Monday, June 29, 2009

Somewhere in England Thomas Thwaites is attempting to build a toaster

..from scratch

Beginning by mining and smelting the raw materials.

Can he do it? And how much more than £3.99 will it cost him?

It'll be a lesson in the value of the riches that trade and specialisation bestowed on us through the industrial revolution.

And it'll understate those wonders. He's using one of the products of the revolution - a microwave oven - to do the smelting.

Betraying the planet - Krugman

"Is it fair to call climate denial a form of treason? Isn’t it politics as usual?  Yes, it is — and that’s why it’s unforgivable."

Today's NYT:

"So the House passed the Waxman-Markey climate-change bill. In political terms, it was a remarkable achievement.

But 212 representatives voted no. A handful of these no votes came from representatives who considered the bill too weak, but most rejected the bill because they rejected the whole notion that we have to do something about greenhouse gases.

And as I watched the deniers make their arguments, I couldn’t help thinking that I was watching a form of treason — treason against the planet.

To fully appreciate the irresponsibility and immorality of climate-change denial, you need to know about the grim turn taken by the latest climate research...

The fact is that the planet is changing faster than even pessimists expected: ice caps are shrinking, arid zones spreading, at a terrifying rate. And according to a number of recent studies, catastrophe — a rise in temperature so large as to be almost unthinkable — can no longer be considered a mere possibility. It is, instead, the most likely outcome if we continue along our present course.

Thus researchers at M.I.T., who were previously predicting a temperature rise of a little more than 4 degrees by the end of this century, are now predicting a rise of more than 9 degrees. Why? Global greenhouse gas emissions are rising faster than expected; some mitigating factors, like absorption of carbon dioxide by the oceans, are turning out to be weaker than hoped; and there’s growing evidence that climate change is self-reinforcing — that, for example, rising temperatures will cause some arctic tundra to defrost, releasing even more carbon dioxide into the atmosphere.

Temperature increases on the scale predicted by the M.I.T. researchers and others would create huge disruptions in our lives and our economy. As a recent authoritative U.S. government report points out, by the end of this century New Hampshire may well have the climate of North Carolina today, Illinois may have the climate of East Texas, and across the country extreme, deadly heat waves — the kind that traditionally occur only once in a generation — may become annual or biannual events.

In other words, we’re facing a clear and present danger to our way of life, perhaps even to civilization itself. How can anyone justify failing to act?

Well, sometimes even the most authoritative analyses get things wrong. And if dissenting opinion-makers and politicians based their dissent on hard work and hard thinking — if they had carefully studied the issue, consulted with experts and concluded that the overwhelming scientific consensus was misguided — they could at least claim to be acting responsibly.

But if you watched the debate on Friday, you didn’t see people who’ve thought hard about a crucial issue, and are trying to do the right thing. What you saw, instead, were people who show no sign of being interested in the truth. They don’t like the political and policy implications of climate change, so they’ve decided not to believe in it — and they’ll grab any argument, no matter how disreputable, that feeds their denial.

Indeed, if there was a defining moment in Friday’s debate, it was the declaration by Representative Paul Broun of Georgia that climate change is nothing but a “hoax” that has been “perpetrated out of the scientific community.” I’d call this a crazy conspiracy theory, but doing so would actually be unfair to crazy conspiracy theorists. After all, to believe that global warming is a hoax you have to believe in a vast cabal consisting of thousands of scientists — a cabal so powerful that it has managed to create false records on everything from global temperatures to Arctic sea ice.

Yet Mr. Broun’s declaration was met with applause.

Given this contempt for hard science, I’m almost reluctant to mention the deniers’ dishonesty on matters economic. But in addition to rejecting climate science, the opponents of the climate bill made a point of misrepresenting the results of studies of the bill’s economic impact, which all suggest that the cost will be relatively low.

Still, is it fair to call climate denial a form of treason? Isn’t it politics as usual?

Yes, it is — and that’s why it’s unforgivable.

