I have a lot of T-shirts, almost none of them bought in clothes shops. They celebrate or advertise defunct sporting teams, (mostly) unsuccessful political campaigns, obsolete versions of operating systems and long-gone folk music festivals. What’s in your wardrobe?
It’s time (on time for once) for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
The news from Mumbai is still unclear, but extremely grim. Scores of people are dead, and hundreds wounded in yet another murderous terror attack.
As the cycle of war and terror has gone on, it’s become increasingly clear that the kind of easy evasion involved in slogans like “one man’s terrorist is another man’s freedom fighter” is no more tenable than the bogus arguments for war put forward by Bush and his followers. Terror attacks like this one are always crimes regardless of the purported cause, regardless of whether the terrorists deal death hand to hand or with bomber planes, and regardless of whether they are individual criminals, political or religious groups, or national governments.Phenomenon movie full
I haven’t had time to digest the implications of this story which has been around for at least a month, but only now seems to be attracting attention (I’ve seen it in a few different places today). Apparently, short sellers in the US Treasury bond market are failing to deliver the securities they’ve sold. As long ago as 1 October, the shortfall was more than $2 trillion by one report. Via Felix Salmon, here’s Helen Avery in Euromoney.
I’m not an expert on this stuff, but it seems to raise the question of whether bond markets can and should continue to exist in their current form. Maybe the US and other Treasuries should be selling bonds directly, and offering repurchase options to provide liquidity, perhaps using the banks they’ve already part-nationalised to handle the mechanics.
I couldn’t go past this neat headline on a piece by Michael West in the Age . The central point is that the impending failure of both financier Babcock and Brown and bond insurer FGIC will leave the Vic government holding the risk on a PPP hospital project. Money quote
Maybe the Government ought to have issued its own bonds, with a state guarantee and consequent cheap funding cost, because this now looks like a PPP that lost two of its Ps.
That’s what I thought at the time.
Another note to myself post: an idea I thought I’d blog quickly rather than trying to work through in detail.
One of the big unsolved problems in economics is to explain the risk premium for equity, that is, the fact that the historical average rate of return to equity investment (shares) is much higher (about 6 percentage points) than the average rate of interest on high grade (government or genuinely AAA corporate) bonds, whereas the standard economic model of these things (the consumption-based capital asset pricing model or CCAPM) suggests that the premium should be no more than 0.5 percentage points. The basic idea is that the reason for the premium is that the market portfolio of equity represents a claim on aggregate consumption, so the risk premium must arise from the variability of the growth rate of aggregate consumption and this is small (the growth rate ranges from about 4 per cent in a boom to -3 per cent in a moderately severe recession).
One possible explanation for the puzzle is that equity investment has its own special risks in addition to the riskiness of aggregate consumption. But not any kind of risk will do: the risk has to be correlated with fluctuations in aggregate consumption, that is with the business cycle.
I’ve done a few posts here on the implications of the financial crisis for the ideological/political viewpoint often referred to as “neoliberalism”. Various people have objected to this as pejorative, but usually without offering a satisfactory alternative. I’m just starting a paper on the topic and looking over my old files, realised that I’ve previously used “economic liberalism” which seems much more satisfactory.
The crucial point it conveys is that economic liberals may or may not be liberal in the more general political sense – Pinochet is the most extreme example, but the extensive support he got from the Mont Pelerin society and from authoritarian economic liberals like Thatcher illustrates the point. Locally, the range of possibilities consistent with economic liberalism includes authoritarians like Howard and Downer as well as more broadly liberal positions such as those of John Hewson, Malcolm Turnbull and, to some extent, Peter Costello.
It’s time once again for the Monday Message Board. I’m still interested to learn if readers are finding the site more responsive following the migration to an accelerated server (of course, feel free to post on any topic, but a brief comment on this point much appreciated). As usual civilised discussion and no coarse language.
This post on a question-begging argument in favour of carbon taxes and against an emissions trading scheme, naturally raised (!) the question of whether the correct interpretation of a phrase like “begging the question” is determined by the predominant usage or by its original derivation as a technical term in logic or maybe by some other criterion such as the efficiency of communication.
That set me thinking and I turned to the usual research tools Wikipedia and Google to look at how this phrase and a couple of other standard items for debate (“aggravate” and “methodology”) are actually used.
