Sunday, September 30, 2007

Sunday dollars+sense: The dollar cost of having a child

Intending parents everywhere should be grateful to the couple suing a Canberra in vitro fertilisation specialist for the wrongful birth of one of their twins, whatever they might think about the case.

They’ve put a figure on how much it costs to have another child.

They’re claiming $400,000 for the unintended birth of their extra daughter (they got two and say they only asked for one) most of which is the extra cost of feeding, clothing, teaching and the like.

The figure was calculated by Australia’s child-costing guru, Dr Paul Henman from the University of Queensland.

He has prepared expert reports in around 70 cases of wrongful birth, most involving failed sterilisation or contraception. All but three have been settled before going to court...

How does he work out how much it costs to have an extra child?

In just about the most complicated way possible.

The research began more than a decade ago when in order to get a handle on the adequacy of government benefits the Keating Government commissioned the Social Policy Research Centre at the University of NSW to add up the actual cost of each item that we need to live.

The team identified more than 700 such items, and prepared budgets for two standards of living: "modest but adequate", based on the prices of the leading brands sold at Woolworths; and "low cost" based on the prices of home brands.

Then it calculated the extra costs of providing for children. Children need extra toothpaste, extra refrigerator space and many more clothes. A six-year-old girl is assumed to need 49 different items of clothing and footwear, all purchased at Target. Where there are two girls they are assumed to be able to share a room until one turns 12 – after that they’ll need an extra room.

Henman has been updating the prices on the list but not the list itself ever since. That would be too big a project without new funding. It's left the list looking quaint. It allows for no spending on mobile phones. Visits to the doctor are assumed to be bulk-billed.

But it’s the best list we have. And assuming private schools, as he has for this couple, and leading brands rather than no-name products it prices an extra child at something approaching $400,000.

If you think you can‘t afford that without drastically cutting your standard of living you’re probably right. You can thank Dr Henman and the couple taking action in the ACT Supreme Court for letting you know.

Paul Henman's Cost of Kids website, School of Social Work and Apoplied Human Sceinces, University of Queensland.

Peter Martin,
Honey We can't afford the kids Sydney Morning Herald June 22, 2005

Friday, September 28, 2007

Where are there more jobs going than people to fill them? In Canberra, that's where.

The ACT has the tightest employment market in Australia. The latest figures released by the Bureau of Statistics yesterday show that there are now only five people unemployed in the ACT for every six jobs that are vacant.

The ACT was the only state or territory in which the number of vacancies exceeded the number of people unemployed.

The next tightest jobs market in August was Western Australia’s where the number of people unemployed exceeded the number of vacant jobs 35,300 to 29,700.

In Queensland there were roughly twice as many people unemployed as vacant jobs, in NSW and South Australia roughly three times as many, and in Victoria roughly four times as many...

Tasmania had the worst unemployed to job vacancy ratio in the country with 2,800 unemployed people chasing 12,900 jobs.

The Bureau’s measure of job vacancies is more accurate than the measures of job advertisements put out by organisations such as the ANZ Bank because it counts the number of actual vacancies reported in a survey rather than the number advertised.

The ANZ Bank found that 973 ACT jobs were advertised in August, a fraction of the 6,100 that the Bureau found were actually vacant.

3,700 of the vacant jobs were in Canberra’s private sector; 2,400 in the public sector.

Nationwide the number of job vacancies hit a record high in August, and also a record high in relation to the number of people unemployed.

Australia’s unemployment rate was 4.1 per cent in August. The ACT’s was 2.5 per cent.


Thursday, September 27, 2007

Perhaps he's joking

BRISBANE, Sept 27 AAP - Workplace Relations Minister Joe Hockey says young people are perfectly capable of negotiating pay and conditions with their employers.

Unions have argued the federal government's Work Choices laws give the upper hand to employers, particularly when dealing with young, inexperienced workers.

But Mr Hockey said young people were more used to negotiating these days areas.

"The kids are negotiating mobile phone contracts worth literally thousands of dollars a year," Mr Hockey told ABC Radio...

"In some cases, they are borrowing money for cars, they are going and borrowing money for overseas trips - yet they can't negotiate a contract?"

He said that in any case workers under the age of 18 needed parental consent before they could sign an Australian Workplace Agreement (AWA).

Mr Hockey said he would "love to be on AWA".

"But that is for other people," he said.

"I'd love to have a bonus scheme and I'd love to have arrangements that rewarded on the basis of hours of work.

"I'd happily trade off everything."

But he said politicians did not have the opportunity to do so because their pay was set by the independent Remuneration Tribunal.

Wednesday, September 26, 2007

What do we owe? The nation's entire GDP, that's what.

Australian households now owe almost the nation’s entire GDP in debt. The Deputy Governor of the Reserve Bank presented the figure to a banking and finance conference in Melbourne yesterday and said he expected it to climb further.

Ric Battellino told the conference that as recently as the 1970s Australian household debt amounted to only 20 per cent of annual GDP. He said it climbed to 30 per cent by 1990 and is today approaching 100 per cent.

He said he expected it to climb further because to date the rise in debt had “exhausted neither the collateral nor the debt servicing capacity” of the borrowers.

“Average real income is rising, even after interest payments financial net worth has increased noticeably; gearing levels are not out of line with international standards; and the proportion of households experiencing financial difficulties, though higher than a couple of years ago, remains historically very low,” Mr Battellino said.

In a sign that the Reserve Bank believes that expressions of concern over housing stress are overblown the Deputy Governor said that while there were some pockets of stress “the low numbers involved – less than 20,000 of the 5,300,000 housing loans in Australia are 90 days overdue on repayments – mean that this is not a macroeconomic problem"...

Mr Battellino said the build up of household debt was often wrongly portrayed as being driven by young couples trying to buy their first home.

“A more accurate description is that it is mainly being driven by older, higher-income households that are trading up to higher quality or better located houses, buying investment properties and taking out margin loans to buy shares. These are all signs of rising affluence, driven by a very prolonged economic expansion.”

The Deputy Governor said that debt appeared to be “one of the products, like education and health, which has a high income elasticity of demand – meaning that as income rises, demand for it rises more than proportionately. It would be a mistake, therefore, to conclude that a rising ratio of debt to income is necessarily a sign of financial stress”.

While a debt pile of 100 per cent of Australia’s annual $1 trillion GDP sounded big, as a proportion of the assets of households, the proportion was much smaller, around 17 per cent.

Nine out of every ten dollars borrowed by households in the last ten years had been used to buy assets, mainly houses to live in, houses to rent and shares.

It had happened because “democratisation of finance” which probably had not yet run its course.

“Those of us over 50 years of age can remember when, in order to qualify for a housing loan, people had first to establish a long and consistent record of savings with a bank, and even then there was a tight limit on how much the bank would lend. Many borrowers had to resort to ‘cocktail’ loans, at higher cost, to meet their needs.”

Mr Battellino said central banks could stop the rising trend in household debt “by raising interest rates to levels that exhausted households’ debt servicing capacity” but he did not expect them to.

“Central banks around the world have generally concluded that the level of interest rates necessary to do this is higher than that needed to achieve monetary policy objectives in relation to inflation and economic growth,” the Deputy Governor said.


