraine (second of many, after Iceland) quotes Timothy Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London as saying

`The money is only half of the issue, conditionality is key. We hope the fund is maintaining its push for a more flexible exchange rate, far- reaching reforms in the banking sector and more privatization.”

Mr Ash, just returned from a six-week holiday on Mars, was reading from his prepared boilerplate script and had yet not been advised of the recent nationalisation of the Royal Bank of Scotland.

(found in today’s AFR)

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.