Do you remember the days when Bush administration officials claimed that terrorism posed an “existential threat” to America, a threat in whose face normal rules no longer applied? That was hyperbole — but the existential threat from climate change is all too real.

Yet the deniers are choosing, willfully, to ignore that threat, placing future generations of Americans in grave danger, simply because it’s in their political interest to pretend that there’s nothing to worry about. If that’s not betrayal, I don’t know what is."

Read a new Krugman every few days on my blogroll -->

This is the website the government doesn't want you to use

Entitled "choicegrocery" and up until Friday due to go live Wednesday it held out the promise of allowing shoppers to compare supermarket prices before they left their homes.

The procedure shown on these screenshots is straightforward. First a costumer enters a postcode, then selects the most convenient nearby shops and then enters the quantities, weights and brands of the products they want.

The total prices displayed on the screen are meant to give each shopper a good idea of which supermarket are likely to be the cheapest for the exact basket of goods they wanted to buy...

...a big advance on the previous government-run Grocery Choice website that made comparisons on the basis of fixed baskets of goods, the contents of which were undisclosed.

The non-profit group Choice had more than 25 information technology staff working almost around the clock at its Marrickville headquarters in order to get the site ready by Wednesday until the government pulled the pin on its $13 million contract with Choice Friday.

Unable to get data directly from retailers other than Aldi and Foodworks, Choice had contracted a private research firm to get it price lists for Woolworths, Coles and IGA.

Some of the information was to have been sourced from specials advertised in Coles and Woolworths brochures.

The Herald understands that it was concern about the accuracy of the information and the political damage it could suffer if it was wrong that made it abandon the project.

"It would have been perfectly understandable if a very large number of consumers had complained that they clicked on a basket they thought would cost them 65 bucks and it ended up costing 74," said one source.

"They would have said, you the government are supporting this website, and it gave us wrong information."

Choice last night fed speculation that it might go ahead with the website on its own, although it said that was only one of a number of options it would consider including legal action against the government.

"We have met the obligations of our contract with the Treasury," said spokesman Christopher Zinn. "The contract made no reference to political risk."

Although the site had been almost ready, it now would not to go live on Wednesday, what ever the organisation decided.

"We have lost three days. I would never say never, but it would take a miracle for us to get it ready by Wednesday now," he said.

Relations between Choice and the new Consumer Affairs Minister Craig Emerson are strained with each accusing the other of being unwilling to talk. Choice says the media heard about the Minister's decision before it did on Friday, and the Minister says Choice refused to attend the pivotal meeting with retailers on Friday that persuaded him to axe the scheme.

Published in today's SMH and Age


Sunday, June 28, 2009

I think this'll be good reading

UC Berkeley economist Brad DeLong has just published the draft of his next lecture:

Econ 115: Slouching Towards Utopia?: The Economic History of the World
in the Long Twentieth Century

You need to understand three things to grasp the state of the world
economy in 1870: that the drive to make love is one of the very strongest
of all human drives, that living standards were what we would regard as
very low for the bulk of humanity in the long trek between the invention
of agriculture in 1870, and that the rate of technological progress back
before 1870 was glacial, at best.

Where'd those dollars come from?

Shane Wright in the West Australian:

A plan to reveal the home country of companies that buy Australian debt is unravelling just a week after it was forced on the Federal Government to put it in place.

The West Australian understands Government bureaucrats are struggling to come up with a system that will conform with what has been demanded by the Parliament, not become overly expensive and actually reveal the details sought by the coalition.

It follows the Government’s move to offer States and Territories a Federal guarantee for their debt, so they can compete on national and international markets for investors.

To get the guarantee through the Parliament, the Government accepted a coalition amendment that required a register to be set up that would list the company that bought the debt and the home nation of that company...

The coalition has expressed fears Australia will end up financially beholden to China.

At the time, Treasurer Wayne Swan warned there could be problems with the plan.
“The Treasury has advised that it will not be possible to publish the additional information and have any confidence it would provide an accurate reflection on the beneficial owners of Australian securities,” he said.

