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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Why Lehman Brothers was allowed to fail
Date: Thursday, February 25, 2010
Author: Henry Thornton

Andrew Ross Sorkin's book - Too big to fail.  Inside the battle to save Wall Street - has all the raw material.

Rather than build a case item by item, I present here my impressions, and leave it to professional scholars to confirm or deny my conclusions.

Clearly the US financial system was close to chaos as 2008 ground on.

The background is here, as concisely as I can manage,

The CEO of Lehman Brothers, Richard Fuld is portrayed as aggressive to the point of being dysfunctional. As the crisis deepened it seems he repeatedly upset negotiations that held at least some hopes of saving Lehman in some form or other.

His leadership was under attack from within and one suspects the authorities had more reason than in other cases to mistrust Lehman's management and its accounts of the facts of the matter.

One's overwhelming impression is that the board and management of Lehman at no stage had a sensible or realistic view of their situation or prospects.

The US Congress was wary of bailout, with Treasury Secretary Hank Paulson, a Republican, philosophically uneasy asking for approval to commit vast sums of taxpayer's money in 'socialist' rescue policies, even as he was convinced this was needed to avoid catastrophe.

When it came to it, several problems converged - Freddie Mac and Fanny Mae were rescued, then on the fateful weekend of September 13&14, Lehman Brothers, Merril Lynch and American Insurance Group all demanded focussed attention.

Merril Lynch and AIG were rescued, and Lehman Brothers was not.

There is an argument that its status as an investment bank made it technically difficult to rescue, but other legal and institutional difficulties were overcome.

Then there was the international dimension, and it is not unknown for Americans to struggle with their core isolationist tendencies.

US officials thought for some time that the British bank, Barclays, might be part of a rescue but this was vetoed by the UK regulator.  Paulson supposedly said of the British that 'They grin-fucked us.'

My interpretation of this part of the story is that British reserve came up against American superpower assumption that a loyal ally would help out when push came to shove.  It is not only Asians who sometimes say 'Yes' when they mean only 'Yes we understand you.'

Did the Americans do everything possible to secure a deal? 'In the series of hectic phone calls on the morning of Sunday, September 14 2008, neither Paulson or Geithner ever offered to have the government subsidize Barclay's bid, helping reduce the risk for the firm and possibly easing the concerns of wary politicians in Britain.' (Sorkin, p537)

From Congress's point of view, the fact that something like half of Lehman's counterparties were in overseas jurisdictions made it virtually impossible to secure some sort of guarantee.

Clearly all the main players were under extraordinary strain, and perhaps the wonder is that enough was done to prevent a global financial system meltdown.

Sorkin's Epilogue makes some broader comments.

'In the span of just a few months, the shape of Wall Street and of the global financial system changed almost beyond recognition.'

'Wiring tens of billions of dollars from Washington to Wall Street, did not immediately bring an end to the chaos in the markets. Instead of restoring confidence, the bailout had, perversely, the opposite effect: Investors' emotions and imaginations, the forces that John Maynard Keynes famously described as "animal spirits," ran wild.'

Then, far more profound, 'a national debate emerged about what the tumult in the financial industry meant for the future of capitalism ...'.

President Bush sought to counter his critics: The government intervention is "not to weaken the free market.  It is to preserve the free market."

Sorkin buys this point. 'To be sure, if the government had stood aside and done nothing as a parade of financial giants filed for bankruptcy, the result would have been a market cataclysm far worse than the one that actually took place.'

However, 'it cannot be denied that federal officials - including Paulson, Bernanke and Geithner - contributed to the market turmoil through a series on inconsistent decisions.  The offered a safety net to Bear Stearns and backstopped Fannie Mae and Freddie Mac but allowed Lehman Brothers to fall into Chapter 11, only to rescue AIG soon after.  What was the pattern? What were the rules?'

The analysis of what happened, Sorkin concludes, is only important 'if its lessons are used to help strengthen the system and protect it from future crisis.'

This is at one level entirely self-evident, and at another level deeply controversial.

I suspect there will be many more exciting episodes like this to be played out before this issue is settled.


Further reading

The Age - The Age! - reports that even the Reserve Bank - the RBA! - was trying to understand Lehman Brothers as it headed for its very own Niagra Falls.

And a report of a new book.

'WHEN a 2200-page legal report on the collapse of Lehman Brothers landed with a thud in New York last week, exposing the grand deception the firm used for years to mask its perilous financial situation, many were left wondering how so many of its top executives could have been so bloody stupid. What made them think they were so special that the normal rules of the market, of the law and of common sense did not apply to them?'

Read on here.

A reader says: 'Your comments on "why Lehman Bros was allowed to fail" omits one vital and somewhat personal point, and dates back another 10 years to the Asia crisis of 1998 and the (somewhat) associated failure of the well-connected LTCM. Apart from the somewhat eerie parallels of failed derivatives strategies, LTCM was bailed out by a consortium of Wall St players (having been leaned on by the regulators).

Lehman was on of those leaned on and which initially committed to an LTCM bail-out, but then Fuld reneged when the time came for hands to be put in pockets for the cash required. Perhaps apocryphally, the big Wall St players at the table said "you'll need us some day, and you just lost the chance of sympathy; we've got long memories".

10 years later (almost to the day), Lehman needed help, and the only player willing to even consider helping was British (Barclays) and even then not committed. So Lehman was hung out to dry because they went back on their word 10 years previously....