Tuesday, September 25, 2007

Tuesday Column: It's not about economic management

Don’t believe for a moment that the coming election is about who is about who is best to manage the economy.

Decide your vote on the basis of something else - perhaps who will do the most for private schools or trade unions or climate change if that’s what you care about, but don’t for a moment imagine that the name of the election winner will make a jot of difference to the management of the economy.

Smart people already know this...

When US financial markets imploded last month the money market was acutely attentive to the words of the head of the US Fed, the head of Australia’s Reserve Bank and their counterparts worldwide.

They paid next to no attention to what George Bush, John Howard, Peter Costello and their ilk had to say.

The organisation of Australian Business Economists has for decades held a forecasting conference in Sydney. Part of the tradition was annual after dinner speech from the Australian Treasurer. A few years back it stopped inviting him and invited in his place the Governor of the Reserve Bank. Its members were keener to hear from the organ grinder than the monkey.

Think I am being too harsh?

Late last week the Macquarie Bank’s Rory Robertson sent his clients a note asking them, as an exercise, to guess who had made this statement:

“Australia has enjoyed roughly 15 years of sustained economic growth, with low and stable inflation and increasingly healthy public finances. Our unemployment rate is the lowest it has been in about 30 years, and a greater proportion of the population is now working than ever before.”

“For about the past three years, the Australian economy has been operating near, or above, its production potential. Strong economic growth has led to rising incomes across the country. The market for skilled labour is tight throughout Australia, but especially in the western provinces…”

It was a trick. Robertson had substituted the words “Australia” and “Australian” for “Canada” and “Canadian”. It was the head of Canada’s central bank.

Greater trade, enmeshed financial markets and floating currencies have meant that the fortunes of the major industrial economies move together.

It is not just me saying this. Robertson has extracted several quotes in which the former Reserve Bank Governor Ian Macfarlane makes the same point.

Here’s one: “I think it is true to say that if you wished to forecast the path of the Australian economy, and you were able to have foreknowledge of only one economic variable, the one you would choose would be the path of the world economy."

Here’s another: “As a general rule, when the world economy as a whole is in a sustained expansion, there is a good chance that an expansion will also be continuing in an economy such as Australia.”

Can an Australian Treasurer beat the odds by either doing his or her job spectacularly well or spectacularly badly?

Well most of the “levers” that we grew up thinking the Treasurer had to pull are no longer there.

When a younger John Howard was Treasurer in the early 1980s he was able to set the exchange rate, interest rates and lending guidelines for banks.

Robertson points out that these days global markets set the exchange rate, the Reserve Bank sets interest rates and banks do more or less what they want.

“Canberra's macroeconomic management task today is a shadow of its former self. It's not quite on "auto pilot", but institutional changes over recent decades mean the Australian economy runs with less direct input from Canberra than ever before.”

He unkindly observes that the volume of economic commentary emanating from the mouth of the Treasurer about for example the GDP, inflation, interest rates, unemployment, commodity prices and so on dwarfs his ability to do actually do anything about those things.

“The job of any modern Treasurer - Liberal or Labor - is not so much to manage the economy as to pretend to manage the economy. The biggest part of the job is to provide regular and upbeat economic commentary.,” Robertson says.

“On a typical day, the job is to explain that everything is going very well, and that’s all because of us. And, if everything is not going well - it's not our fault.”

That’s not to say that the boffins in the Reserve Bank and the Treasury don’t fret a lot and work hard, but they keep their jobs and do them as best they can whichever Treasurer finds himself “in power”. The Reserve Bank makes its decisions without reference to him.

Robertson says those institutions “don’t skip a beat when one Treasurer leaves and a new one arrives.”

Usually, “new Treasurers are not economists but career politicians. The good news is that Ken Henry at the Treasury and Governor Stevens at the Reserve Bank will be keen to provide excellent economic tuition and advice to any new Treasurer - Liberal or Labor, former lawyer or former union official, whatever. In particular, they will highlight the things to say and do to look smart, or look dumb.”

Treasurers and Prime Ministers do have a lot of say over government spending and tax rates (and that’s why those things are widely and misleadingly reported as if they were important economic levers).

In recent years Mr Howard and Mr Costello have been flooded with tax revenue (for reasons beyond their control - that’s the nature of things). They have used the windfall to cut tax rates and boost government spending.

Would Mr Rudd and Mr Swan have done any different?

I doubt it, after last month sitting through the most excruciating press conference I can remember.

They’d called it to attack “the failure of the government’s economic policy to put maximum downward pressure on interest rates”.

Given that the only levers the government had were tax rates and spending (which together are called fiscal policy) it was natural to ask whether theirs would be any different.

Mr Rudd said four times that his fiscal policy “mirrored” the governments, adding that there was not a “slither of light between us”.

On industrial relations, which could affect the economy if it boosted employment and productivity (in fact both were growing faster before WorkChoices) there’s little more than a slither of light as well.

Don’t take my word for it – consider the actions of the Chamber of Commerce and Industry which has commissioned research and advertising comparing the Coalition’s policy not with Labor’s, but with one that would actually be significantly different.

Please - vote how you like in November, but don’t fall into the trap of thinking that you’re helping decide Australia’s economic future.

Sunday dollars+sense: We are using our cash more slowly.

Last week I marveled at the number of $100 notes in circulation – eight for each man, woman and child in Australia, which is eight more than I ever see.

I suggested that Australians have an extraordinary love affair with cash, which is true. The Japanese and Swiss love it the most, but Australia has about as much cash in relation to GDP as does the United States (which is quite an achievement when you consider how widely US dollars are used) and far more than the UK and New Zealand.

We have the cash - but we appear to be using it less, in the view of Australia’s Payments System Board, which reported this week.

How can we be using our cash less?...

Think about $20 notes. There are only 7 of them per person, but each of us uses those seven notes over and over again. As soon as one leaves my wallet it goes into someone’s cash register and then into an ATM via a bank and back to me to spend again. How fast this happens is an indicator of how much the note is used – what economists call its “velocity of circulation”.

The Board thinks this velocity must be slowing because of the huge takeoff in our use of cashless EFTPOS at supermarkets and the like.

In the past year the value of card-based payments jumped 9.5 per cent, far more than did our total spending. Each of us now gets out a card 240 times a year, up from 130 a decade ago.

But the amount of cash that each of us has lying around hasn’t fallen; in fact it climbed a further 3.9 per cent last year.

Another indication that we are using cash more slowly is that our withdrawals from ATMs - once rocketing ahead - are now growing a good deal more slowly than is our total spending.

But the Board says the truth is it can’t know for certain what we are doing with cash. Unlike cards, cash doesn’t create an automatic record (which is why some people like it).

So in June this year it had Roy Morgan Research ask 1,000 Australians to carry around a pocket-sized diary and note down every single payment they made and how they made it.

670 of them followed through. It’ll examine very carefully the way in which they spent their money.

Saturday, September 22, 2007

Saturday Business: Customers queuing to get their money out of banks... How did it come to this?

In Britain queues formed outside a bank, in Australia there was a share market run on the Bank of Adelaide, and in the US authorities slashed interest rates in order to help keep financial institutions afloat.

