Lessons from the GFC
Date: Friday, November 06, 2009
Author: Henry Thornton
'The Road to Recovery' is the title of the conference organised by the Melbourne Institute and the Australian newspaper.
This is a conference etched into every serious economist's diary, and has been held every 18 months since 2002.
Yesterday four key players - Minister of Finance, Lindsay Tanner, ANU Professor Warwick McKibbin, Shadow Treasurer Joe Hockey and peripatetic economist Henry Ergas debated the causes of the Great Crash of 2008 and the policy issues on the road to recovery. The session was chaired by The Australian's Michael Stutchbury and was, in a word, lively.
Stutchbury opened the discussion by pointing out that, eighteen months ago, the cracks were first becoming visible.
There had been a major 'labour supply shock' from China which produced deep imbalances in the global economy. At the same time there was a lot of greed in the Western nations. Were these the major factors?
Lindsay Tanner agreed that the rise of China and the failure of the developed world to adapt well to this was a major issue. But there was serious regulatory failure on top of that. 'Greed is always with us' and was discounted as a major contributor by all speakers - wrongly so in my case, though I would say 'unrestrained greed' was the problem.
On the regulatory issue, 'Basle II' had encouraged banks to put more money into residential mortgages, which required lending to less credit-worthy borrowers, leading directly to the sub-prime crisis in America.
The Great Crash was however, like an aviation disaster - with a number of contributing factors perhaps impossible to disentangle.
But there are two clear consequences.
'Exceptionalism' is now dead and globalisation cannot be ignored - for example, it is now impossible to argue for 'light touch' regulation in London, and other standards elsewhere.
It is also impossible to argue that 'Financial Services are different' to other industries. Finance has to serve other industries rather than being 'parasitic.'
Henry Ergas agreed with Tanner that it was difficult to disentangle the causes of the crash. But a banking crisis could not exist without other problems in an economy.
The expansion of China was interesting but not sufficient to explain the crisis. Neither were the global imbalances, nor a model with an asset bubble followed by a collapse.
A trade model with two countries, one (China) with a vast supply of unskilled workers, and the other (USA) which suffered downward pressure on wages of skilled labour with trade, and therefore a 'wealth shock,' provided part of the story.
At this point, Henry (Thornton, not Ergas) began mentally to plead for the Keynesian notion of 'animal spirits' to be introduced into the debate.
Warwick McKibbin came to the rescue, emphasising that his comments were personal, not delivered as a member of the board of the Reserve Bank of Australia (RBA).
As the most qualified model builder on the panel, he confirmed that his real-life models agreed that the story was complex and that the individual factors already introduced could not explain the size of the crisis.
McKibbin said there were two shocks. The first was the 'inevitable' collapse of US housing. The second was the dramatic effect of the collapse of Lehman Brothers, which 'showed how bad things were in the USA.' Risk premia rocketed up and there was an enormous rise in pessimism and global 'transmission of pessimism.'
Australia had no financial crisis, considerable fiscal stimulus (McKibbin reminded us he had opposed the size of the second round of stimulus) and rapid cuts to interest rates.
Australia's long series of economic reforms, introducing flexibility into all our markets, meant that we avoided the worst consequences of the global meltdown.
Joe Hockey pointed out that the US, UK and Spain all experienced massive falls in house prices. Australia avoided this, which meant we avoided the massive shock to confidence experienced elsewhere.
By March 2008, Hockey asserted, there was clear signs of global 'calcification of credit,' which is why the Coalition had been critical of the RBA's final interest rate hikes. Later Joe Hockey heaped praise on the RBA for the speed and size of the rate cuts, so presumably, like others; he forgives it for mistakes in the boom and early crisis time.
Michael Stutchbury took the discussion in a more philosophical direction. He asked Lindsay Tanner to share with us his darkest thoughts during the crisis. (Earlier in the day Wayne Swan had said over lunch that the Cabinet had reflected on what the Scullin Government must have felt as it faced the reality of the Great Depression.)
'In September/October 08, it was very dramatic. We were in uncharted waters. Confidence was absolutely vital, more so even than we thought. The fiscal stimulus had two effects - one mechanical, dollars out and in, the other was the effects on confidence.'
Tanner ruminated on the effects of the 24 hour news cycle and whether this made the world now 'fundamentally different.' He also discussed the effects of the 1990/91 recession, when fiscal response was very delayed, in helping create a proper sense of urgency in the government's response to the crisis.
He admitted that the scale and content of the fiscal response will be debated, and mistakes were unavoidable. But the atmosphere was one of 'grim determination' and the only certainty the need to act.