Plausible, no?

It seems even the experts disagree - here is a report from early September 2010.

Saturday Sanity Break, 21 November 2015
Date: Saturday, November 21, 2015
Author: Henry Thornton

The civilised world is still mighty angry about the terrorist attacks in Paris.  France has upped the ante with its entirely understandable 'declaration of war' and there seems to be a deep reevaluation of Eurozone policies towards refugees which has simplified the coming and goings of the terrorist leaders. Australia's Tony Abbott has intervened to encourage the toughest possible response, and has been clearly marked out as a leader of conservative thinking globally.

The recent Canadian election was a sign for some of a swing to the centre, or even the centre left.  Malcolm Turnbull's accession could be seen as part of a similar trend if it wasn't so clearly the result of particular personality politics in a country that has become very quick to dump a leader who does not tick all the boxes - polite, good tempered, positive, articulate and with attractive policies in which there are  many winners and no or very few losers.

The US Fed seems to be steeling itself to begin restoring a normal monetary policy, while other nations or aggregates of nations - Japan and the Eurozone to cover both sorts of makers of monetary policy - are preparing for further easing, including even negative cash rates and bond rates.  Henry hopes that the RBA will sit where it is with 'accomodative' monetary policy that should enable further drops of the currency, especially relative to the US dollar, when the Fed finally acts.

The RBA has this week released a paper - reference below - that shows with graphic clarity its limited ability to predict movements in commodity prices.  Allowing us to peep inside the kimono is brave of the RBA, but the evidence presented reflects a methodological weakness. As Henry has argued before, professional forecasters should always include some attempt to elicidate the 'realistic worst case' as well as their best guesses.

During the late lamented commodity boom, what if someone had asked about consequences if the boom had been far stronger than 'best guesses' assumed - a 'realistic worst case' given the severe case of Dutch Disease suffered by Australian industry.  Would the Howard-Costello government have been more careful in its budgeting with less give-aways?  Would some brave soul have proposed a tax on capital inflow to prevent an exchange rate that seriously weakened non-mining industry? And when the commodity tide reversed, would a far more pessimistic set of commodity forecasts have prompted Treasurer Swan to implement serious economic reform?

Sadly, with the extreme Keynesian bias of Treasurer and Treasury in the era of Treasurer Swan, one has to assume the result would have been even larger shovelling  of money out of the Treasury, larger 'sugar hits' to stoke the age of entitlement rather than sober decisions to reform economic policies and rein in the budgetary deficits.  But a cannier Treasury and Treasurer might just have acted more prudently.

Australia's current short-term indicators, including jobs growth and household and business 'confidence' are looking better, while debt, especially household debt continues to grow, signalling trouble to come. Why is growth everywhere slower than expected, and slower than achieved in the so-called 'great moderation' of the 1990s, is a question Henry is often asked. One answer is the weight of debt affecting the 'Animal spirits' of the nations. In the case of Japan, high debt levels, the shock of the massive share price collapse of 1989-90 and a declining population are all factors of a type that are affecting developed nations, albeit Japan seems to have the most deeply ingrained national gloom. 


Fiona Prior sizes up the latest James Bond movie.


The retirement of Mitch Johnston is a sad day for Australian cricket, especially as it was almost certainly in part due to the glassy batting paradise of the pitch in Perth. With Josh Hazlewood said to be very tired, some say just about burnt out, it seems Peter Siddle and James Pattinson  will get the chance to return to the Australian team, with Shaun Marsh replacing Usman Khawaja as a batter.  There is some chance that leg spinner Steven O'Keefe, with successful experience with the pink ball, will be part of a spin twin attack. Pink balls, and a day-night test, whatever will they think of next?

And the anniversary of the tragic death of Phillip Hughes will cast its pall as the sun sinks slowly in the west.

Footy hots up with trade week, and Caaaarlton! seems to have already recruited a bunch of young blokes who may become good players in three or four years, given good luck and some miraculous financial wizardry to keep the Blues from bankruptcy followed by collective black dog unhappiness.

Russian athletic drug cheats, cycling drug cheats, corrupt soccer administrators, footy players boosted by possibly illegal 'supplements', the list of real or alleged sporting malfeasence goes on and on until one is forced to conclude the lure of victory with winner take all rewards is just too great for sporting contests to be fair. We have also sickened by women cage fighters at work beamed into our living rooms in the past week. It's all getting a bit like the battles between gladiators in Roman times, and it cannot be too long before the filmic 'Hunger Games' is replaced by live versions of the concept.

Image of the week

Courtesy Reserve Bank of Australia, The Terms of Trade; Outlook and Implications, Alexandra Heath, Head of Economic Analysis Department

Global recession - phase three
Date: Monday, November 16, 2015
Author: Henry Thornton

'First America, then Europe. Now the debt-crisis has reached emerging markets'.  That is the first leader for The Economist today. Coincidentally, the OZ discusses 'The Commodity Calamity'.  This is sufficient to put at risk Australia's apparent recovery from its growth recession, and certainly suggests we are in for soggy asset markets.

We focus on the venerable mag's 'Never-ending story'. 'It is close to ten years since America’s housing bubble burst. It is six since Greece’s insolvency sparked the euro crisis. Linking these episodes was a rapid build-up of debt, followed by a bust. A third instalment in the chronicles of debt is now unfolding. This time the setting is emerging markets. Investors have already dumped assets in the developing world, but the full agony of the slowdown still lies ahead'.