We’re forever being told that the worldwide economic conditions are the best they’ve been for a generation.

So what’s going wrong?

It probably began with efforts by the US central bank, the Fed to keep conditions good in the aftermath of the September 11 terrorist attacks six years ago.

The Fed slashed official US interest rates and slashed them again until they reached an extraordinarily low 1 per cent (by contrast ours were above 4 per cent). It kept them at 1 per cent for more than a year.

The man who took that decision, the then Fed Chairman Alan Greenspan has just published an autobiography for which he received a reported $9.8 million in which he handsomely praises the economic management credentials of Australian Prime Ministers Bob Hawke and John Howard.

Greenspan’s concerns weren’t limited to the terrorist attacks... He was also worried about the wave of corporate collapses that had begun the year before in the wake of the high-tech stock collapse. His overwhelming aim was to avoid and then get out of a recession.

But by leaving rates low for longer than now seems wise he created another problem.

An entire industry grew up offering what was by now very cheap money to people who had never previously been able to afford it.

On Four Corners on Monday a California real estate agent Jim Adams explained how easy it became to sell houses to people who never really head a hope of hanging on to them.

“I keep relating it to buying a car. You go into a car lot and the sales people come swarming all around you and it’s the smell of the new car, the sound of that engine, the total excitement of being able to get into something new. It’s the same way with the house. It’s the smell, the looks, the excitement, it’s oh it’s new, we can do this. And then you start looking at the paperwork and they tell you … we’re going to make some money, yeah.”

Adams said the only criteria for getting a loan seemed to be that you were breathing. Credit was directed to “people who have not paid their bills on time, or had little to no credit, no credit history, no credit lines, maybe they’ve had a bankruptcy, a foreclosure or a repossession”.

Some required no documentation and no deposit. Reporter Paul Barry explained that some were called NINJA loans, which meant "No income, no job, no assets”. Others were called Piggy Back loans where two loans sat on top of each other to create 100 per cent finance. Colloquially they were known as LIAR loans because someone wasn’t telling the truth.

The most dangerous of them, and the one that is responsible for at least the timing of the present worldwide crisis was the so-called “2/28” sub-prime loan. It worked a bit like a time bomb.

At first the repayments were very low. But after 2 years they were to be adjusted up for the remaining 28 to a rate even higher than the standard one.

Because the defaults were at first low these loans were given a AAA credit rating and then packaged into bundles and sold around the around the world to unsuspecting organisations as far away as Sydney’s Manly Council.

Manly’s Mayor Peter McDonald says his council had half a million dollars invested in US sub-prime loans through Australia’s Grange Securities.

When it became apparent that in August that many US borrowers couldn’t repay their loans the value of Manly Council’s investment collapsed. It’s now worth only half of what it was.

As a result 45 Australian councils in similar situations and all sorts of other investors world wide suddenly reconsidered the wisdom of investing in mortgage-backed securities.

Britain’s Northern Rock bank sourced three quarters of its loans from such securities.

It asked fror emergency funds from the UK central bank and saw a stampede of customers clear out 5 per cent of its deposits.

In Australia on Tuesday rumors gathered that the Adelaide Bank had also asked for emergency funds, from the Reserve Bank. The rumors were false. But even after the Reserve Bank denied them the Adelaide Bank share price was savaged. The Adelaide Bank (which actually does much of its lending outside of South Australia) sources around half of its loans from mortgage-backed securities.

RAMS which sources all of its loans from mortgage-backed securities has seen its shareprice collapse from $2.50 last month to around 80 cents at the close of trade on Friday.

The Reserve Bank itself says that underlying quality of the assets against which Australian banks lend is sound.

The Governor Glenn Stevens said on Tuesday that loans that could be called ‘sub-prime’ in Australia account for only “about 1 per cent of the stock of total mortgages, compared with around 15 per cent in the US”. The proportion of borrowers behind on their housing loans remained “exceptionally low.”

But the problem was that “at times like this, investors are often unable, or unwilling, to discriminate between different underlying credit risks”.

The Governor said the wholesale mortgage market had “virtually came to a standstill” and that to remain in business some retail lenders would have to charge more.

“Some borrowers are being asked to recognise this higher cost in the rates they pay for their loans, a trend that will continue if the higher funding costs persist,” he said.

The Adelaide Bank has lifted the rate it charges for low-doc loans by 0.25 per cent, on top of the 0.25 per cent increase it passed on from the Reserve Bank in early Mortgage.

RAMS and the low-doc specialist Bluestone also lifted some of their rates by more than the Reserve’s Bank-sanctioned 0.25 per cent.

So far none of the big four banks have passed on higher costs to mortgage borrowers, although the ANZ has passed on higher costs to some non-mortgage borrowers.

It says the higher costs are costing it $20 million per month.

Even Australia’s big banks source 40 – 60 per cent of their loans from the wholesale mortgage market.

Wednesday’s move by the US Fed to slash its official rates for the first time in four years - by an unexpected 0.50 per cent - may not be of much help back here.

It is doubtless needed to attempt to contain some of the damage from the US housing crisis.

One estimate suggests that if all US homes with "For Sale" signs currently out the front were stacked one on top of the other, they would reach half way to the moon.

But by itself it won’t do anything to encourage foreign lenders to once again believe that mortgages are a good bet.

And the size of the 0.05 per cent cut may indicate that the Fed knows something that others only suspect – that the US mortgage is even worse than has so-far been revealed.

In the current environment Australia’s Reserve Bank would like not to have to increase the interest rates over which it has control.

But if Australia’s inflation result due in October is high (and there are signs that it could be) it may feel that it has no choice, given its anti-inflation mandate.

Many Australians would then have suffered two interest rate hikes since the last official one – one decided at the Bank board’s Melbourne Cup day meeting in November, and the other imposed as the whim of those lenders that are the first to crack and start charging more.

It’d make for a painful election campaign.

Thursday, September 20, 2007

Should Australia's banks jack up their mortgage rates?

The Reserve Bank Governor says he would understand.

The Treasurer says

Below the fold are the two stories I wrote.

Personally I would side with the RBA Governor. The banks can do what they like. They get 40 - 60 per cent of their mortgage funds from securitisation, which has become more expensive.

Are any Australian banks or non-bank lenders at risk of going under?

I'm writing a piece about that right now.

Wednesday September 19

The head of the Reserve Bank has warned of even higher interest rates in the months ahead amid rumors that at least one Australian financial institution is under severe stress.

The Adelaide Bank, which is in merger negotiations with the Bendigo Bank yesterday had to deny rumours that it had sought extra funds from the Reserve to bolster its capital.

The Reserve Bank’s deputy governor Ric Battellino also dismissed the speculation.

The rumours knocked 7 per cent of the Adelaide Bank’s share price and 4.5 per cent of the Bendigo Bank’s share price. Shares in RAMS Home Loans lost a further 4.5 per cent to close at 75 cents, just a fraction of the $2.50 price it listed on the exchange at just six weeks ago.

Overnight Monday the Bank of England took the unusual step of guaranteeing deposits in the UK lender Northern Rock after its share price plummeted 35 per cent as customers queued up to withdraw their money.