There followed a discussion of whether Australia was locked into an excessive and inflexible fiscal package, aspects of which I discussed here earlier this week.
Lindsay Tanner raised another theme with his observation of how hard it was just now to predict economic and budget outcomes. Warwick McKibbin retaliated by asserting, correctly in my view, that it is safer to rely on a flexible response to changing circumstances than accuracy of forecasting - 'like climate change.'
The discussion ended with a discussion of how Australia should cope with a renewal of the mining boom, if this indeed is what is going to happen. Lindsay Tanner clearly did not want us to get too far ahead of the facts, and reminded us all that all mining booms end and this presented some agonisingly difficult adjustment problems.
Opinion differed as to whether it would be best to create an offshore sovereign fund, financed (I assume) by some sort of resource rent tax or whether to spend excess revenues to ease transitions or whether to look for other, more innovative, solutions such as building people's superannuation balances.
This summary, I hope, illustrates the vigorous and democratic nature of Australia's policy debate as practiced at these regular Melbourne Institute conferences.
We look forward to the new policy institute to be directed at the Australian National University (ANU) by Professor Warwick McKibbin for a more permanent version of this conference.
Its the coalition ... says Tiresias
Date: Tuesday, August 17, 2010
Author: Tiresias of Canberra
A Canberra man calls election for Abbott.
Tiresias of Canberra says: The Coalition will win, possibly win very big with lots of gains in Qld and NSW, but without necessarily gaining control of the Senate. Whatever reservations people may have about work-choices can easily be alleviated by denying Abbott control over the Senate and he is on a winner in emphasising concerns over debt/spending and the boat-people. If I were a professional political campaign manager, I’d pick Abbott as my preferred candidate over Julia any day. At the very worst he is only three quarters of a generation behind the trendies on most social issues...as is most of Australia. No one who isn’t a card carrying feminist or a Womens’ Electoral Lobby member feels threatened by Abbott’s ‘conservatism’. The snide jibes at his Catholicism are simply weird and anachronistic – just about no one young enough to be sexually active can make head or tale of the old style sectarianism which is the stuff of history books and family mythology.
Julia is a poster girl for upward social mobility Australia style and is in many ways quite agreeable (certainly a vast improvement on Rudd), but the coup d’etat against Rudd has clearly offended many people who think that it is the people’s prerogative to get rid of unpopular leaders and since becoming PM her TV appearances are so contrived it is not funny. I have no idea why MPs put so much faith in media advisers – media spin is very 20th century. Nowadays people see spin a mile off and they start to run. The push for reality TV shows and cooking shows with real people should have taught the geniuses on the Hill that the dominant mood now is for sincerity, authenticity and the straight-shooter.
The mood in Canberra is instructive: at work all-most everyone in the public service thinks that Julia is wonderful and that the ALP will win. But the last few weeks it has been a lot easier than usual to get a table at a restaurant in Civic whenever you like...so I expect that people secretly believe that that the Coalition will get elected and abolish their jobs.
Galaxy Poll shows Coalition in winning position.
Professional opinion has it that the election is too close to call, but the latest Galaxy Poll put the Coalition in a winning position just one week out from the federal election. The Australian reports the Coalition would win the 17 seats it needs to oust the Labor government if replicated on Saturday.
On a two-party preferred basis, this poll has the Coalition is ahead of the ALP 51.4 per cent to 48.6 per cent.
The poll of 4000 voters in 20 marginal electorates in five states predicts devastation for Labor in Queensland, where a potential swing of 5.4 per cent against the government could cost it 10 seats.
In NSW, polling in Eden-Monaro, Gilmore, Macarthur and Macquarie found a swing of 2.4 per cent against the government, while the coalition was likely to win all the seats polled, plus three others if the swing was statewide.
The coalition is also in front in Swan and Hasluck in Western Australia according to the poll.
Anyone with such an authoritative view as that of Tiresias may Contact Henry Here and we shall share your thoughts with our readers. Only on advertorial per party will be accepted to limit the pollyspeak.
Global warming is crap ... or is it?
Date: Monday, August 16, 2010
Author: Henry Thornton
Melbourne, possibly most of Australia, is having its coldest winter for decades. More and more of Henry's friends and relatives are making this observation as our aching bones remind us of ice on the puddles and frozen fingers and toes as we walked barefoot through the snow to school.
(Ed: 'Barefoot to school through the snow' is crap, a slight overstatement.)
Late last week it snowed in Boggabri, a small town in northern NSW. Henry's 88-year-old Father-in-Law has lived there for 60 years and can recall only one similar occurrance.