The bust will not be as bad as those that created debt default, asset deflation and currency crashes in the 1980s and 1990s, but it will 'hit growth harder than people now expect, weakening the world economy even as the Federal Reserve begins to raise interest rates'.

Chronical one: capital flooded across borders, driving interest rates down and inflating debt and asset prices in first world nations. Booms went bust, and capital switched direction to flow into emerging markets where debt ballooned, egged on by rich nation 'quantitative easing'.  China's debt to GDP ratio increased by 50 % in the past 4 years. Now slower Chinese growth has reduced commodity prices and 'next comes the rekoning'.

'Some debt cycles end in crisis and recession - witness both the subprime debacle and the Eurozone's agonies. Others result merely in slower growth, as borrowers stop spending and lenders scuttle for cover'.

Developing nation economies fall into three catagories.  The first will involve 'a prolonged hangover, not a heart attack' and this seems to be the case in Korea, Singapore and China. These nations have the resources to forestall the risk of severe crisis at the cost of sapping growth. It is worth considering if Australia fits into this group, despite our status as an 'advanced economy'.  Australia's international debt is rising rapidly, and household debt is as high as anywhere in relation to (very high) household incomes.

In considering our asset markets, it seems that Australia's housing boom is cooling. Share prices will follow those in major markets, especially those of the USA, with especial downside due to the narrowness of of our markets. Prices of major resource companies, notably RIO and BHP Billiton, have already crashed, and in the latter case with the tragedy in Brazil adding to the gloom. Australia's banks are down by around 30 % from their peaks, and today's post-terror attack falls will add some downside. Australia's banks have plenty of room to fall further, and the fall will be especially severe if Australian households decide to begin saving at a faster rate.

The Economist does not, of course, follow the Australian economy, except for a quizzical occasional remark that reveals deep-seated ignorance of the economy that is the wonder down under.  But the venerable mag is pretty sharp on various global issues, and posts a chilling warning this week.

'Volume four?

'Europe’s open economy is most exposed to a cooling in emerging-market demand, which is why more monetary easing there looks likely. But America’s policy dilemma is more acute. The divergence in monetary policy between it and the rest of the world will put upward pressure on the dollar, hurting exports and earnings. And waves of capital may again seek out the American consumer as the borrower of choice. If so, the world’s debt crisis may end up right back where it started'.

Further reading

The never-ending story

The Economist  - 'The world is entering a third stage of a rolling debt crisis, this time centred on emerging markets'.

The Economist - 'What Paris's night of horror means for Europe'.

The Australian - 'The Commodity Calamity'.

Terror attacks in Paris
Date: Sunday, November 15, 2015
Author: Henry Thornton

The Attacks in Paris


French television and news services reported that dozens of people were killed and many more wounded in multiple attacks across Paris on Friday night.

More here. Western world facing all-out war.

Comments of world leaders

Francois Hollande

Barack Obama

Xi Jinping

David Cameron

Angela Merkel

Malcolm Turnbull

Julie Bishop


Saturday Sanity Break, 14 November 2015
Date: Saturday, November 14, 2015
Author: Henry Thornton

Malcolm is off on an 11 day trip during which he shall meet 14 heads of state.  Pictures of him with the Indonesian President were a welcome start to the trip. Choosing not to preach to Eurozone leaders about their refugee problems was another master stroke. We wish him a safe and productive trip, for his success is Australia’s success.

‘Nothing could more fully illustrate the fatuous idiocy of the United Nations than having North Korea, Iran and Egypt portentously criticising Australia’s human rights records we are sized up for whether as a nation we meet the lofty standards required for membership of the UN Human Rights Council’.  Good on yer, Greg Sheridan, someone has to point out obvious idiocy.

And in concluding the same article: ‘For the moment, Turnbull has the style of Keating and the substance of Abbott. So far, it’s a winning formula. Turnbull is absolutely right to avoid being caught up in needless symbolic conflicts. But eventually the substance of things means that if he governs well the left will grow to hate him. That needn’t be debilitating. As John Howard showed, a good leader can live with that and a few twinkle toe pirouettes to avoid needless cultural polarisation early on is no more than good political management.

‘But as even Bob Hawke found, consensus in democratic politics is a chimera, a temporary fantasy at best. Politics is rightly about choices. And conflict’.  Read on here.


More strong job figures and some improved confidence measures provide heart that the worst of Australia’s growth recession may soon be behind us.  Service sector jobs are the key point, with tourism going like the clappers on the back of the lower Aussie dollar.  The key to sustained recovery will be a strong increase in non-mining investment, so keep watching, dear readers.

Better statistics have increased the Aussie dollar slightly, but the start of the increase in US interest rates (from near-zero) is likely to have the opposite effect.  Henry is still betting on the Aussie dollar hitting 60 cents US before it improves.

Big 4-page wrap on Innovation Thursday’s Oz. Headline says ‘Wyatt Roy says Israel offers lesson in how to encourage start-ups.  Linked here.

The ‘Wrap’ has a lot of interesting views from prominent Australians who are, or should be, good at innovation.  Henry’s co-incidental report of Israel’s stellar performance is available here, along with other, some playful, contributions.