In Sydney the Reserve Bank’s Governor Glenn Stevens told a business lunch that the “good times” of easy credit had vanished for the time being.

He said the market for the asset-backed commercial paper used by mortgage providers to fund loans had “virtually came to a standstill”.

Financial organisations were “operating on an impossibly short timeframe, out of fear of what tomorrow might bring.”

To remain in business some lenders would have to charge more.

“Some borrowers are being asked to recognise this higher cost in the rates they pay for their loans, a trend that will continue if the higher funding costs persist,” he said.

"It appears, at this stage at least, that we may well observe a further tightening of financial conditions in the Australian economy in the months ahead.”

Last week the Adelaide Bank lifted the rate on its low-doc loans by 0.30 per cent.

The Reserve Bank has lifted its target cash rate nine times since 2002, five of them since the last election.

Mr Stevens said that until the US financial crisis the interbank rates Australian banks charged each other had closely hugged the Reserve Bank’s target rate.
The Reserve was still managing to meet that target, but interbank rates had shot up as much as 0.50 percentage points above it.

In an expression of concern he said while the Reserve did not set interbank rates “we can and do take account of how the margin between these rates and the cash rate alters”.

On Monday the Bank widened the range of assets against which it would lend to banks in order to give the financial system “some additional confidence that quality assets can be turned into cash if needed.”

“From our point of view, this means accepting a little more private credit risk in our operations, but we have been moving in that direction anyway for years,” the Governor said.

Absent from the Mr Stevens remarks was any hint that the Reserve Bank was considering tightening its cash rate in November as had previously been thought likely.

He said while readings of the Australian economy since the Bank last tightened rates in August were “at least as strong as the Board’s assessment at that time, with few signs of that momentum slowing” global growth might now turn out to be weaker than had been thought and that this “would perhaps not be unwelcome”.

“This episode may have some time to run. But the sooner the exposures to problem assets are accounted for and disclosed, the sooner markets can get back to pricing risk prudently and providing credit on sensible commercial terms.”

The Open Market Committee of the US Federal Reserve was due to meet early this morning Australian time to decide whether to cut interest rates in order to shore up US financial institutions.

An Australian banking analyst Brian Johnson of JP Morgan warned yesterday that mortgage stress was climbing dramatically and flowing into middle-class households.
He said around 600,000 Australian households - eight per cent of the home lending market - were suffereing some sort of stress which he defined a change in behaviour as a result of increased repayment obligations.

He said many were borrowing on credit cards to meet mortgage payments.

A University of Western Sydney economist Steve Keen said mortgage obligations were set to reach crisis point in less than two years with Australians becoming addicted to debt and set to face a repayment burden similar to when interest rates stood at 17 per cent in 1990.

The Treasurer Peter Costello warned Australians not to be complacent.

“You are seeing a huge fallout in international financial markets brought on by poor financial regulation in the world's largest economy, the United States,” he said.

"It has affected some of the mortgage originators who have already put up their lending rates."

"It has affected some of the stock market, it has even affected the currency. It is not over yet."

Thursday September 20

The US Federal Reserve yesterday sparked a wave of euphoria on worldwide financial markets, cutting its key federal funds rate by twice as much as had been expected.

The cut, of half of one per cent to 4.75 per cent, was described by the Macquarie Bank’s Richard Gibbs as “the most decisive single event rate cut ever seen”.

It sent the both the US and Australian share markets up 2.5 per cent and saw the Australian dollar climb almost two and a half US cents to 83.04.

But the jubilation was mixed with concern that aggressive move might signal that the Fed believed the US economy was in worse shape than had been thought.

It came just days after the Bank of England guaranteed the deposits of a large private lender Northern Rock, in order to keep it afloat.

The Treasurer Peter Costello said there was risk that the financial turmoil could spread to Australia.

“We will be watching very, very carefully the fallout from this instability. We will be watching very, very carefully as to how this flows in the real economy. And the thing that I would say is we have to be on our guard here in Australia, we are not immune, totally immune from international events.”

Asked about the financial health of the Adelaide Bank, under pressure after rumors, strenuously denied, that it was short of liquidity the Treasurer said that Australia had a strong regulatory system and that Australian banks were very profitable and well capitalised.

He said the turmoil meant that some of Australia’s non-bank lenders would have to increase the rates they charged.

“For some of the mortgage originators it means that they will have more difficulty raising money and they will raise it at higher prices and they will pass on those prices to borrowers,” Mr Costello said.

However he took issue with the Governor of the Reserve Bank Glenn Stevens who in a speech on Tuesday signaled that Australian banks might have to increase their mortgage rates as well.

“There is no reason whatsoever for the major banks to lift rates to housing borrowers,” the Treasurer said.

“The Australian banks are highly profitable and well capitalised. There has been no movement in official interest rates. It is true that for those institutions that borrow a lot of money in the United States the costs have gone up. This applies to mortgage originators and they will be charging some of their customers higher rates. But the Australian banks with strong deposits, strong profitability and strong capital in a very strong economy have no reason whatsoever in the light of this to move housing borrowing costs up.”

The ANZ bank said yesterday that it was more likely to cut its mortgage rats than to lift them, telling analysts that it was aiming to increase its share of the Australian mortgage market at the expense of other providers.

The bank’s head of retail banking Brian Hartzer told an analysts briefing that the global credit crunch was costing it $20 million per month but he said he did not think it would “sustain itself over the long term”.

But the head of low-doc loan specialist Bluestone, which has increased some of its rates by 0.30 per cent, said he expected others to follow suit.

“All lenders, regardless of their funding mix, regardless of whether they're a bank or a non bank, are reviewing exactly this point now,” the chief executive Alistair Jeffery said.

Monday, September 17, 2007

Tuesday Column: The rigged campaign

So Kevin Rudd wants three debates. He probably expects the election be fair. If so, he hasn’t been observing every previous Howard government election campaign.

Campaigning from Opposition against John Howard is a bit like playing poker against an opponent who can see the front of your cards.

Here’s how it will work in this election and how it has worked in every election since the newly installed Howard government introduced the cutely named Charter of Budget Honesty back in 1998.

The Charter encourages each side of politics (there is no provision for minor parties) to get their policies costed.

So far, so good. What could be more honest that costings, especially ones prepared independently by the Secretaries of Finance and Treasury?.

For a start there’s the process of getting the Treasury and Finance to cost the policies.

It can only be done after a writ is issued for the election. This itself can happen up to ten days after the Prime Minister visits the Governor General to request the election. So it is pretty late in the piece...

It has to be done through the Prime Minister. Yes, through the Prime Minister. That doesn’t cause much anguish for the government. It can submit its policies for costing through PM confident they won’t leak.

But the Opposition has to submit them “through” the Prime Minister as well. As the handbook says: “Secretaries are not obliged or authorised to take action in relation to any request unless the Prime Minister has referred the request to them.”

There’s no requirement for the request to be in a sealed envelope. The Prime Minister (John Howard at the moment) gets to read everything that the Opposition sends for costing, even though during the so-called caretaker period he is not able to direct Treasury and Finance in how to do the costings.

You think that’s more or less fair? Here’s the next step.

