John Quiggin

To all my readers, their friends and their families, however and wherever you celebrate, my very best wishes.

There’s been a lot of talk about the idea that the GFC (the in-group shorthand for ‘global financial crisis’) is an example of a ‘black swan’, that is, an event that would be treated as impossible on the basis of induction from past experience, and hence that could not be encompassed by formal models of the kind used by risk managers. All this talk has of course been great for Nicholas Taleb who has a book with this title. It’s good in a lot of ways, but I found it ultimately insufferable in the continuous repetition of the message that only Taleb was smart enough to see all this. ( To be fair, Taleb predicted a global financial crisis, and didn’t simply claim it in retrospect as an unpredictable Black Swan).

I spend a lot of my time working on how to think about unforeseen contingencies and I’m not at all convinced that the GFC should be described in this way. Of course, the models used by the risk managers in investment banks didn’t include this as a possibility; if they had, the implication would have been that all sorts of much-desired deals should not go ahead. But as I pointed out a while ago, very simple models based on well-established principles predicted that the bubble economy would end badly.

The crisis then, involved something more like dark matter, the ‘missing’ matter in the universe that must exist if it is to work as it does, but can’t at presented be detected. Given that risk can’t easily be made to disappear*, it was obvious that the risk associated with lending of all kinds (most obviously, mortages offered to people with no capacity to repay) was being borne by someone, and probably someone who was unaware of it.

The big problem for the Cassandras (and we were certainly both correct and disregarded) was that it was easy to see that the bubble could not continue and much harder to foresee how it would end – it’s one thing to say that dark matter must exist and another to work out what it is really like. Like Brad and Brad, I expected that the problems would emerge first in the form of a run on the US dollar, given that holders of US dollar assets were receiving very little compensation for the obvious risk of large capital losses. In fact, the US dollar actually rose in the early stages of the meltdown, though it has been falling more recently.

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It’s time once again for the Monday Message Board. As usual civilised discussion and no coarse language.

It’s time once again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.

My opinion columns at the Fin appear to have emerged from behind the paywall. I guess that says they aren’t vital enough that people will pay to read them (especially since they can get much the same opinions here) but maybe that having this material available will attract readers to the Fin site and sell advertising. Anyway, here’s my latest

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

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

That’s the new target interest rate announced by the US Federal Reserve today (with a margin of up to 25 basis points). It’s also, following the $50 billion Madoff fraud and the increasingly widespread suspicion that the entire bailout scheme has been operated to promote the interests of Goldman Sachs at the expense of its competitors and the general public, an upper bound for the credibility of the global financial system. And it’s a pretty good estimate of the probability that we’re going to avoid a recession worse than any since the Great Depression.

Without a household name like Citigroup or GS going bust, it’s hard to convey the seriousness of the latest news in an environment where we are already inured to financial cataclysms. But it seems pretty clear that the last couple of days spell the end for both hedge funds (many of which have lost a fortune with Madoff and all of which are subject to invidious comparisons with his decades-long Ponzi scheme) and money market funds, which can’t possibly cover their costs while paying positive net returns, given a funds rate of 0.25 per cent.

Finish Line movie download

In the leadup to the release of the White Paper, Kevin Rudd said he’d be aiming for balance, and predicted criticism from both sides

We’ll be attacked from the far right and by various business groups I suppose and certainly the Liberal Party for doing anything at all,” he said.

“We will be attacked by extreme green groups for not taking the most radical course of action.”

This kind of reasoning is often specious. For example, we see the Bush Administration being praised for finding a middle course between the extremists one side who want unlimited torture and those on the other side who want torture banned altogether. But let’s grant Rudd his premise this time.

You have to go a long way to the right to find anyone willing to say the government has done too much. As Tim Lambert points out, the Australian Newspaper, long the main outlet for those happy to reject science and trash the environment, is entirely satisfied.

The other side of Rudd’s prediction is satisfied only if you define “extreme green groups” to mean anyone who cares about the environment.