Traumatised veterans

On a recent trip to the Kimberly seeking interesting stories for Henry’s readers, (errrr, holiday) we met an old soldier.  Despite being in his late 70s, he was the fittest bloke on the trip and, we discovered over dinner, is passionately committed to getting a better deal for veterans of Australia’s wars.  He told his own story.  Having led his team of Special Forces into Vietnam for three one-year tours of duty, he said he suffered post-traumatic stress that cost him his marriage and did great damage to friendship groups.

Terry ultimately woke up to his problem and did something about it.  Now he is a far more normal bloke, good company at dinner and an acute observer and communicator while we were all in the bush hiking up gorges, looking at rock paintings, swimming in pools (with several keen eyed staff watching for crocodiles) and enjoying other offroad experiences.  ‘It’s not just the soldiers’, Terry explained, ‘also police, ambos, victims of crime and others who suffer traumatic experiences need help’. 

Since then Henry has detected several people speaking on this matter and now there is a film.  Here is a review, and let’s hope this gets widespread exposure.


Fiona Prior sees the Australian Ballet's 20:21 at Sydney Opera House


The Aussie batsmen have done it again, with Warner 244 not out after a day of fun in the sun on the WACA. This wicket was supposed to be fast and bouncy, like the WACA wickets of old, but sadly this was not to be. One felt very sad for the Black Caps, just as one grieved for the Aussie Rugby team in its doomed tilt at the Rugby World Cup.

[Postscrip. The Black Caps retailiated to great good effect and if the Aussie batters lose confidence the NZers can actually square the seties.]

Caaaarlton! has lost a bucket of green folding stuff to go with its last - 18th - place in the AFL competition this year.  There is talk of a radical challenge to the incumbent board but ‘Caro’ in the Age advocates existing board members being given further time to fix the woeful fiscal and player performances.  ‘Bring back Jack’ is the cry of the revolutionaries, or ‘Try (Jack’s son) Tom’, nearly as silly as trying Bill’s wife Hilary in the White house, or electing Trump the chump.

Meanwhile, Hawthorn has made a cool $3 M and seem set to sit atop the AFL table for a few years yet.

The clear evidence of Russkie overenthusiasm in athletic competition should lead to banning the pestiferous drug cheats from the next Olympics, along with their mates in the UN. Please remember Henry's solution, dear readers.  The world needs three classes for sporting competitions - Amateur, Professional and Enhanced. Like Professional Wrestling, the Enhanced Olympics would capture the attention of young men everywhere, and would help with the redesign of of warfighters and bank traders. (NB. 'Enhanced' should include the genetically reengineered as well as those boosted by drugs.)

Lying half-asleep this morning, Henry heard a fine piece of advice to people who would like to be rich: 'How did your family become so rich?' a Rothschild was asked. 'By selling too soon' replied the wizened old mega-millionaire.

Image of the week

Courtesy The OZ


Saturday Sanity Break, 7 November 2015
Date: Saturday, November 07, 2015
Author: Henry Thornton

We are told today that the Reserve Bank is confident that the economy is rebalancing away from mining towards services. Put another way, the economy is switching from high productivity mining production to low productivity services activity.  As the press has amply illustrated, high penalty rates means it costs too much for some activities to take place on weekends and public holidays. This is surely one of the vital areas for reform.

The RBA also said that inflation is under control - in fact it is technically below the so-called 'target range' of 2 to 3 %.  If further rate cuts are needed, the RBA will therefore be able to implement them without too much hand wringing.  RBA Chief, Glenn Stevens, has of course reminded us all that there is only so much that can be done by varying monetary policy.  The biggest policy challenge - well, equal to the need for serious IR reform - is to devise and then implement a credible and widely accepted fiscal policy to fix the budget. 

The generally agreed fiscal package includes a 15% GST with far fewer exclusions, lower income tax rates, lower company tax rates and some 'reform' to superannuation programs. A separate current of opinion looks to lower taxes for all savings vehicles, clearly needed if Australia is to adopt Treasurer Scott Morrison's 'work, save and invest' mantra.

The challenge of innovation

The most difficult challenge  of all is to make Australia a more innovative nation. This is a topic that Henry has pursued for some time now. Here is a modest contribution. It is inspired by Prime Minister Malcolm Turnbull, who recently asked Vice-Chancellor Glyn Davis why universities were so bad at helping companies innovate.  As Henry understood the answer it was not especially focussed, which is itself a telling fact.

Of course, this is a hard question. 'National Complacency' is one answer - riding on the sheep's back or in a mining truck has been a relatively obvious path to prosperity. 'Poor tax arrangements for innovators' deserves consideration. 'The university culture of publish or perish' is part of the answer.  'Australia's national culture of aversion to risk and fear of failure', gets close to Henry's favourite answer.

A famous New York Times best seller, Start-up Nation. The Story of Israel's Economic Miracle, provides a fascinating case study for one successful innovative nation.

The book begins with a discussion of a plan hatched in Israel to create a widely used electric car. As well as helping reduce global pollution, success of such a plan would make oil far less attractive as an energy source and greatly reduce the ability of terrorists to launch attacks on Israel, not to mention the rest of us.  The electric car project is an unfinished story, and the opening chapter moves on to discuss Israel's mighty performance.  In 2007-08 it lead the world by a vast margin in Venture Capital Investments per capita.In 2009, Israel beat Canada into second place, with other nations performance tiny, in listings of non-US companies on NASDAQ. And from 2000-2005 it was first ahead of Japan and the USA in Civilian R&D Expenditure as a share of GNP.