Five or so days later Finance and Treasury give the PM and the Opposition Leader eight hours notice that they are about to release their costing, but no notice of what it will be.

One hour before the public release the costing gets hand delivered to the offices of both the PM and the Opposition Leader.

Then it goes up on a joint Finance-Treasury website, and that’s it – game over. No further correspondence need be entered into.

For the Opposition it is a high-risk one-shot game over which it has no control.

If the policy it wants costed is complex (almost all of them are) Treasury and Finance are exceedingly likely to come up with a different costing to its own. Economists and accountants love disagreeing about assumptions.

The Opposition will have already announced its policy and its estimate of the cost (because to do otherwise would be to give the PM inside information) and so will be made to look stupid or worse when Treasury and Finance “correct” its “mistakes”.

But that’s not how things work for the Government. It has access to Treasury and Finance all through the year, right up until the time the writs are issued. In fact it has access to those officials right now, the same ones who will later be doing the independent costings.

It can submit its draft policies to these officials for “advice”, “consultation”. If the officials come up with a high cost, the government can alter the draft policy, then resubmit it - over and over again. By the time the PM formally asks for a costing during the campaign he knows he won’t be embarrassed, because he knows what the costing will say.

What did I say about “playing poker against an opponent who can see your cards”?

In previous years Labor has attempted to get out of the trap by submitting its policies for costing late.

It was a flawed approach because it gave legitimacy to a rigged contest. In allowed the Prime Minister to claim that by submitting its costings late Labor has treated the Australian public with “disdain and contempt".

A bolder, more honest and more effective approach would be to declare that the process has no legitimacy and to submit nothing. Labor hasn’t yet announced what approach it will take - it might yet take the bold and honest option.

Two years ago the Opposition’s Finance spokesman Lindsay Tanner introduced a modest Charter of Budget Amendment Bill designed to improve things. It would have given the Opposition 12 months ahead of the election in which to consult with Finance and Treasury about costings, and removed the requirement to use the Prime Minister as a sort of all-seeing post box.

The approach would have improved the quality of the polices put up during election campaigns (at the expense of extending the influence of Finance and Treasury) but it would have required a good deal of trust on behalf of the Opposition – trust it apparently had.

Tanner even wrote to his opposite number Nick Minchin saying he would be prepared to deal openly with Treasury and Finance on the basis that they would not leak what they knew to their political masters.

Minchin dismissed the offer replying that Labor appeared “to seek an arrangement whereby departmental resources are made available to provide confidential and ongoing costing advice on iterations of proposed Labor policies so that they can be refined and prepared for public release. I do not believe that such an approach is feasible or desirable in a Western democracy.”

Actually, other democracies go further. In the United States policies are costed by the independent publicly-funded Congressional Budget Office. In the UK they are costed by the Institute of Fiscal Studies.

Here, the decks are loaded against the Opposition in another way as well. The so-called Charter of Budget Honesty requires Finance and Treasury to release a “Pre-election Economic and Fiscal Outlook” within 10 days of the start of the campaign. It lets the parties know how much money they have to play with if they want to maintain a budget surplus.

What’s wrong with that? The Treasury’s thoughts aren’t released to the Opposition until beyond the last minute. As a result it can’t release its policies until beyond the last minute. It won’t know until ten days into the campaign how much it can afford.

Until now Labor has said it wants to make the game fairer. The Coalition had better hope that it means it. Should it lose office and be attempting to campaign from opposition for a decade it’ll need it.


Sunday dollars+sense: Where the hell are our $100 notes?

Where the hell are our $100 notes? After I wrote about them in the Canberra Times this week I did a radio interview in which I was embarrassed to say that I wasn’t sure what colour they are. I thought they were grey. In fact, $100 notes are green. That’s an indication of how often I see one.

Yet this week’s figures from the Reserve Bank show that there are an extraordinary 167 million $100 notes out there in circulation – eight for each Australian citizen.

Importantly, and unbelievably, there are more of them than there are $20 notes.

Yet there’s not an adult in the country that doesn’t know what colour a $20 note is.

We know where the $100 notes aren’t...A random survey in the US some time back found not a single shopper carrying a $100 note. We know that they are not widely used in automatic teller machines.

We know that shops and taxi drivers often carry them. Try asking for one.

And we know that only a proportion are stored in bank vaults. The old image of banks as storehouses for bundles of cash is outdated. Like all businesses, banks keep their cash balances to a minimum.

And yet, incredibly, $100 notes account for more than one third of the value of the $40 billion worth of notes out there somewhere.

Maybe there are lots of Kerry Packers. He once explained his decision to carry around $225,000 in cash by saying “I like cash. I have a squirrel-like mentality."

But in the year after Packer died the number of $100 notes in circulation actually jumped (by a further eight million). So it can’t have been just him.

Internet banking, eftpos and the GST were all going to dissuade us from using cash. In fact the number of $100 notes in circulation has climbed 50 per cent since the GST came in.

Perhaps its poker. One poker player told me during the week to say he had four in his wallet. Not long before, he had 40 in a bankroll. They are used at casinos and racecourses as well.

And to cover the tracks of a surprisingly large number of Australians who want to avoid the attention of the police or the Tax Office.

They are quiet about it. Which is why many of the rest of us don’t know who they are and don’t know the notes are green.

Thursday, September 13, 2007

More $100 notes than $20 notes?

Tell me this isn't true:

Take look inside your wallet or purse.

How many $20 notes, how many $50 notes and how many $100 notes do you see?

If you see mainly $20s, a few fives and tens and perhaps one $50 note I suspect you are like most people.
But not according to the Reserve Bank. Each year it tots up the total number of notes in circulation for its annual report.

The latest released yesterday shows that we hold three times as many $50 notes as we do $20 notes. Per person we hold five $5 notes, four $10 notes, seven $20 notes and an astounding eighteen $50 notes.

Of course many of these notes are not held by people but in cash registers and ATMs – which help explain the large number of $50 notes. Most ATMs are configured for $20 and $50 notes.

What’s more surprising is the very large number of $100 notes, a denomination not widely used ATMs...

The Bank’s figures show that there are now more $100 notes in circulation than $20 notes - a surprising result given the contents of most of our wallets: eight per person as opposed to seven.

Part of the explanation may involve the Y2K scare in the lead-up to the year 2000. The Bank says it printed and distributed a large number of $100 notes in the lead up to Y2K to help people and businesses prepare for the eventuality that they might have to use cash rather than computers.

But the figures in its report show that these $100 notes were not returned. In fact there are many more $100 notes in circulation now than there were back then.

There is evidence that many of them do not change hands. The Bank reported in 2001 that so few soiled $100 notes were returned for replacement that on average each would last 70 years. By contrast each $50 note would last only 25 years.

One likely explanation for the preponderance of unseen, unsoiled and apparently untraded $100 notes is that most remain wrapped up in bundles in briefcases, traded only in bulk and nefariously. When not traded they are hidden under floorboards and in roof cavities away from the eyes of the authorities.

The Good and Services Tax, introduced seven years ago, was intended to kill the black economy. The latest Reserve Bank figures suggest that it remains alive, if well hidden.

What reserves? They're shrinking, but the Bank will pay its masters a billion anyway.