It’s pretty clear that the government has been willing to dump its own supporters in the hope of wedging Turnbull. This kind of thing is characteristic of the cynical centrism implicit in Rudd’s statement.

After a long hiatus, the Risk and Sustainable Management Group blog is working again. Some recent contributions

Links to podcast and presentation on The End of Economic Liberalism? I gave recently

Peggy on perverse incentives for forest depletion in Germany

Alternative views on fluoridation from Sarah and David

This New York Times article on the (apparently widespread) practice of drug companies drafting and ghostwriting scientific articles favorable to their products, and then arranging for academics to publish the articles under their own names, focuses, reasonably enough, on the potential for such practices to mislead doctors and other readers.

As an academic, though, I was particularly struck by the stress that the drug company Wyeth laid on the fact that the nominal authors of these articles were not being paid and endorsed the contents. In reality, having someone write articles for you amounts to not doing the job for which, as an academic, you are paid and, if the articles are sufficiently numerous and well-placed, promoted. It would be far more ethical (or less unethical) to pay academics for product endorsements, published as commercial advertisements.

Of course, in a world where a $50 billion (or maybe $17 billion, who can tell?) fraud barely makes the front page, and a $100 million rip-off is buried somewhere behind the shipping news, it seems a bit precious to worry about allegations of goldbricking academics passing off corporate propaganda as their own work. But at least I can understand how this scam works, as opposed to how a massive Ponzi scheme can be operated for decades under the noses of what are supposed to be the world’s most sophisticated fnancial markets and regulators.

It’s time once again for the Monday Message Board. As usual civilised discussion and no coarse language.

The long-awaited White Paper version of the government’s emissions trading scheme is out. I’ve been too disheartened to read anything more than the summary so far. The target of a 5 per cent reduction on 2000 emissions by 2020 seems designed to secure the support of the Opposition, which will probably not be forthcoming anyway. That’s about the only defence that could be made for it.

The government’s main argument in favour of such a weak target is based on Australia’s relatively high rate of population growth. I have no objection to per capita, rather than national, emissions targets in the context of a contract-and-converge agreement leading ultimately to a uniform global allowance per person. But if you wanted to argue that way, the fact that Australia has one of the highest emission levels per person in the world means that our (interim and final) reduction targets must be more stringent than those of other countries.

At this point, the only real hope is that the Obama Administration will take a strong line on the issue. If it does, then the US-EU combination will dragoon recalcitrants like Australia into a sustainable agreement whatever Rudd and Turnbull might say or do about it.

It’s time once again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.

I was unimpressed by this story on the ABC website, headlined Bill of rights not likely to be supported: Law Society The Adventures of Ichabod and Mr. Toad psp . The story quotes Hugh Macken from the Law Society (I think he is in fact the president) as saying

A bill of rights in terms of constitutional change is probably too far down the track to consider at this stage,” he said.

“It is likely to be quite divisive and as history has shown any divisive referendum which goes up invariably fails, so it tends to be costly failure.”

While literally correct, this remark totally obscures the point that no-one is currently talking about a constitutional change. For some years discussion has focused on the idea of a legislated bill of rights which governments could amend if they chose to wear the consequences of openly acting against human rights. This has already been introduced in Victoria and the ACT, not to mention the UK.

The legislative proposal overcomes the main objectives to a constitutional bill of rights that it would remove parliamentary sovereignty. The objections now coming from, for example, Janet Albrechtsen and other rightwingers have nothing to do, in most cases, with such issues. The problem is rather that they are opposed to the human rights that would inevitably be included in a legislated bill, such as freedom from arbitrary arrest, indefinite detention without trial and torture. We can thank the Bush and Howard Administrations for clarifying these issues.

Among news items of interest:

* The US Treasury briefly paid negative rates of interest on three-month bills (it’s now paying a more sensible zero).
* The outgoing Republican Administration in the US is about to nationalize General Motors perhaps proving the old adage, “what’s good for GM is good for the US”
* The Canadian Parliament has been prorogued until late January, precluding any legislative action against the economic crisis, but giving the Harper minority government another couple of months in office.

Any of these stories would have seemed unbelievable a year ago.