The failure of Citigroup, which looks increasingly likely to happen in the near future, would mark the end of the beginning of the financial crisis. Until now, the prevailing view has been that the crisis and recession will pass in a year or so, after which things will go back, more or less, to the way they were, with a few less financial institutions, and a bit more regulation. A Citigroup failure would put paid to that idea.
Longtime reader Jack Strocchi sent me this piece from the Times, reprinted in the Oz, with the headline “Carbon crash hits Europe’s emission trading scheme”. The main point is that, with the economic downturn, the price of carbon permits has fallen. The author concludes that this proves the need for a carbon tax rather than an emissions trading scheme.
This is a fine example of the fallacy of “petitio principii” or, in English, begging the question. This does not (yet) mean what TV commentators seem to think, namely “begging me to raise the question”.* Rather it refers to an argument in support of a proposition which assumes the truth of the proposition in advance. Clearly, if price instability is, in itself, evidence that a program has failed, then you need a program with fixed prices, that is a tax.
The main argument for a carbon tax rather than a trading scheme is that, if there is a lot of uncertainty about the cost of reducing emissions, and not much uncertainty about the damage caused by climate change, a fixed price for emissions (that is, a tax) will get closer to the optimal outcome than a fixed quantity.
But what’s happening here is completely different. The demand for emissions has fallen due to the economic slowdown. The reduction in price offsets the adverse impact of the trading scheme on firms that are already facing hard times. Equally, if the economy booms, the price of permits will rise. This is a clear case when a fixed quantity trading scheme performs better than a tax.
* Of course, meaning is defined by usage, so if a word or phrase is used in a particular way long enough, that becomes the meaning. But “begging the question” in its traditional sense is a useful phrase for which we have no good substitute. For the TV usage, “raising the question” is perfectly adequate.
My article in yesterday’s Fin, over the fold was about the need to prepare for rising unemployment
It’s time (on time for once) for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
BrisConnect is a multibillion enterprise set up to build a series of PPP road and buslink projects in Brisbane. The backers are the usual big names like Macquarie Bank and Deutsche Bank.
Yet a Melbourne woman, named Hang Fe, just bought a 10 per cent stake in BrisConnect and you can do likewise if you have a spare $32 000 sitting around (immediate word of advice:DON’T). Shares in BrisConnect are currently trading at 0.1 cents, so Hang Fe’s investment brought her no less than 32 million of them.
The catch (there’s always a catch, isn’t there) is that these are partly paid “stapled securities” carrying with them an obligation to pay an additional $1 a share next April, and a further $1 in early 2010. For 32 million shares, that comes out at $64 million dollars. But most analysts say the value of fully paid shares will be well below $2, so anyone who pays up will lose a lot of money.
It seems safe to say that, at this point, holding BrisConnect shares makes sense only if you have no other assets the company can seize to enforce the $1 payment. For someone in this position, the shares appear to represent a one-way bet, admittedly at long odds. And, presumably, anyone who is in position to pay will be sure to sell out before the payment is due in April: a problem with partly paid shares of which I was unaware until now.
Since the remaining payments almost certainly won’t be made, the obligation will therefore fall on the underwriters. That in turn raises the question of whether the underwriters will still be around, and in a position to pay up, when the money falls due. That seems fairly likely as regards the payment due in 2009, but much less certain as regards Macquarie in 2010. At that point, the whole thing will presumably fall back into the lap of the Queensland government.
Note: I am Not a Financial Advisor, and I don’t claim an exact understanding of either Brisconnect or the implications of buying partly paid shares when you are already insolvent. So, please seek proper advice before going anywhere near this.
Hat-tip: Rabee Tourky alerted me to this
Here’s a post on the credit crisis from my colleague, Rabee Tourky
In a Minneapolis Fed. research paper Chari, Christiano, and Kehoe
examine three claims about the way the financial crisis is affecting the economy as a whole and argue using a number of graphs that all three claims are in fact myths.
It’s an analysis familiar to most on the Left. Support for laissez-faire is a hypocritical pretence, typified by Republicans who denounce a universal health care scheme as “socialist” while backing huge handouts for wealthy sugar producers.
For cultural and historical reasons, the United States has never had a proper socialist party of any significance[1]. Instead
the socialism we do have is the surreptitious socialism of the strong, e.g. sugar producers represented by their Washington hirelings.
In America, socialism is un-American. Instead, Americans merely do rent-seeking — bending government for the benefit of private factions.
As I say, familiar stuff. But it’s mildly surprising to see it coming from George Will.