But in the northern hemisphere it has been unusually warm.
The New York Times reports: 'The floods battered New England, then Nashville, then Arkansas, then Oklahoma — and were followed by a deluge in Pakistan that has upended the lives of 20 million people.
'The summer’s heat waves baked the eastern United States, parts of Africa and eastern Asia, and above all Russia, which lost millions of acres of wheat and thousands of lives in a drought worse than any other in the historical record.
'Seemingly disconnected, these far-flung disasters are reviving the question of whether global warming is causing more weather extremes.
'The collective answer of the scientific community can be boiled down to a single word: probably'.
Henry is a climate change agnostic who thinks we should act to limit greenhouse gas emissions just in case. 'Let's give the planet the benefit of the doubt'.
Henry's attempt to achieve pre-selection for the local Federal electorate failed, he was told by a voter, because 'you are too old, too fat and too grumpy, and because you are also soft on climate change'. 'How many reasons do you need?' was Henry's rather lame response.
Henry's friends include a number of mining magnates and workers, who to a man are climate change skeptics. They occasionally tell Henry he is a deluded fool, in their blunt Australian way of describing a spade as a bloody shovel. As recently as last night, at a family party to celebrate the coming-of-age of Henry's oldest son - himself a climate change skeptic - another friend sneered visibly when Henry raised the question of the Russian drought and the Pakistan floods and asked if these great human catastrophes might be connected to global warming.
Part of the case of the climate change skeptic is that the case for ameliorating action is part of a global socialist conspiracy to take over the world.
So it might be thought of little use quoting the President of Russia on this subject, or for that matter the New York Times. But bear with me. “Everyone is talking about climate change now,” President Dmitri A. Medvedev told the Russian Security Council this month. “Unfortunately, what is happening now in our central regions is evidence of this global climate change, because we have never in our history faced such weather conditions in the past.”
Please note, skeptical readers (if you are still following my logic trail), Russia actually is conflicted on this issue, with the same self-interest as the mining magnates. This is because the Siberian wilderness will be warmer if climate change is real, and Russia is likely to be be able to grow wheat in its previously frozen tundra. Of course, the unfreezing of the tundra may, probably will, release large volumes of methane, a far more noxious greenhouse gas than CO2. If - I emphasise if - additional greenhouse gas is driving global warming, release of a lot of methane will be one of the 'positive feedback loops', accelerating the onset of all the changes created by a warmer planet.
Recently Henry has discovered fresh energy for the battle with the climate change skeptics, as he worries about geopolitical risks facing Australia. 'What of other geopolitical risks? At Copenhagen the world dodged, or postponed, the challenge of getting serious about limiting greenhouse gas emissions. Global warming skeptics took great delight in this outcome and if they are right the world will owe them a great deal. If they are wrong, of course, they will be reviled as the world battles to adapt to a warmer climate, rising sea levels, accelerated loss of entire species and the fiscal burdens of amelioration.
'Great movements of people are another real and present threat. War, irredeemable poverty, natural disaster and (possibly) the unnatural disaster of rising sea levels all have the potential to manufacture millions of refugees – indeed, this is a constant feature of the modern world'.
Irredeemable poverty and natural disaster have newly afflicted millions of people in Pakistan. If the 'warmists' are right we shall see much more of the same, and we shall know exactly who to blame.
Saturday Sanity Break, 14 August 2010
Date: Saturday, August 14, 2010
Author: Henry Thornton
Despite a negative lead from Wall Street, the Australian share market finished over one per cent higher Friday, led by gains in the mining and energy sectors. It seems investors took the previous day's decline as a buying opportunity.
At 1610 AEST, the benchmark S&P/ASX200 index closed up 58.7 points, or 1.33 per cent, at 4,459.6 points, while the broader All Ordinaries index gained 58.5 points, or 1.32 per cent, to 4,480.9 points.
On the Sydney Futures Exchange, the September share price index contract was 72 points higher at 4,429 points, with 34,574 contracts traded.
We need about six weeks of such 'decoupling' to see Australian markets correctly reproduce Australia's decisive economic outperformance of the American economy. Here is a contribution to debate.
A balance sheet of Australia's history
An item from the archives, but just as relevant as when it was written in 1993.
'Most young Australians, irrespective of their background, are quietly proud to be Australian. We deprive them of their inheritance if we claim that they have inherited little to be proud of''.
Australia's housing market.