These compelling facts are all the more impressive given the history of Israel. For yours after its formation is was bedevilled by tiny size in a harsh climate, food rationing, frequent wars for survival, a highly heterogenous population and many other potential barriers to entrepreneurial flair.  As authors Dan Senor and Saul singer say: '[This] is a story not just of talent but of tenacity, of insatiable questioning of authority, of determined informality, combined with a unique attitude to failure, teamwork, mission, risk, and cross-disciplinary creativity'.

More on the story of Israel's stellar rise as an innovative nation here.


Fiona Prior visits the big buzz exhibition The Greats, presented by the Art Gallery of New South Wales until 14 February 2016.


Trade week has come and gone with Caaaarlton! flying well below the radar.  Only clear result seems to be signing Jack Silvani - Grandson of Serge, Son of Stephen, both great stars for Caaaarlton! in times past.

The Rugby World Cup is best described as a triumph for the ANZAC tradition.  The game was dominated by ANZAC teams,

and finally the All Black team won what was a moderately brutal encounter.  A keen (Kiwi) supporter freely conceded that a clear forward pass leading to a try may have broken the Aussie spirit.  He added that in a previous World Cup, NZ had been put out after the same referee 'missed' a clear forward pass by the Frenchies. Such is life, as Ned Kelly reportedly said just before they hung him.

Cricket is offering some better news with two highly talented youngsters starring with the bat and the two Mitchs (Starc and Johnston) plus youngster Josh Hazelwood demolishing the Black Cap's top order.   As a selector might say ata prize giving ceremony in 2019: 'Always bet on yoof, lades and gennelmen'.

Experts plus the black box recorder say the Russian plane was downed as the result of a bomb. When the pestiferous Russkies reluctantly accept this, a more determined attack on ISIS should be the result. 

Image of the week

(Long) Weekend Sanity Break,
Date: Sunday, November 01, 2015
Author: Henry Thornton

It is time for Melbourne's quasi-religious racing weekend, long weekend if like many Melbournians you take Monday as a RDO (or, gasp!, a sickie) to be as fit for The Big Day as humanly possible. Henry's favourite journo, Paul Kelly, this weekend is discussing the geopolitical scene occasioned by America's brave visit to international waters claimed by China.  Supposedly there was a full-scale battle group just over the horizon in case of fireworks, but good sense prevailed and World War III is not yet upon us.

Have you ever employed a builder, dear reader?  Henry and Mrs T decided they needed a kitchen update and enlargement of an upstairs bedroom involving a new roof and a deck. We employed a builder previously used to great good effect. 'It'll cost about $40 K', said builder said. 'And I can start and finish the job quickly as I have found a team of carpenters I want to keep and it will fill in the schedule nicely'.

You got it, dear reader. After almost 6 months the kitchen is almost finished and the first 'progress payment' was a shade over $65 K. 'We found a bolthole in the roof that had let water in and the back wall was rotton' was the story. Apparently said builder mumbled something about the bolt hole to Mrs T, with the implication that it was a trivial matter.  Naturally we insisted on a hard quote - one to be kept to - for the bedroom extension/deck, but a month later this work has not started, and the festive season is rapidly approaching. Gor Blimey, comrades, is there no builder in Australia who keeps his word, provides progress reports and springs no unhappy financial suprises?

The US Fed is trembling on the brink of a rate hike but cannot quite summon the gorm to put us all out of our mistery and begin the long and difficult task of returning the global economy to normal.  The key factor holding the Fed back is, it seems, fear of deflation.

The economic story is taken up today by Henry's recalcitrant retired geologist, Louis Hissink. He delivers a wonderful explanation for apparent deflation.  And on the Fed's dithering about interest rates, please see today's Image of the Week below.

'It seems the ECB, and hence I presume other central banks as well, thinks there isn't enough inflation and that it needs to be increased by monetary easing. Not enough inflation? Not as measured by government it seems but a couple of days ago I came across an interesting phenomenon of the economic kind, the way in which sellers of manufactured goods can adjust their product to cope with inflation'.

Read on here.  You will learn a lot about Socialism. Capitalism and Fascism, along with the fallacies of the Monetarists. Then if you remain unsatisfied, cop this 43 year-old article by Australia's living national treasure and Henry's editor. After being rejected 5 times all those years ago, it is about to be published in a book about Lord Keynes.


Fiona Prior explores Sydney Open – Sydney Living Museums.


Only two more AGMs to go, dear reader, and Henry can begin winding down for Christmas, after what has been a Keating of a year. But before then we have ... the Rugby World Cup final, which began at 3 AM today. The All Blacks are fearsome favourites but Australia's coach, Michael Cheika, has sharpened and focussed the Wallabies beyond imagination and we are just about guaranteed a fierce struggle with neither side guaranteed to win.

In the event, Australia was dealt a big dose of shock and awe in the first half and in the first monents of the second half.  The good news is that they refused to curl up and surrender but staged a wonderful fightback.

The Kiwis deserved to win and did so comfortably 34-17 in the end.  It was a great game and Cheika's Wallabies will be number one in the world before long.

The World cup of Rugby has ended just in time for our attention to turn unhindered to the Melbourne cup.