The Centre for Policy Development, based in Sydney, runs a series called “Common Ground” in which people who might be expected to be opposed (for example, because of their party-political alignment) explore issues where they have some views in common. On Wed 26 November, they’ll have Bob Carr and Pru Goward on climate change.
Venue is Customs House, at 5:30 for 6
You can register to attend online, or RSVP by email to [email protected]
It’s time once again for the Monday Message Board. Today, I’m particularly interested to learn if readers are finding the site more responsive following the migration to an accelerated server (of course, feel free to post on any topic, but a brief comment on this point much appreciated). As usual no civilised discussion and no coarse language.*
*I hope that the coarse language I have directed at my screen when it displays 503 errors and similar is a thing of the past now.
Back when I was a high school debater, my team once had to take the negative position on the topic ‘Australian democracy is dying’. With the Vietnam war at its worst, conscription of 18-year olds (old enough to die, but in those days too young to vote) a big issue, and a conservative government that had been in office since before my classmates and I were born, it didn’t seem likely that we were going to carry the audience with Panglossian rhetoric. So, we decided to argue instead that Australian democracy couldn’t be dying because it was already dead. The resulting debate was somewhat farcical, as we rushed to agree with every piece of gloomy evidence raised by the affirmative side, and pile on with our own. We won easily, but I gave up debating not too long after that.
I’m reminded of this episode by a piece by Robert Kagan, criticising the idea that American power is declining. In effect, Kagan argues that, while things might seem bad for American power just now, they’ve actually been terrible for decades. Unchallenged economic dominance had already been lost by 1960, when the US share of the world economy (around half in the immediate aftermath of WWII) had fallen to 24 per cent. The international image of the US was trashed by Vietnam and other disasters of the 1960s. Military failures are nothing new. So, those who, decade after decade, proclaim that America is in decline have simply forgotten how bad things were in the past.
Supporters of social democratic and labour parties have had plenty of experience of seeing their parties in office. Despite some substantial achievements there has been plenty of disillusionment, particularly in the case of coalition governments with centrist or liberal parties. Time after time, the promise of radical transformation has faded to hard slog for modest reforms or even (particularly in times of crisis) capitulation to the demands of capitalist orthodoxy.
By contrast, explicitly libertarian parties have hardly ever scored enough votes to elect candidates, let alone form governments. But now, thanks to New Zealand’s multi-member proportional system, a new government, led by the National Party, has been formed in which the ACT (Association of Consumers and Taxpayers) party (with a bit over 3 per cent of the vote) holds a couple of ministries. ACT was the subject of some enthusiastic commentary in open threads here, and an op-ed piece by John Roskam of IPA in the Fin (paywalled, maybe someone can find a link). They combine libertarian economic policies with the now standard accompaniments of climate change delusionism and coded law-and-order rhetoric.
Unsurprisingly, given the circumstances, the first announcement of the new government was that the longstanding requirement under the Public Finance Act for budget surpluses over the cycle was to be abandoned. At this stage, declining tax revenues are the main factor, but large-scale Keynesian stimulus is going to be needed, and soon.
Labour’s guarantee of bank deposits looks certain to be retained, and there’s every likelihood that more intervention, maybe even nationalisation, will be needed before the financial crisis is resolved.
As far as I can tell, ACT has had to settle for a review of public expenditure (plus the ministers’ jobs) as its price for participation in a government which seems likely to be forced in the direction of interventionism. It will be interesting to see how long they last.
With some generous technical help, I’ll be attempting a move of the site to a (hopefully) faster and more reliable server. The posts should be readable, but no more comments until further notice please.
Update The move is complete and we’re set to go. You can treat this as an open thread. I’ll try to post something new before long.
It’s 90 years today since the Armistice that brought a temporary halt to fighting on the Western Front of the Great War. The War had already brought forth the horrors of Bolshevism and fighting in Russia continued well beyond the Armistice. Within a few years, Fascism and Nazism were also on the march. Full-scale war resumed in the 1930s, first in Spain, Abyssinia and the Far East and then throughout the world. The War brought nothing but evil, and its evil has persisted through almost a century since it began.
Read more…
I was discussing the economics of happiness with my son, and in particular the Easterlin paradox. Within a given country, people with higher incomes are more likely to report being happy. However, in international comparisons, the average reported level of happiness does not vary much with national income per person, at least for countries with income sufficient to meet basic needs. The same is true over time – average happiness levels don’t change much even as incomes rise.