'In January 1836 the young Charles Darwin sailed through Sydney Heads on the Royal Navy brig HMS Beagle. Feeling rather jaded after four years on the southern seas, the natural philosopher’s first impression of the fledgling colony was distinctly unfavourable. In contrast to the riotous natural abundance of South America and Tahiti, the land around Port Jackson was, Darwin noted, “covered by woods of thin scrubby trees that bespoke useless sterility.”
'Once ashore, the English gentleman appears to have found Sydney dinner party conversation similarly barren. Although “full of admiration” for a settlement that in less than fifty years had evolved from a place of exile into a bustling commercial town, the scion of two of Britain’s grandest families seems to have been a little taken aback by the colony’s property obsession. “Every one,” he commented in his diary, “complains of the high rents & difficulty in procuring a house.”
We are delighted to introduce Tiresias of Canberra.
In Greek mythology, the original Tiresias was the blind prophet of Thebes, famous for clairvoyance and for being transformed into a woman for seven years.
The new Tiresias was born in Sydney in 1967. Educated at the University of Sydney and the University of New South Wales, he worked as a casual tutor in politics before joining the Australian Public Service in Canberra.
A former teenage neo-liberal and Thatcherite, he has also been a workplace delegate in the Community and Public Sector Union, where has he has done a little bit of good assisting individual members dealing with bullying and harassment. In his opinion the central task facing Australia is how to have the best of all possible worlds: a market economy embedded within a stable, bourgeois society, which offers its members the widest possible variety of meaningful and worthwhile life-choices and that maintains a Western culture under the protection of a government resistant to social engineers within and the UN, NGOs etc without.
Tiresias studies classical Greek in his spare time and is about to publish a PhD thesis on an early Enlightenment political philosopher.
Australia - policy free zone with sovereign risk
Date: Friday, August 13, 2010
Author: Henry Thornton
There are three big things weighing on global equity markets.
The slowing recovery in the USA, with associated risk of a 'double dip' recession. The slowdown in China, with Chinese inflation replacing the deflation that served the world economy (and western central banks) so well for so long. And the sovereign debt crisis in Europe.
These matters will bother markets for some time. In Australia, business leaders say our economy is still fragile. The rate of unemployment edged up, but this was because 23,000 new jobs were more than balanced by new people looking for jobs, so the 'participation rate' rose. Job ads are still running hot, up 36 % over job ads a year ago.
If recovery in the 'miracle economy' is set to slow, the good news will be no further interest rates until momentum is reestablished.
On Wednesday we canvassed the reasons that global investors remain wary about the Australian economy and in particular the value of shares in our largest companies.
We reminded readers about the dire consequences of the Poseidan boom as well as political and geopolitical uncertainty. Right on cue comes a report on perceptions of Australia as a safe place to invest, based on the opinions of global resource investors.
Andrew Burrell reports: 'AUSTRALIA'S reputation among global mining investors has taken a massive hit over Labor's bid to introduce a resources rent tax
'The sovereign-risk survey of 429 world mining chiefs, conducted by Canada's Fraser Institute, found Australia's global ranking slumped from 18th to 31st in the past six months when ranked among 51 mining jurisdictions'.
The next time your investment advisor suggests you buy more Australian shares, do quiz him about this matter.
The election campaign is about to enter its final week. Henry's impression is that Labor did a bit better this past week, though the massive swing in the Morgan poll - illustrated below - looks a little odd. Tony Abbott's vote of confidence from the Rooty Hill RSL meeting will comfort the Libs, showing as it does Mr Abbott's abilities as a stump politician and also Labor's vulnerability in marginal electorates where people are still doing it tough, slipping backwards rather than 'moving forwerd'.
We note in passing the bad news that the latest weekly Roy Morgan Consumer Confidence Rating for the weekend of August 7/8, 2010 was at 129 (up 4.8pts).
As a policy tragic, Henry echos the editorial of The Oz today. 'With just over a week to go, it is time for Mr Abbott to show that he has the policies to meet the central economic challenges of improving productivity and building a bigger, better country. Ms Gillard, meanwhile, must demonstrate she can be a reforming prime minister, rather than our federal Labor premier. Her election slogan is sounding a little tired but its message, moving forward, should be etched in the policies of both parties'.
US struggles, China`s inflation rises
Date: Thursday, August 12, 2010
Author: Henry Thornton
Its official. The US Fed has met and says America's recovery is struggling. It (the Fed) will therefore again do some renewed 'quantitative easing'. The helicopters are warming up as we write.
The key paragraph in the Fed's post-meeting commentary was the following: 'The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period'.