The government has just had another $1 billion added to its election war chest, courtesy of a less-than-cashed-up Reserve Bank. The Reserve Bank lost $1.393 billion in last financial year just ended, its first loss in more than a decade.

But because of the provisions of its Act it has been required to pay the Commonwealth a dividend of $1.085 billion.

The Act requires it to pay a dividend broadly in line with its net interest earnings, which did well in the last financial year because of the increasing volume of funds given to it to invest and because of higher global interest rates.

But those gains were more than outweighed by a collapse in the Australian dollar value of its investments as the Aussie dollar climbed.

“The exchange rate appreciated by 12 per cent in weighted-average terms against the currencies in which Australia's international reserves are invested,” the Bank said yesterday in its annual report...

While higher dollar meant that Australian dollars could buy more overseas, it also meant that Australian money already invested overseas would be worth less in Australian dollars when it was bought back.

The Bank’s “net unrealised valuation loss” over the year amounted to $2.475 billion.

Most of the loss would not be reflected in a lower dividend payment because it was “unrealised”. It wouldn’t actually take place until the Bank brought some of the money it had invested overseas back onshore, by which time the Aussie dollar might have changed in value again.

The Bank could only deduct “realised” losses from the dividend payment it made to the government.

The Governor Glenn Stevens defended the rules saying they had “proven over the years to be a very sound basis” for determining dividends.

He said foreign exchange losses were inevitable whenever the dollar rose.

“This is not the first such loss - the Reserve Bank last experienced one in 1993/94 - and it is unlikely to be the last," he said.

“The reason is that there is very little scope for a central bank to manage foreign currency risk without compromising its policy obligations.”

“Foreign assets cannot be hedged back to Australian dollars because that would defeat the purpose of holding them. This risk has to be accepted as part and parcel of being a central bank.”

The Bank also revealed that it had taken no action to slow the dollar’s rise. During 2006/07 the Aussie climbed to an 18-year high against the US dollar and a 22-year high against the trade weighted average of currencies.

Governor Stevens said he viewed the rise as “broadly consistent with developments in the Australian economy, particularly the continued increase in Australia’s terms of trade to its highest level in over five decades”.

The Bank had not intervened in the currency market since 2001.

The Bank’s assets under management soared 25 per cent in
2006/07, largely as a result of continuing Commonwealth budget surpluses.

The governor said that when the Future Fund became fully operational in the next year or so he expected the Bank’s assets under management to shrink.

Monday, September 10, 2007

Tuesday column: The RBA loses control

The Reserve Bank has lost control of interest rates. As a result everything you’ve ever heard about the Bank “setting”, “tightening” or “adjusting” rates no longer applies. For the moment, it can’t do any of those things.

They idea that it could was always a fiction, perpetuated knowingly by the likes of myself and other financial journalists because it would usually be close to the truth and because the more we said it, the closer it became to the truth.

The Reserve Bank can’t set interest rates any more than a punter on a horse (or an election date) can set odds.

The Bank can influence rates because it is big and not easily trifled with, but it can no more guarantee a rate than can any big borrower or lender...

Some years ago the Bank of England declared that it could set the British exchange rate. It announced a rate of 2.95 Deutsche Marks to the pound and kept buying pounds in an attempt to keep it there.

The billionaire speculator George Soros didn’t agree that that should be the rate and relentlessly sold pounds and borrowed pounds in order to sell them until, ten billion pounds later, the Bank of England gave up and let the exchange rate plummet. Soros made a one billion pound profit.

Australia’s Reserve Bank has no more say over the price of money - the interest rate - than a big buyer or seller does over the price of apples at the fruit market.

It can try, and assert that it is in control (as I and others have assisted it to do for years) but it can’t issue a decree. Interest rates are prices. Australia lacks price controls.

When the Bank began announcing its efforts to adjust rates early in 1990 it spoke modestly about attempting to achieve a target. It now speaks more grandly about “decisions”.

Its latest announcement on August 8 said that it had “decided to increase the cash rate to 6.5 per cent”.

Two days later international financial markets went into free-fall and it lost control. Money market interest rates haven’t been near 6.5 per cent since.

When lenders worldwide discovered that the many of the US mortgage financiers through which they had lent money misled them about whether it could be paid back, many stopped lending – to anyone.

With money in much shorter supply, just as with apples in shorter supply in the fruit market – the price went up. In Australia the 90-day bank bill rate, which normally hugs the Reserve Bank’s target rate and is used to price other rates, climbed above 7.0 per cent – two entire rate hikes above than the Bank’s target.
Late yesterday the bill rate hit 7.07 per cent – entirely new territory for a cash rate target that’s supposed to be 6.5 per cent.

The usual way for the Bank to get the bill rate back down is to advance financial institutions money in return for collateral – a bit like unloading several more trailer-loads of apples at the fruit market. The Bank’s been unloading and furiously. Last week it announced that it would broaden the range of securities it would accept as collateral.

But as fast as it has pumped truck-loads of cash into the hands of Australia’s financial institutions they have sat on it. They’ve kept it away from the market, preventing the price (the interest rate) from falling.

Why are our financial intuitions and others all around the world sitting on money rather than on-lending it for profit?

Because they know they are about to need it themselves, big time.

All of our lenders on-sell some of their loans overseas. They bundle up at least some of their mortgages and sell the right to repayments to foreigners.

Non-bank lenders such as Rams, Wizard, Resi and the like do little else. Even the big banks bundle up a fair proportion of their loans to on-sell because they no longer have enough money on deposit to fund all of their loans. We’ve lost interest in parking our savings in low-interest savings accounts.

With lenders overseas suddenly (and hopefully temporarily) reluctant to part with their money Australia’s big banks have to lend out their own funds instead. In financial language they are eating into their capital. It is making their loans more expensive.

For non-bank lenders things are far worse. They don’t have deposits to fall back on. It is entirely possible that one or more of them will fall over.

The Rams share price has fallen 60 per cent in the last month.

When non-bank lenders do disappear, or when they are forced to charge prices so severe they are no longer competitive, Australia’s big banks will push up their rates too, regardless of what the Reserve Bank does.

For two reasons. One is that, to varying degrees, they too will be paying more for the money they lend. The other is - because they can.

When Rams, Aussie and the like began stealing business from the big banks in the mid-1990’s first the Commonwealth Bank, then the ANZ Bank, then all of the big banks sliced their margins and cut their rates to meet the competition without waiting for a move by the Reserve.

At the time the Treasurer Peter Costello hailed the working of the market declaring that competition was the best interest-rates policeman.

When that competition vanishes the banks will push their margins back out to about where they were before. That’s also the working of the market.

The market has taken over from the Reserve in setting interest rates. The Bank appears unable to get that control back without cutting – yes, cutting – its official cash rate target in the months ahead.

As recently as one month ago - before everything changed - no-one would have thought it possible.

Peter Beattie to resign.

Announcing it now...

His final words: "Okay, we all done?"

Sunday dollars+sense: Elton needs the money

APEC was the biggest show to hit Sydney this year. Elton John will be the biggest show to hit Canberra.