This is often taken to mean that it’s relative rather than absolute income that determines happiness, so an increase in everyone’s income won’t make anyone happier. Hence, we shouldn’t worry so much about increasing income, but should focus more on factors likely to contribute to happiness. The point that struck me was that, given Easterlin’s data, the paradox is almost certain to apply whatever potential source of happiness we consider, in one form or another.
It’s time once again for the Monday Message Board. Post your thoughts on any issue. Civilised discussion only. Please avoid snarks and trolling and strictly no coarse language.
I’m attaching my presentation to the BrisScience lecture series on The Financial Crisis and what it means for you(2.7 Mb PDF). It incorporates part of a cartoon exposition that circulated early in the year, in the style of (but apparently not by) xkcd. I left a fair bit out, partly because I only give PG-rated talks and the cartoon was NSFW (coarse language), but you can read the whole thing at BoingBoing.
I’m working on questions of a new financial architecture in the wake of the financial crisis and the various bailouts, and I’m interested in whether there is a well-worked out free market alternative to the policies we’ve seen so far.
To be clear, I’m not interested, at this point, in arguments about whether free markets are to blame for the crisis. I’m also not interested in criticism of the bailout unless it’s presented as part of a reasonably detailed argument that doing nothing, or doing something different, would produce a better outcome. Finally, I’m not interested in responses based on fringe economic theories, for example, anything based on gold or the ideas of Ron Paul[1]. That is, I’m interested in work by mainstream economists putting forward a more free-market alternative to the policy of partial nationalisation adopted so far.
fn1. I’ll post on this later, but in this thread, I will terminate with prejudice anything of this kind, and similarly for meta-comments that Paul is not really a fringe figure or that someones right to free speech is being censored here.
Tim Dunlop has announced the closure of the Road to Surfdom blog. It’s been a gradual process. Tim moved to the News.com blogocracy site a couple of years ago, and recently announced his retirement from blogging there.
Tim was one of the pioneers of Australian blogging. He started Surfdom in May 2002, at a time when the dominant voices in blogging where those of the US-centric warbloggers, beating the drum for war with Iraq. Tim joined Rob Corr and a handful of others putting forward more an alternative view.
I started blogging a few weeks after Tim and in those long-gone days, we found we thought very much alike, not only sharing the same views, but often writing almost identical posts, to the extent that we seemed to be blogtwins.
That was when the Iraq war and the merits or otherwise of the Bush administration were matters of lively debate, and much of the news was viewed through that prism. Bloggers had something to prove, particularly given the acquiescence of the mainstream media in the spurious case for war. Most of the pioneers from that time have proved their point and moved on, but the space they helped to create has been filled by millions more blogs, including dozens (maybe hundreds, I don’t keep up as well as I should) of Australian political blogs.
Blogging is going to be very different now in all sorts of ways, and Tim is taking a new direction, with plans to write a book. I wish him all the best.
You guessed it, it’s a bleg(gh!). To improved the performance of this site, I need to move the blog from its current shared hosting to a different accelerated server. This involves various bits of SQL database magic that are beyond my skills. If someone can help, I’ll be happy to reward them with a post on a topic of their choosing or (if professional skills are needed) with a reasonable monetary return for their time.
The move to the new server is complete, and I have high hopes that the problems that have plagued the site for so long may be behind us. While I get some posts going, it’s tim for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
The idea that bad mathematical models used to evaluate investments are at least partially to blame for the financial crisis has plenty of appeal, and perhaps some validity, but it doesn’t justify a lot of the anti-intellectual responses we are seeing. That includes this NY Times headline In Modeling Risk, the Human Factor Was Left Out
. What becomes clear from the story is that a model that left human factors out would have worked quite well. The elements of the required model are
(i) in the long run, house prices move in line with employment, incomes and migration patterns
(ii) if prices move more than 20 per cent out of line with long run value they will in due course fall at least 20 per cent
(iii) when this happens, large classes of financial assets will go into default either directly or because they are derived from assets that will default in the event of a 20 per decline in house prices
It was the attempt to second-guess human behavioral responses to a period of rising prices, so as to reproduce the behavior of housing markets in the bubble period, that led many to disaster. A more naive version of the same error is to assume that particular observed behavior (say, not defaulting on home loans) will be sustained even when the conditions that made that behavior sensible no longer apply.
Click to buy at Black Inc
Recent Comments