The Fed's decision was almost unanimous. Only dissident was Thomas M. Hoenig, who judged that the economy is 'recovering modestly, as projected'. Mr Hoenig believes that continuing to support the 'expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee's ability to adjust policy when needed'.
No great fear of inflation, gentle readers, though there is a lot of history that says this should be on the radar by now..
Across the Atlantic Ocean, the Bank of England has denied it is 'soft on inflation', despite inflatyion being over the 2 % target for 41 out of the past 50 months.
Like the Fed, the BoE stressed that there was no evidence of inflationary expectations rising, and there was a prospect of slow but steady economic recovery.
See this New York Times report for more, including quotes from the Bank's struggling Governor, Mervyn King.
'CHINA'S inflation accelerated in July - to 3.3 % from 2.9 % in June - due to a spike in food prices amid severe flooding, but analysts said there was no cause for alarm.
'The inflation outlook was uncertain as higher wages might feed through to a higher consumer price index, Sheng Laiyun, spokesman for China's National Bureau of Statistics, said'.
Mr Sheng said China could achieve its full-year target for a CPI rise of about 3 per cent - we add, this is a dramatic reversal from a few short years ago when Chinese deflation was making western central banks look good.
Analysts said there was no great cause for alarm as the rise was mostly due to one-off factors and they expected inflation pressures to decline in the months ahead. Attributing inflation to one-off facots that will be reversed shortly is an old mistake. Maybe this time it's different.
Mr Sheng said a slowdown in industrial activity and investment was good for China's economy at this stage.
'We are in a crucial period of moving toward steady economic growth from relatively fast growth. An appropriate economic slowdown is good for preventing economic overheating and accelerating economic restructuring to keep economic development sustainable,' Mr Sheng said.
The official also expressed confidence about domestic investment and consumer demand, as China is in a period of 'accelerating industrialisation and urbanisation'. 'Momentum for China's economic growth is still comparatively strong' said Mr Sheng.
Debate downunder.
Today two heavyweight economists support Henry's line, and that of Australia's opposition Liberal party - the fiscal stimulus of Labor's ham-fisted government played very little part in our dodging the bullet of recession.
RBA board member, Warwick McKibben, is surely looking for a rest from central banking. He repeated his view that Labor's claim to have produced 2000,000 jobs during the Global financial Crisis is simply 'wrong'.
Even more definitive, since is is a new claim from a fine economic historian, is the judgment of Harvard's Niall Ferguson.
'Five factors saved Australia from the GFC, and Labor isn't one of them'.
Previous reports of this debate are linked here, here and here.
Is Australia a safe bet for investors?
Date: Wednesday, August 11, 2010
Author: Henry Thornton
The Global Financial Crisis (GFC) will be analysed to within an inch of its life.
Today in his regular column in the Oz, Henry's former colleague Dr Don Stammer displays characteristic optimism and enthusiasm:
'IT began in the US and Europe, but the global financial crisis quickly hit hard in all countries and investment markets.
'At the time, many people feared a worldwide depression would follow or, at best, a deep and drawn-out recession, and expectations were that other economies and investment markets would remain "coupled" to what would unfold in the north Atlantic countries, particularly the US.
'These turned out to be exaggerated concerns. The US and Europe did not slide into depression (or even lasting recession).
'Good rates of economic growth soon returned in most Asia-Pacific countries, other than Japan. Sharemarkets turned positive from March last year.
'Last week, I mentioned some of ways in which Australia has seriously "de-coupled" from the post-GFC experience of the US: economic growth, interest rates, house prices, inflation and the challenges facing monetary and fiscal policy. I should have added business capital spending which is 10 per cent higher as a percentage of the overall economy in Australia relative to the US.
Dr Don goes on to say that Australia's differential economic performance may, indeed eventually should, allow Australia's shares to 'decouple' from Wall Street.
The problem, he says, is that currently, the mood is one of 'extreme caution, with many investors waiting to be convinced, among other things, that the Chinese authorities won't go too far in slowing their economy and that company profits in Australia are improving'.
Australia has suffered from a reputation as an unreliable destination for share investments. Henry once was asked to pitch the case for Australian stocks in Edinburgh, home city for some of the world's canniest investors. 'We remember the Poseidon debacle' was the comment of one such investor after the pitch was delivered. This canny Scot may have contributed to Wikepedia's account, if not the Reserve Bank's conference.