Henry's choice is Red Cadeaux, an elderly (10 years) horse that just keeps coming and would be a deeply popular winner.  But there are plenty of younger, possibly faster horses so do not back Henry's romantic choice without consulting a real horse guru, like Henry's TP Mahar.

Soon the cricket test will provide Australia with a chance for revenge against a team from the land of the long white cloud.  Trouble is, Henry has not heard of most of our team's batters so lacks confidence in the outcome. The good news is that there is a great chance for a young bloke to make his name.

On with the show, and before long Santa comes then footy will be underway again.

Image of the week - Janet and the mob.

Ideas relevant to this painting may be found here - will she, or won't she, raise interest rates any time soon and (either way) will it scare the mob?

More of Henry's economic images here.

Global recession, new Chief Scientist
Date: Wednesday, October 28, 2015
Author: Henry Thornton

'China will keep growing at double-digit rates for the forseeable future'. This was the confident assertion of Australia's China-watchers until recently, when China began its 'pivot' to consumerism. Like Australia trying to transform its economy from mining to services - education, tourism, accounting, law - this was never going to be easy, but the difficulty was never understood or predicted by Australia's most prominant economists, those in Treasury, the RBA and the better universities. 

Commodity prices just keep falling and that is slicing great chunks off Australia's national income and from the incomes of many individual Australians.

Now we learn that 'global worries lengthen odds of Fed rate rise'. The US economy is sliding into recession, the Eurozone remains stuck in the mud and bedevilled by a flood of refugees that defies imagination, Japan's exports are declining and the world may be slipping into recession, certainly a growth recession.

Malcolm Turnbull has focussed on the opportunities provided by the current global turmoil.  Good on him, this is perhaps better than Tony Abbott's Churchillian vision of Australia surrounded by enemies and with enemies within - including Islamist sympathisers and nasty,  rapacious unions. But there is a long way to go to fix Australia's budget deficit, restore business and household confidence and encourage growth by removing obstacles including excessive and overbearing business regulation and especially industrial regulation.

New Chief Scientist

Australia has a new Chief Scientist, Dr Alan Finkel. He is a neuroscientist who went to the so-called 'Dark side' to commercialise high level technology and made a success of what is one of Australia's most difficult challenges. Turning science into business is something Australia does especially badly - ranking 29th (last) behind Mexico in one authoratitive survey - and Dr Finkel is ideally placed to do something about this. He was described as 'a scientist and an entrepreneur; an innovator; a communicator' by Prime minister Turnbull.

One of the articles about this appointment said that the word 'innovation' had been banned by the previous minister for industry and science.  What it failed to add that in Ian Macfarlane's view it had been replaced by 'competitiveness'. Emphasis on Australia's ability to compete is an even more general description of what we need to do than 'innovation' (or 'turning science into business').  But both words will be used to describe any highly successful economy, and we wish Dr Finkel well as he focusses on what will be his greatest professional challenge.

Tax relief for innovation is being talked about.  It is worth noting that the reform of the tax treatment of shares or options issued in lieu of cash for start-ups has already removed one blocker to successful innovation, and further moves in that direction will also be worthwhile.  Less red tape in programs like the highly successful Cooperative Research Centre (CRC) program would also make life easier for small companies to receive infusions of useful new technologies.  Go for it, Christopher Pyne.

Dr Finkal's enthusiastic advocacy of the nuclear option for cheap, clean future energy supply is also very welcome.  This was also a dream for Prime minister Hawke, and for a country with a sizeable chunk of the world's known supplies of uranium this is a completely natural development.  The idea will get the Greens going, and generally split the environmental lobby. Go for it, Alan Finkel.

Henry's contributions on the nuclear option include:

* PP McGuinness, 2006

* Report on Bob Hawke's views

Saturday Sanity Break, 24 October 2015
Date: Saturday, October 24, 2015
Author: Henry Thornton

Much ado about Malcolm today.  The Smage says Malcolm is 'set for big spend' on 'roads, transport and other infrastructure', financed by borrowings.I do not believe this is simple crude Keynesian thinking.  Rather than an attempted 'sugar hit', this is a strategy that seeks to improve productivity, which is a much needed challenge for Australia.  Of course, such spending has to be financed by borrowing, and each project should be justified by rigorous benefit-cost calculations.

Commentators have brought the line that Malcolm's government is 'strictly business', benefit-cost studies are the businesslike approach, and shareholders (ie the punters, aka voters) should be given the chance to scrutinise the relevant studies.  Malcolm's point that hating corrodes the personality of the hater is powerful magic, and needs to be heeded by every aspiring leader.  Joe Hockey's statesmanlike farewell speech set high standards in this matter.

Other features of the weekend commentary on Malcolm's government are the attempted collegiality (aka taking his colleagues into the decision-making process), attempting to restore dignity and good order to parliament and making some much needed changes to Australia's IR framework.

On the policy front, the fact that broad-based tax reform is also allowed to be discussed, including (gasp!) widening the GST and/or raising its rate, is a great relief to economists everywhere. There is some brutal arithmetic at play here.  Spending decisions already taken are incredibly hard to roll back. Tax reform whose main effects are to improve the budget bottom line, while also increasing incentives to 'work, save and invest', are needed to provide the quickest and fairest return to overall budget balance.