Sir Elton will perform all of his hits under the stars at Stage 88, Commonwealth Park at the end of November in what the National Capital Authority assures us will be “an entertainment coup for Canberra”.

They needn’t feel so proud.

An examination of Elton John’s finances, along with those of the world’s other top 35 musical superstars shows that they are virtually compelled to tour. Economically, they are prisoners of the road.

Most of us probably imagine that artists such as Sir Elton, Sir Paul McCartney and the rest make their money selling CDs...

That’s certainly how we spend our money. In 2003 US citizens spent $15 billion on CD’s, but only $2.5 billion buying concert tickets.

But according to Princeton University economists Marie Connolly and Alan Krueger in a paper entitled Rockonomics, for the artists the rewards are reversed.

Sir Elton made $25 million from live concerts in 2002, but only $1 million from selling CDs plus another $1.6 million from publishing.

The proportions were much the same for Sir Paul, the biggest earner, who made $74 million from concerts but only $2.7 million each from selling CDs and publishing music.

Billy Joel appears to have made nothing at all from selling CDs after rounding, but $20 million from touring.

And things are even worse at the bottom of the heap.

Connolly and Krueger say most recording artists never see a royalty cheque. They get an ‘advance’ to cover the cost of recording and making the promotional video which their royalty payments are meant to pay back.

But the royalty payments are tiny - a few cents per CD - and for all but the biggest selling CDs never come close to repaying the advance. The artists are continually “in debt” to their recording companies.

From an economic point of view CD sales are an incredibly inefficient means of rewarding the artists who create them. Each CD costs less than a dollar to manufacture, the artists get a few cents and the rest of the $30 price tag goes heaven-knows-where.

Only on the road can performers such as Sir Elton get what they deserve.

That’s why the sexagenarian will be back behind the piano on Stage 88 in November, even though he would probably prefer to be tucked up in bed being properly paid for the work he has already done.

Alan B. Krueger and Marie Connolly, Rockonomics: The Economics Of Popular Music, NBER Working Paper, No. 11282 April 2005

Sherwin Rosen,
The Economics of Superstars, The American Economic Review, Vol. 71, No. 5. (Dec., 1981), pp. 845-858.

APEC, as really seen by the media


"And the nominees for best actor..." How others see the Sydney Declaration

Shane Wright in The West Australian:

If you believe John Howard or Alexander Downer, the Sydney declaration is up there with some of the world’s greatest pieces of policy and statesmanship.

Moses received wisdom on two tablets, Newton discovered gravity under an apple tree and the Federal Government reckons the answer to climate change was found in the bowels of the Sydney Opera House.

Unfortunately, the six-page declaration signed by APEC members is part diplomacy and part political cover for one of Mr Howard’s most obvious policy shortcomings.

Let’s remember a few key points about APEC first...

One: It takes in only 21 economies, so about 15 per cent of the world’s governments.

Two: Nothing agreed to at APEC is legally binding.

Three: Members of APEC can ignore anything agreed to by its leaders.

In other words, any commitments made by the various members are not worth anything more than a non-core promise by a candidate in a Federal election campaign.

Australian officials were keen to talk up what they have achieved.

Correctly, they argue that at least China and the US have agreed to the same sort of general principles, in a public manner.

Judging by the length of time it took China to come on board, signing up only on Friday evening, that in itself is a major achievement.

However, putting (carbon dioxidefree) rubber to the road is another thing altogether.

While there’s no agreement on a binding commitment to cut greenhouse gases, there is an aspirational deal to increase forest cover across the Asia-Pacific region by 20 million hectares and to reduce energy intensity by 25 per cent.

This at least signals to other nations, developing and those outside APEC, what is going to be necessary to tackle climate change.

So for the Federal Government (and the other APEC members), goals on trees and energy intensity are good but they won’t have a bar of a 60 per cent cut in emissions, which is what the world’s scientists are arguing is necessary to prevent Gosnells becoming a beachfront suburb.

And there is still the problem posed by other APEC members that are fighting between lifting their people out of poverty while at the same time protecting the planet.

Thirteen years ago, APEC leaders agreed to the Bogor goals. It was a commitment by APEC nations for free trade between developed member nations by 2010, and developing nations by 2020.

It is a clearly articulated goal, with a timeline, while the benefits of the policy objective of free trade is clear to all.

But when it comes to climate change, which many would argue is of more economic import than free trade, punches have been pulled, countries have gone out of their way to protect narrow interests while the host of the show kept the ambition so low that he could claim an outcome no matter what.

It’s not just Mr Howard’s fault, but a collective blame for most of the region.
The people of the Asia-Pacific deserve much, much better.

Editorial in the LA Times

Posturing on climate

And the nominees for best actor at an international summit are... President George W. Bush, Chinese President Hu Jintao and Australian Prime Minister John Howard. All are giving compelling performances in Sydney this week in the against-type role of leaders who give a fig about global warming.

Climate change tops the agenda at the Asia-Pacific Economic Cooperation forum, which wraps up Sunday. It's an unusual topic for a 21-nation club formed mostly to negotiate trade agreements -- amid all the talk about global warming, Malaysian International Trade Minister Rafidah Aziz noted archly that the "E" in APEC stood for Economic, not Environmental -- but many of the leaders present have political reasons for at least pretending to care about the issue.

Howard, who is fighting for his political life against a much greener opposition party leader, has the most at stake. Australia is suffering severe droughts and wildfires, and polls show that the environment is among Australians' top concerns. His goal is to persuade the U.S., China and Russia -- the world's three biggest polluters -- to sign an "aspirational" agreement for reducing greenhouse gases. For aspirational, read: voluntary, vague and useless for anything but padding a fading prime minister's environmental resume. The heads of state are expected to sign the agreement today.

Even before most of the world leaders arrived, Howard and Bush had signed their own joint statement on climate change, a 16-point plan in which the two countries announced their commitment to practical action without actually proposing any. Bush threw out a few platitudes about global warming during his speech Friday before quickly moving on to a subject with which he's more comfortable: fighting terrorists.

Hu, meanwhile, in the diplomatic tradition of Chinese leaders, politely told Howard to drop dead. He emphasized that the United Nations, not APEC, was the appropriate forum for negotiating climate deals, and that although he welcomed the discussion in Sydney, any agreement at this week's summit must acknowledge that different countries have "differentiated responsibilities." Translation: Don't expect much from China.

Unfortunately, the festival of fakery won't end Sunday. Bush is convening his own international meeting on climate change this month in Washington, and given his focus on voluntary measures and nonexistent technology to solve the problem, there's no reason to expect anything meaningful to come of it. The only hope of progress this year comes from Congress, which is debating energy bills that would crack down on automotive fuel efficiency and require that the nation get more of its power from renewable sources. That won't slow emissions in China, and it's nowhere near enough to halt climate change, but it's a start.

The Sydney Declaration that nearly wasn't

The historic Sydney Declaration on climate change adopted by APEC over the weekend nearly didn’t get over the line.

The Canberra Times understands that just hours before the declaration was unveiled by the Prime Minister on the shores of Sydney Harbour China’s President Hu Jintao was uncertain about whether to commit to it.

It took the leaders meeting itself to get the President to agree to the statement that his officials had helped draft.