John Simon - author of 'Three Australian Asset-price Bubbles' at a Reserve Bank conference in 2003 - comments: 'The Rae Committee report, handed down in 1974, documented the abuses that had gone on during the Poseidon boom. The report highlighted how the stock market had been poorly regulated and that much of the information relied upon by investors was uncorroborated rumour. It recommended a number of changes to financial regulation and the regulation of stock markets which would, presumably, prevent the sort of abuses that occurred during the Poseidon boom from happening again'.
Perhaps Australia's reputation as a cowboy economy is fading, but behaviour of Australian shares does not support this hypothesis. As Don Stammer says today 'our sharemarket has remained closely tied to the ups and downs of US sharemarket. Indeed, the relationship running from US shares to the Australian sharemarket since early 2008 is the tightest I've known it to be'.
There are two further reasons why Australian markets cannot break free of the constraint of global/US markets.
The first is concerns political turmoil, the prospect of a hung parliament (or at least continuation of a hung Senate) and that we are enduring a Federal election with two inexperienced leaders who seem to be firmly in the 'no further economic reform' camp.
When trying to win friends among deeply cynical professional investors, some assurance of stable government and continued economic reform is necessary.
Then there is the far deeper matter of our location remote from the major metropolitan centres to the south of a region whose main powers are either hostile to 'white fellas downunder' or disinclined to have much consideration for us except as buyers of cheap goods, diggers of valuable minerals and wasters of scarce water.
Part of our concern is the strong possibility that the USA will deal with its unsustainable budgetary situation by embracing a new isolation.
Today's contribution to this debate draws attention to the words of a Chinese admiral who reportedly said to an American counterpart: "the U.S. take Hawaii East and we, China, will take Hawaii West and the Indian Ocean. Then you will not need to come to the Western Pacific and the Indian Ocean."
With this background, international investors would need to be confident that Australia could at least put up a very strong fight should an Asian superpower decide to impose its will.
Tell me if I am wrong, Don Stammer, tell us your grounds for optimism about Australian politics and geopolitical realities.
US Financial Reform
Date: Tuesday, August 10, 2010
Author: Henry Thornton
US stocks rose overnight in the quietest session of the year on speculation that the Federal Reserve would signal potential steps to boost the sluggish economic recovery.
Volume was a mere 5.71 billion shares, compared with last year's estimated daily volume of 9.65 billion shares. Investors reportedly were wary of taking new positions before the US Fed's statement on Tuesday - ie tonight, our time.
The Fed could, presumably, do some more 'quantitative easing', printing money and handing it out to worthy recipients like Wall Street's biggest financial institutions.
Meanwhile, much is being made of the fact that JPMorgan Chase chief executive Jamie Dimon told the US Financial Crisis Inquiry Commission in early 2010 that the financial system experiences a crisis 'every five to seven years'.
By that measure, the next crash could come by 2015 - years before new banking changes are in place.
Christine Harper writes from New York: 'Many of the measures ordered by US Congress and global regulators, aimed at cushioning the financial system in future crises, are years away from being implemented. The Basel Committee on Banking Supervision plans to give the world's banks until 2018 to comply with limits on how much they can borrow.
'Parts of the new Dodd-Frank Act in the US that would force companies to cut stakes in in-house hedge funds and private-equity units, may not go into effect for a decade.
'Banks' appetite for using borrowed money for investing in complex, illiquid securities contributed to the credit crisis. The pace at which curbs on leverage are likely to be imposed contrasts with the speed at which banks, including UBS and Morgan Stanley, are hiring to increase trading activities'.
"Based on our experience of government's ability to execute these things effectively and in a timely way, we are almost uncovered now from any future financial risk for at least another eight or 10 years, and that's a little scary,'' said Roy Smith, finance professor at New York University's Stern School of Business and a former banker at Goldman Sachs.
'US Treasury Secretary Timothy Geithner said last week that the administration wanted to change the "frustrating, glacial pace" at which rule-writing has occurred. "We will move as quickly as possible to bring clarity to the new rules of finance,'' he said'.
'Even so, he said that banks would have until the beginning of 2013 to meet the new minimum capital requirements and "several years beyond that" to create new capital buffers.
It seems the Dodd-Frank Act requires 67 studies and 243 new rules, according to one Wall Street law firm.
The Act's 'Volcker rule', which bans banks from proprietary trading and limits investments in private equity and hedge funds, is regarded by non-conflicted observers as hopelessly watered down againt the benchmark return of the glass-Steagal Act proposed by America's best former Fed Chairman, Paul Volcker.
Simon Johnson of the HuffingtonPost calls Jamie Dimon 'The Most Dangerous Man In America'.
'There are two kinds of bankers to fear. The first is incompetent and runs a big bank. ...