There is also Malcolm's point that there is a lot of luck in business or indeed in life generally.  As fair-minded people recognise, this provides a cast-iron case to tax more heavily incomes or assets of the well-to-do.  Success is also due to powerful focus and hard work, so redistribution must be limited to an extent that most people, including well-to-do people, accept. Australia's current tax and welfare system is by no means the worst in the world, but Australia needs to establish a more sensible balance of equity and efficiency.

Labor is trapped by this approach and also by the fact that many of its supporters believe Malcolm is a better Prime Minister than Labor's Bill Shorten is ever likely to be.  Will there be a Bill-spill?  The ALP's new rules would seem to make this impossible, and there is also Joe Hockey's point that the revolving door should be jammed for a bit.

It seems that Malcolm's government has accepted that growth will be slower and that budgeting will therefore be more realistic.  Predicted budget deficits will also be larger and there remains an urgent need to bring a better balance between spending and raising revenue.  How this is achieved is one of Malcolm's greatest challenges. If the rebalancing merely blunts incentives further, it will fail. If tax and welfare reform improves the budget balance that is good news for the Australian economy  but if it does so while improving the efficiency of the tax and welfare system it will be a great success, especially if most Australians accept the need for necessary reform.

The housing market is apparently cooling off in the hot-spots of Sydney and Melbourne. Casual observation shows massive blocks of new flats everywhere in Melbourne, so there will probably be significent rental savings available before long.  But the overall price structure for houses has shifted up to really difficult levels, so trouble remains for many young people, who are also struggling to find decent jobs.


Fiona Prior dons her walking shoes to enjoy this year's Sculpture by the Sea, still one of the world's most innovative sculpture exhibitions.


Rugby football is Henry's main focus this weekend and possibly next. He assumes the All Blacks will beat South Efrica in their semi-final, but hopes the men from the veld give the men from the land of the long white cloud a terrific pounding. Australia, from the land of drought and flooding rain, take on the men from the Pampas and national insolvency. The Argies have been playing sublime Rugby and look good in comparison to Australia's relative poor victory over the canny and committed Scotsmen last weekend. Henry will watching the latter game at 2 AM Monday, so do not expect too much good sense later at the start of the week of work.

Our cricket team is lacking practice and grappling with different color balls. 'What a balls-up' is all that can be said, and we wish well the newbies, including new Captain Smith, that make up our next test team.

Plenty of 'Stuff' around, including the flood of refugees from the Middle East into Europe.  For some reason Henry's favourite magazine, The Economist, was unable to be delivered to a boat travelling from Broome to Darwin, so Henry is playing catch-up. It seems the Eurozone's credo of compassion has been stretched to the limit and The Economist said two weeks ago even the compassionate Germans have reached thier limits.

'On the night of September 4th Angela Merkel made the most dramatic decision of her decade as German chancellor: to suspend European asylum rules and allow tens of thousands of refugees stranded in Hungary to enter Germany via Austria. It was a moral gesture that fitted the mood of the moment. ...

'In Germany, however, that altruistic embrace has caused a backlash that could weaken a chancellor so far considered all but invincible. Using uncharacteristically missionary language, Mrs Merkel said repeatedly that the right to asylum has “no upper limit”. But Joachim Gauck, who as president is expected to keep out of workaday politics, responded that “our reception capacity is limited even when it has not yet been worked out where these limits lie.” As though on cue, the political tone turned against Mrs Merkel'.

Thirtieth anniversary of Uluru's return to indigenous custody.  All's well and the Great Rock remains in superb form.

Image of the week - The Spirit of the Rock

Booby traps ahead
Date: Tuesday, October 20, 2015
Author: Henry Thornton

There is a strange disconnect in the Australian economy and discussion of it.  The government, lead by two excellent communicators Malcolm Turnbull and Scott Morrison, emphasise the opportunities facing Australia. Official agencies, like the RBA and Treasury articulate a 'glass half full' view of slower growth, the need for greater competitiveness via a lower exchange rate and the desirability of fixing the budget. Some business leaders support fixing the budget by cutting spending (Treasurer Morrison's preferred approach).

Others think wholesale tax reform is the preferred approach and a wider GST at a higher rate the key to allow lower company tax and removal of Australia's notorious 'fiscal drag' with special focus on income tax. A significant minority of commentators see lower rates of income tax the best way to encourage 'Work, Save and Invest' as Treasurer Morrison puts it so eloquently.

Lefties want capital gains to again be taxed at recipients' marginal rates of tax and some even want to tax the family house, a sure remedy for a permanant spot in the opposition ranks for any party that embraces it. Some of this lot want to tax superannuation balances (or self-funded pensions) of 'rich' people - those with balances above $2.5 million. Politicians who want to stay in government will think very carefully about grandfathering arrangements currently in place, including for politicians and officials which have hardly even been mentioned in debate so far.

The good news is that debate is joined and one can only hope that good sense eventually allows a sensible new set of inventives and disincentives, encouragement of 'Work, Save and Invest' for young workers, lack of fear for those whose working days are over, or all but over, and an acceptably fair treatment for current welfare recipients who cannot turn overnight into workers in the services sectors, or for that matter doctors, lawyers, nurses, staff of old person's homes and so on - the list is endless.  Of course, the rapidly growing aging of the population emphasises the need for reform including stronger government spending in relevant sectors.

