After a fairly somnolent campaign, the LNP is going into tomorrow’s Queensland state election with a narrow lead in the polls. I haven’t paid much attention, since the capacity of state governments to make a difference, always limited, has been reduced further by the financial crisis. If I could choose an outcome it would probably be a minority Labor government, relying on a Green independent or two for its majority. As regards a change of government, it’s always beneficial to have alternation of power in a democracy. I’m not at all impressed by the apparent quality of the alternative government, but it’s more convincing as a united party than as the chaotic rabble that went under the name “Coalition”. The Bligh government has some reasonably strong performers (Bligh herself and Paul Lucas for example), but there have been plenty of duds or worse. And the involvement of proven disasters like Mike Kaiser in the campaign was a big mistake.
Austrian economics: a response to Boettke
I’ve long promised a post on Austrian economics. To organise my thoughts and minimise the risk of attacking a straw man, I’ve taken as my starting point this encylopedia article by Peter Boettke. Boettke sets out ten claims and derives some claimed conclusions. I’ve responded point by point, and then given my own summary.
As I’ve had trouble with various fringe adherents of Austrianism, I’m setting out some strict ground rules for discussion here. Comment should stick strictly to discussion of economics. Anyone making personal attacks of any kind will have their comments deleted and be barred from this thread. Avoid anything that might be seen as insulting other participants in the discussion
Mont Pelerin in Iceland
A reader has pointed me to this fascinating site showing the impact of the Mont Pelerin Society on Iceland. According to the material prepared for its 2005 conference in Reykjavik, the Society’s intellectual influence directly guided those responsible for making Iceland what it is today.
Cache crash at CT
Due to arcane problems with caches, users of Firefox (and maybe some other browsers) haven’t been able to read new posts at Crooked Timber for over a week. You can work around by using Safari, or by clicking on the comments thread of a post, then clicking Home in the expanded view (please don’t ask me why this works). RSS feeds also appear to work normally.
Monday Message Board
Its time once again for Monday Message Board. Post comments on any topic. As usual, civilised discussion and no coarse language.
Bonds Beat Stocks in ‘Earth-Shattering’ Reversal
This Bloomberg story gets the headline right., but the lead (or lede) wrong. The intro “Buying 30-year Treasuries is returning more than stocks for the first time since Jimmy Carter was president. ” is wrong – bonds have beaten stocks in quite a few years since then.
The finding in the chart is much more dramatic, to the point that “earth-shattering” is justifiable hyperbole. What it shows is that, over the entire period since 1979, a strategy of buying 30-bonds (trading so that the portfolio always holds the most recently issued bond) has outperformed the strategy of buying stocks and reinvesting the dividends.
Weekend reflections
It’s time once again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
Refuted economic doctrines #6: Central bank independence
The idea that central banks can and should act independently of governments is, fairly clearly, inoperative for the duration of the crisis in many countries. The combination of massively increased liquidity provision and large-scale bank bailouts requires close co-ordination between central banks and national treasuries, though the form of this co-ordination is inevitably different in different countries.
But the failure of central bank independence goes much deeper than this. The underlying idea was that monetary policy should be left to independent experts, and should be the main tool for macroeconomic stabilisation. Governments were expected to avoid active fiscal policy, focusing primarily on maintaining budget balance (there were some differences in view as to whether governments should target annual balance, or balance over the course of the macroeconomic cycle). The shift to independent central banking was closely associated with the adoption (implicit or explicit) of inflation targets as the primary focus of monetary policy, and with interest rates as the primary tool.
Not much of this appears sustainable in the light of the crisis. Inflation targeting failed to prevent unsustainable asset price booms, and it now seems clear that these could not have been prevented without much more direct control over unsound financial innovations. That’s a task where interaction between governments and central banks appears unavoidable. On the one hand, expertise is crucial. On the other hand, as with war, financial innovation is to important, and too dangerous, to be left to finance experts.
The idea that monetary policy alone is sufficient for macroeconomic stability might have looked appealing during the Great Moderation, but does not stand up when examined over a longer period. To put it bluntly, central bank independence appears to work well except when it is most needed.
A more difficult question relates to the separation between monetary policy and prudential regulation. The need to take systematic risk into account suggests that monetary policy must be closely integrated with prudential policy. On the other hand, Australia, with a clear separation between monetary and prudential regulators has done better than countries where central banks are more closely involved. My feeling is that the correct separation is between strategic issues, such as monitoring of systemic risk and the regulation of financial innovations, which belongs with the central bank, and institution-level supervision, which belongs with a specialist agency.
Nerd alert
According the Wikipedia front page today “… author Guillaume Prévost created The Book of Time series to help children understand that history can be fascinating?”
I wonder how many readers, at the halfway point in this sentence, expected “econometrics” in the place of “history”? I think I need to get out more.
Wrong time for the Razor Gang
Over the fold, my column in yesterday’s Fin. Not the final version, as I made some last minute changes in response to Lindsay Tanner’s defence of the Razor Gang yesterday.