'The second type of banker is much more dangerous. This person understands how to control risk within a massive organization, manage political relationships across the political spectrum, and generate the right kind of public relations. When all is said and done, this banker runs a big bank and -- here's the danger -- makes it even bigger.
'Jamie Dimon is by far the most dangerous American banker of this or any other recent generation'.
Henry's comment on all this is that the really big financial crises have mostly come a generation or two apart. Perhaps Jamie Dimon knows better, and on his side is the massive globalisation of finance and instantaneous spread of information around the globe, at least when the world Wide Web is working - imagine the chaos if the web was not working at a time when a crisis erupted in London or Tokyo. Plus there is the fact that Jamie Dimon's traders could probably cause a crisis on their own.
Readers are advised to keep their seatbelts firmly tightened.
Return of Leviathan Inc
Date: Monday, August 09, 2010
Author: Henry Thornton
The weak state of the 'developed' economies means governments are under pressure to reduce unemployment and stimulate growth.
Support for chosen industries - picking winners, saving losers - is an understandable way of trying to save jobs and help local firms fight foreign competitors. The latest edition of The Economist features the return of 'Leviathan Inc'.
Furthermore, some countries, such as America and Britain, seek to rebalance their economies away from finance and property. Along with older manufacturing, eg cars, clean technology is emerging as a favourite direction. Nearly every large economy has plans to win global market share and create green jobs.
The apparent success of emerging countries like Brazil, India and China, with a big role for the state in business seems to be turning conventional wisdom on its head. Nine of the world’s 30 largest listed firms are emerging-market companies that count the state as their dominant shareholder.
At the same time, America has rescued General Motors, Freddie Mac Fannie May and other financial institutions is focussing on Greentech in its innovation policies.
The apparent success of emerging countries like Brazil, India and China, where a big role for the state in business seems to be working wonders, helps developed countries to embrace 'picking winners'.
The Economist reports that nine of the world’s 30 largest listed firms are emerging-market companies that count the state as their dominant shareholder.
The venerable mag also notes that the internet and the microwave oven came out of government-led research; 'the stranger stuff that governments do can prove surprisingly successful'. A few governments, such as America’s and Israel’s, have contributed usefully to the early development of venture-capital networks.
The trouble is, most such efforts will fail. Costs will be high, both in terms of the direct cost of money paid to companies and the opportunity cost of missed opportunir=ties, even if this is only because of higher interest rates as governments borrow to subsidise their favourite industries.
It is probably impossible to disuade governments from trying to help industry - 'don't just stand there, do something'.
The Economist offers three ideas that should guide a more sensible approach to securing the jobs of the future.
Rather than provide handouts, improve the environment for business — less red tape, more flexible labour markets, simpler tax and bankruptcy regimes.
Invest in the infrastructure that supports innovation, from modernised electricity grids (a smarter way to help green energy) to basic research and university education.
Encourage winners to emerge by themselves, for example through the sort of incentive prizes that are growing increasingly popular (see article).
This contribution by the Economist comes at a crucial time in Australia's election, and renewed attempts by various writers (eg Garnaut) and journalists to focus on weak productivity growth.
Henry's particular nostrum is policies to boost government and private spending on Research and Development (R&D). Government contribution to spending on R&D should, as it generally is, be the subject of competitive bidding, such as the Cooperative Research Centre (CRC) program that has the further advantage that it exists explicitly to foster end user focussed research and commercialisation.
Tax policies need to encourage R&D by business, and here Australia has an abysmal record. Early efforts were rorted and Kim Carr's latest effort merely spreads a small tax concession thinner and thinner, arguably helping newcomers at the expense of proven winners.
Current tax policy to encourage innovation continues to compare very unfavourably with generous negative gearing for investment in real estate. Is it any wonder that Australia is especially good at providing housing and industrial buildings and relatively poor ar building new industries on the basis of innovative new technologies?
Saturday sanity Break, 7 August 2010
Date: Saturday, August 07, 2010
Author: Henry Thornton
'BUSINESS leaders have slammed both sides of politics over the debate on population.
'And one of Australia's most senior corporate figures says that "we are all fundamentally boatpeople".
'Transfield Services and tollroad operator ConnectEast Group chairman Tony Shepherd said the debate was "terrible" and he was amazed the country was having it.
"If you've got the gumption to go across in a leaky boat across the Timor Sea and arrive here, it is almost a pre-qualification," Mr Shepherd said.
'Speaking at the Infrastructure Partnerships Australia conference yesterday, he also said Australia had benefited from immigration'.