I’ve been meaning for a while to post some links to sites promoting campaigns to protect the rights of workers including the right to organise unions. Here are a few
Justice4Luke a site about the case of a union organiser sacked by the charity for which he worked.
LabourStart, an international site supporting union rights in many countries
Evatt FoundationAn Australian site with lots of useful analysis. One of the early Oz political bloggers, Chris Sheil, writes a fair bit there.

It’s time once again for the Monday Message Board. As usual civilised discussion and no coarse language.

As it has become evident that the financial crisis is comparable, in important ways, to the early stages of the Great Depression, there has been a lot of debate about the lessons to be learned from the responses to the Depression in the US, most notably the various policies that made up the New Deal. There’s a lot to be learned there, but it’s also important to remember that the Depression, in the US and elsewhere, continued throughout the 1930s before being brought to an abrupt end by the outbreak of World War II.[1]

Not only did the slump end when the war began, it did not return when the war ended – a huge difference from previous major wars.[2] Instead the three decades beginning in 1940 were a period of unparalleled prosperity for developed countries, with economic growth higher and unemployment lower than at any time before or since.

What lessons can we learn from this experience?

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My Crooked Timber co-blogger, Michael Bérubé made it to David Horowitz’ list of America’s 100 most dangerous professors. But when the Australian Liberal Students Federation outdid Horowitz by managing a Senate Inquiry into academic bias, I didn’t make the list of 30 or so. Here’s my post at CT – I’ve kept the explanations for non-Oz readers

The great David Horowitz campaign against evul academics has reached Australia, and has even occasioned a Senate inquiry. It was a load of fun. The report is good reading, as is the minority report by the Liberal (= conservative down under) Party Senators who called the inquiry in the first place, but lost control following their election defeat last year. A snippet suggests that those involved knew how to handle Horowitzism

From the committee’s perspective it appeared as
though it was to be called on to play its part in a university revue. The submissions,
the performance and the style – to say nothing of the rhetoric – presented by some
Liberal Students suggested a strong undergraduate tone. The ‘outing’ of Left and
purportedly Left academics and commentators (masquerading as academics as we
were told at one hearing) was in keeping with this tone. None of those outed objected.
Some appeared flattered to be named in the company of others more famous

The list of leftist academics is, I must admit, a sore point. I never located the full list (the links on the inquiry website were skew-whiff) but clearly I wasn’t on it. What does a leftist have to do to get noticed in this country?

It’s time once again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.

Death of a President full movie

Quite a few months ago now I took part in a session on water at the Melbourne Writers Festival, where I got to meet Gwynne Dyer, whose work on international politics I’ve been reading for many decades and also Maude Barlow from Canada and Paul Sinclair of ACF. Peter Mares chaired the session and subsequently broadcast it on The National Interest. You can read the transcript here. There was a lot of agreement but also some fairly sharp disagreement: Maude Barlow took a localist line on food production while I stressed the need for Australia to remain an exporter of food (the audience tended to agree with Maude).

I’ve spent the last couple of days at a workshop sponsored by the Academy of the Social Sciences in Australia on shifting allocations of risk. Most of the papers were well underway when the collapse of global financial markets implied the need for a radical revision of thinking. So a lot of discussion was prefaced with “at least until the onset of the crisis, this trend was ….” Here’s my paper.

Sad news from Calculated Risk. Doris Dungey, who blogged as ‘Tanta’, has died of cancer. She was an insightful commentator on a lot of issues, but particularly those related to the crisis in real estate and mortgage markets.

The National Bureau of Economic Research Business Cycle Dating Committee has just announced its judgement that the current US recession began in December 2007. A year old, and the decline is just beginning to accelerate. As these forecasters quoted in the NY Times say, the recession is virtually certain to be the longest since World War II (in fact, since the 1929-33 slump), and quite possibly the deepest as well.

The only silver lining I can see is that we might not hear any more silliness about the “technical definition” of a recession being two quarters of negative growth.

It’s time once again for the Monday Message Board. As usual civilised discussion and no coarse language.