The content of the draft was only agreed between officials at 6.00pm the night before with the final wording decided at 11.30pm.

Officials involved in the drafting were relieved and pleasantly surprised when the leaders meeting adopted the draft unaltered...

Malaysia and the Philippines also objected to the draft, in particular to the idea of an aspirational target for cutting greenhouse gas emissions that to which both developing and developed countries would be committed.

Under the Kyoto Protocol, ratified by developing countries and by developed countries other than Australia and the United States, only developed nations face emissions targets.

The Sydney Declaration opens the door for targets to be applied to developing nations including China and India for the first time.

The Prime Minister expressed irritation at yesterday’s post-APEC press conference when asked by a Japan’s Fuji TV whether there had been any point in agreeing to an “aspirational goal” that was neither enforceable nor applicable to specific countries.

Mr Howard said he and Australia’s negotiators had achieved the maximum that anyone could.

“What one has to do is find the maximum that individual countries can agree to at the present time, take that, bank it and then move on to something further in the future,” he said.

Anyone who higher goals was “either ignorant of what was achievable. or setting those goals for purely political reasons without any regard to the merits of what is involved”.

He said that just months before the meeting he was doubtful that he could achieve an agreement. “But we did. I don’t want to overstate it, but it is a step forward. To get China, Russia, the United States - the major polluters - agreeing on the need for an aspirational gaol is a big step forward”.

The US was reluctant until two months ago. As recently as one year ago it had argued publicly that the UN had no role in climate change negotiations and that there was no need for an international agreement to succeed Kyoto.

Like China, the US was concerned that a worldwide “aspirational target” would inevitably lead to specific country-by-country targets.

Officials taking part in the negotiations agree, saying that if the post Kyoto agreement is to embody a global aspirational goal, as the 21 APEC leaders now say it should, the next question will be what that goal will be. The question will be decided on the science, with the likely target being a cut in global greenhouse gas emissions of at least 50 per cent by 2050, perhaps as much as 80 per cent.

An aspirational cut that big will necessarily require nations such as the US and China to volunteer specific binding targets.

The Prime Minister yesterday indicated that that was his thinking saying that he saw the process as a series of steps.

“At each of these meetings you should try and take the process a step forward. You should try and get as much as you can realistically hope to get given the nature of the meeting and the circumstances of the time. If we keep building on the previous agreements and we keep moving forward, we’re going to achieve something”.

Indonesia is understood to overcome its previous oppositional to the concept of an aspirational target because it wanted an agreement in Sydney that would give it something to build on when it hosted a UN meeting on climate change in Bali later this year.

China is thought to have agreed in order to achieve consensus at APEC and because of the emphasis in the declaration on technology as a means of cutting greenhouse gas emissions. If China was able to replace much of its energy generation equipment with Japan’s technology it could cut its greenhouse gas emissions dramatically without scaling back its economic growth.

Sunday, September 09, 2007

APEC Newsflash: How they do it in Russia.

Our hosts at the APEC media centre have just made an announcement via the public address system regarding the Prime Minister's post-APEC press conference here this afternoon.

"All questions must be submitted in writing by 3.30pm to the Media Liason Desk in Hall 5. The question and the name of the questioner must also be listed.

Copies of the final declaration delivered by the Prime Minister at Government House in Sydney will be made available as the media enter the final press conference."

These are strange rules.

They are not the "full scale press conference at the conclusion of the APEC Meeting" the PM promised yesterday.

They would require journalists to frame their questions about the declaration before they had read it.

UPDATE: I have just heard, although it hasn't been announced, that he has backed down.

Perhaps the Russian way of doing things hasn't completely rubbed off on him. The press conference is about to start.

Saturday, September 08, 2007

Australia's true colours

My deepest concern is that the Driza-Bones handed out to the visiting APEC leaders on Saturday might actually represent the spirit of Australia.

Back more than 40 or more years ago Australia had an important design decision to make.

We had to create a new currency - $1, $2, $5, $10 and $20 paper notes that would say something about what Australia in the 1960’s was and what we hoped it would be.

The notes were bold, garish, incredibly bright and unlike those of virtually any other nation...

They said that we were positive, straightforward, with faith in the bounty of the future.

A few decades on in the early 90s the designs had to be replaced by ones suited to new plastic notes.

The replacements chosen said we were pastel people – muted, trying not to offend. We don’t feel proud to carry them in our pockets.

The Driza-Bones given to George Bush et al yesterday are like that as well. They are certainly not offensive. They are muted; with only apologetic slabs of colour.

My fear is that by saying nothing much, the costumes in fact say a lot about us and about how we now see our place in the world.

At last, action on climate change (against ourselves)

crowing about the new international consensus he had achieved on climate change today the Prime Minister mentioned the words “United Nations” not once.

But in the six-page agreement itself they are mentioned 10 times.

The United Nations Framework Convention on Climate Change – the one that gave us the Kyoto Protocol that John Howard refuses to ratify – is the forum through which APEC members have pledged to work.

John Howard said the APEC leaders had “moved substantially” to forge the consensus. He is right. The two biggest recalcitrants have been the United States and Australia...

Each treated the United Nations Framework Convention with contempt: taking part in its negotiations, but refusing to ratify the protocol that resulted.

Much of what John Howard achieved yesterday was an “own goal”. He locked himself (and also the United States) into playing by the international rules.

He doesn’t see it that way. He sees it as getting countries such as China in the tent.

But China and India have always taken part in the UN climate change process. They even signed the Kyoto Protocol. It is true that the protocol didn’t require them to meet emission targets, but yesterday’s Sydney Declaration cuts them slack as well.

It says there should be respect for different economic circumstances and capacities. While each country will be expected to make a “contribution” to fighting climate change each country won’t be required to make the same contribution.

John Howard has helped put the UN climate change process back on track (after helping derail it).

The Sydney Declaration will create a lasting legacy in the form of co-ordinated serious action on climate change that’s likely to achieve something after a largely wasted decade.

Arriving at APEC, dreaming of Darwin

I’ve spent the last week in Darwin – 33 degrees in the day, 18 at night.

And really sunny. It felt great to expose the back of my neck.

And the sunset over Mindil beach was to die for.

But it is no longer the place I knew.

I discovered Darwin 30 years ago in 1977. The houses were on stilts (or blown off stilts by the 1974 cyclone). Pawpaw trees were everywhere dropping tropical fruit on to the ground. The city was small and sun drenched; the houses and beach - summery and relaxed. On the beach, blackfellas slept under trees. Refugee boats were parked offshore.

I came back for my second visit in 1990. I stayed at the new Darwin Hospital in the north-Darwin centre of Casuarina. I went back to the places that I knew from before but they had either been demolished or left to disintegrate. The city’s focus had moved inland, away the beach. Most of the houses on stilts were gone

Last week was my third visit. Nearly all of the houses on stilts have gone. I couldn’t find a pawpaw, let alone a pawpaw tree. There was scarcely an aboriginal face around. The people seem to live in opposition to Darwin rather than letting it embrace them. Super-expensive McMansions abound, built for air-conditioning – for keeping Darwin out.

But we had a great time. And the overnight flight to Sydney’s APEC Media Centre was a surreal way to get back to work.