"We are all fundamentally, other than our indigenous population, and even they probably too, we are all fundamentally boatpeople . . . That's what we've grown from."
'How do we reconcile the continued growth of the Australian economy through the first decade of the twenty first century, with the evidence that something has gone wrong with our political culture and economic policy? In truth, it is only the first half of the past two decades of strong economic performance in which productivity-raising reform contributed to Australian prosperity.
'The exceptional prosperity of the past two decades can be divided into three parts. Through the 1990s, Australian productivity growth on the back of post-1983 reforms was the highest of the developed countries, after our country had been a chronic underperformer through the first eighty years of the twentieth century. This delivered sustainable increases in living standards.
'Productivity growth slowed in the early twenty first century, and soon stopped. To use an economists’ term, total factor productivity has actually gone backwards since 2005. However, output, employment and average incomes continued to increase through the early years of the century. Productivity was replaced as the engine of growth by a huge expansion of housing and consumption, supported by increasing bank debt. The banks funded their increased lending by borrowing from foreign wholesale markets to a degree that is unprecedented in Australia or in any other country. ...
'Jumping forward three years, the collapse of global wholesale markets in the Great Crash of 2008 demonstrated that growth based on debt-funded housing and consumption certainly was not sustainable. The banks survived through the timely provision of an Australian Government guarantee to wholesale borrowing in October 2008—eventually accumulating to today’s $157 billion of contingent liabilities. ...
'Without productivity growth, there can be no reliably sustainable increases in the material standard of living. Neither is there scope for increases in the material standard of living from another debt-financed housing and consumption boom.
'Nor is there likely to be additional scope for increased incomes per head from the resources boom. China and the large developing countries are likely to keep growing strongly. However, the expansion of productive capacity in Australia and increasingly in many other countries will, over time, bring down the terms of trade, and reduce the rate of growth of Australian resources investment. The contribution of the resources boom to growth in Australian incomes is likely to be at a peak in 2010.
Australians face hard economic policy choices in the period ahead. Not since the 1930s have Australians faced such tight constraints on growth in living standards, and such high risks of instability and rising unemployment if the constraints are seriously breached.
Reserve says rates on hold, growth strong.
'The RBA also said the country's export earnings were likely to remain high for a number of years on the back of higher prices for iron ore and coal.
'The direction for official interest rates over time likely remains higher with inflation still expected to trouble the top end of the RBA's desired 2-3 per cent target band over coming years.
'The RBA said the country's export earnings were likely to remain high for a number of years on the back of higher prices for iron ore and coal.
'The central bank looks to stay on data watch, with any surprise inflation data likely to bring it back into action. The next batch of inflation data will be released in October'.
Do not forget, this team beat Geelong and St Kilda, and tonight most of the players had their best games of the year.
The Tango.
'Then come the professionals in full flight, and at times it is hard to believe what you are seeing. Instantly there is a rush of delicious steps that dangerously intertwine legs and send the female dancer flying into the air with feet still pulsing - only to return safely and gracefully to the floor'.
From the archives comes Henry's 2004 experience of this wonderful art form in its native habitat.
Cartoon of the week.
A Night in Canberra
Date: Friday, August 06, 2010
Author: Henry Thornton
Visiting Canberra it is impossible to miss the bubble-like growth of the business park that surrounds the airport, the massive roadworks and, of course, the politics.
Henry was in the nation's capital to be farewelled with his former colleagues on the CRC Committee by the new Chair, other new members, one continuing member who, like Kevin07 was resurrected after receiving his 'dear Dorethy' letter of thanks for splendid service from Minister Kim Carr after a proposed new member failed to survive Cabinet scrutiny..
It was one of those slightly nostalgic events, far cheerier than the next time Mr Rudd and Ms Gillard break bread together.
Those at our cheery gathering whom Henry judges to be Labor supporters claimed to be 'gobsmacked' at the swift, brutal and effective slaying of Prime minister Rudd.
The resurrected member recalled Henry predicting just such an event in mid-February. Sadly for Kevin07, who also seemed gobsmacked at his removal, no-one who heard that prophecy saw fit to warn the poor bugger, or he might just have taken notice of the many warning signs.
The headline in the Oz screams 'Pariah to messiah: Kevin Rudd's back'. The various experts in that and other papers Henry has scanned are unclear if the return of Mr Rudd will help or hinder the campaign.
Ah, the glorious uncertainty of life, and political life especially.
The image below shows Canberra as it looked in 1927, when it was still a sheep station. Not much has changed! Did we use a time machine to obtain this image - 'sort of' is the answer.
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