Debate and discussion is frequent and often intense. Henry's circle of friends and acquaintences have never in living memory showed so much interest in economic issues and their questions often begin by saying Australia's economy is in deep trouble. This group is is not  entirely made up of rich old people.  Parents and grandparents in Melbourne's leafy Eastern suburbs mostly discuss the difficulty of later generation's attempts to find jobs. Plus the near-impossible prospects of younger people getting set in the housing market.  When one hears about new technologies to save jobs, their gloom deepens.

The strength of debate is, of course, a good sign. The new government is proving far better at handling Labor and Senator cross-bench members than Mr Abbott's confrontational approach.  But 'This is the best time ever to be alive' is fine if one is by nature and experience qualified for success in the fast-moving world of the twenty-first century. But one feature of modern capitalism is the increasing disparity of winners and losers in the economic game, which is one reason for so-called 'progressive' systems of taxation. That's fair and reasonable, comrades, but too much punative taxation, too many intrusive and overbearing industrial laws and an increasingly weak system of teriary education system not focussing on preparing student for real jobs, together add up to gloom for many people.

Then there are the external shocks, well-summarised by Ashok Jacob in the Oz today. 'Ashok Jacob calls 2015 the “year of the booby trap".

' “I have never seen more unexpected things at a major level come out of the woodwork than this year", he told The Australian yesterday, referring to the Swiss franc devaluation, the collapse of the oil price, the Volkswagen scandal and, most importantly, the devaluation of the Chinese currency'.  One could add  to this list. What happens to asset markets when the US Fed finally begins to restore a sensible monetary policy? Is the Chinese economy merely coasting at the 'official' rate of 7% or is it a far greater slowdown? Is global pollution choking the environment and destroying species at an Olympic rate? How will the European migration flood be emeliorated?

Solving the issues mentioned in the questions will provide wonderful jobs for gifted and well educated global citizens. We must with Malcolm Turnbull and his team every good piece of luck.  They will do well indeed to return Australia to its natural place as a 'lucky country'.

Saturday Sanity Break, 17 October 2015
Date: Saturday, October 17, 2015
Author: Henry Thornton

Housing market to cool, says RBA. Great news, as lots of young people battling to find jobs are also wondering if they will ever be able to buy a house.  There looks like being a real glut of apartments, so at least rentals will be cheaper and some young folk will be able to at least get a foot into the property market.

Serious drought gets increasingly more likely as a dry spring dashes hopes for good wheat crops and limits the extent to which beef farmers can benefit from prices in the stratosphere. Some interest rate gurus say this will give the RBA the excuse to cute rates further.  Cutting rates here just when the USA Fed is dithering about raising rates there will also encourage the Aussie dollar to fall again, after a few weeks of partial and unhelpful recovery.

Mr Turnbull is not rushing to fix Australia's weak budget situation and indeed most of his comments lean on the expansive side of neutral.  This will help support activity for a while, but with the US economy looking toppy, and forecasts of global growth still being revised down, risks of a Banana Republic debacle are rising. 

One hopes that Treasury's fine economists are thinking hard about this issue.  Housing off the boil, farm production being dried as we watch, the much feared recession looks increasingly likely. As Henry's Raff Report has recently pointed out, with large budget deficits everywhere and interest rates low, there is little room for finance ministers and central bankers to move.

The Oz today features some serious analysis of the style of the new government. The theme is that Malcolm Turnbull will pull the Liberal Party toward the centre, and to be safe in the leadership he will need to carry the conservative wing of the party with him. Paul Kelly claims to detect a global swing toward the centralist direction; think Cameron in the UK, Key in NZ and Harper in Canada and looking electorally vulnerable.


Hawthorn blitzed the AFL grand final while Henry was out of range of a TV, and from all accounts it was all over bar the groaning by quarter time, and some say the first 10 minutes. With their fabled Threepeat under their belts, the Hawks are letting go some older players and replacing them with good young blokes, including another Rioli from Tiwi.

Caaaarlton!, however, seems not to be recruiting and sending Lachie Henderson to Geelong, (or is it Brisbane?), and Yarran to Richmond, to continue a player-selling debacle that has lasted for well over a decade now. Henry is beginning to wonder if he will last long enough to see another flag hoisted at Princess Park, or is it Jelly bean Oval or some similar sponsor's haven these days? Perhaps the once mighty blues need a funeral chain as a sponsor. 'White Lady will bury your loved ones faster than Carlton can bury a season of footy' could be the catch cry, with a 10 % discount for season ticket holders.

Meanwhile Henry is following the Rugby, where the home team seems capable of pulling off an unexpected trophy.  The effort to beat Wales with players sin-binned or injured, was prodigous. Scotland will provide another stern test but if our boys survive monday morning's game the real fun might commence, with an aging All Black team to face in the final.

Cricket is also underway.  Here the test team will be just about all new (I exaggerate only a bit) and will face the dangers of a pink ball with almost no game time. Still, all should be well if Smithy is in good form, and the battle for places is real - as it seems to be in Michael Cheika's Wallabies. Here is more on the super-coach's career.

Jarryd Hayne's unlikely journey to a member of an American football team is told here by Will Swanton.


Fiona Prior sees Ariel Dorfman's Death and the Maiden performed at Sydney’s Wharf Theatre. A seriously intense way to focus your thoughts about justice and violence.

Image of the week

Courtesy The Oz

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