Those problems have quickly surfaced.

A major issue is that the amendments failed to outline what would happen in the case of a company refusing to reveal its identity or its home country.

In the US, which along with New Zealand is the other country with the requirement to reveal the home country of a bond holder, those companies that refuse to divulge the information face substantial fines.

But without any penalty to release the information, there are concerns within Treasury any register would be highly suspect.

A spokeswoman for shadow treasurer Joe Hockey said the coalition believed voluntary disclosure was preferred, but it was open to discussions on replicating the American system.

Another issue revolves around identifying owners of older bonds.

Between October 1996 and 1999 more than $9 billion worth of bonds were issued that are still to mature, many of which are believed to have changed hands since then. Following the trail of ownership is proving to be an expensive proposal.

There are also problems surrounding the sheer scale of the demand. The proposal, rather than requiring the details of new debt, called for the identity of debt already on issue from the Commonwealth. States and Territories can take the guarantee for debt they already hold and which they are rolling over.

There are more than $77 billion of Federal government bonds on issue and another $120 billion in government and semi-government bonds on issue from the States, Territories and some of their business entities.

Mr Swan would not be drawn directly, but a spokesman confirmed there are problems with the proposal.

Saturday, June 27, 2009

Where'd that wealthy feeling go?

"It's the result of the collapsing share market. Australians are more exposed to shares than the citizens of virtually any other country."

Australian households have lost an extraordinary 36 per cent of their financial wealth since the economic crisis began in the longest run of wealth destruction on record.

New estimates from the Australian Bureau of Statistics put combined household wealth at just short of $787 billion at the end of March, down from a peak of $1246 billion in September 2007.

The total includes household wealth held in the form of cash, bank deposits, bonds and shares; net of borrowing. Significantly it excludes wealth held in the form of superannuation and real estate both have which have also dived since the crisis began.

Financial wealth per household has slid from $159,000 to $98,000 - it's lowest point for more than three years. Per person it has slipped from $58,900 to $36,200...

"It's the result of the collapsing share market," said Commonwealth Securities economist Savanth Sebastian. "Australians are more exposed to shares than the citizens of virtually any other country. Up until March our share prices had dived 43 per cent."

In the early 1990s recession wealth collapsed sharply during the first quarter of 1991 and then bounced around rather than sliding relentlessly as it has done this time.

"Back then our wealth wasn't so tied up in shares," said Mr Sebastian. "We weren't as exposed."

The good news is that share prices are climbing again. Since March they have rebounded a further 10 per cent, leading CommSec to expect an end to the slide in financial wealth when the next figures come out in three months time.

"We're think household wealth will tread water for two quarters and then pick up towards at the end of the year," said Sebastian.

As our share market slid, more and more of our wealth has been switched into cash and bank deposits, with the total either held under beds, in safes or in banks and credit unions reaching a record $487 billion in March, roughly 60 per cent of household wealth.

However the amount that we owe has continued to climb throughout the crisis jumping a further $15 billion in the March quarter to a record $1,306 billion.

"Our ratio of debts to liquid assets has hit 154 per cent, meaning we don't have the readily available cash we would need to cover our debts if things in the event of a sharp downturn. We are vulnerable," said Mr Sebastian.

In contrast Australian companies have strengthend their balance sheets, paying down debts by a further $11 billion the March quarter.

"As a result their net assets have climbed to their highest point in two years. This should give investors confidence ."

The Australian Financial Accounts show foreign investors demonstrating that confidence, lifting their ownership of Australian shares to 42 per cent, the highest proportion in 12 years. In the first three months of this year they bought an extra $20 billion of net new shares.

Published in today's SMH and Age

Friday, June 26, 2009

GroceryWatch was an election promise

The new Minister Craig Emerson has canned it.

And CHOICE, which was to do the work for it, is most unhappy:

For immediate release:

Five days before launching the new improved GroceryChoice site the Minister for Competition Policy and Consumer Affairs Craig Emerson has met with the big three supermarkets and decided that price transparency doesn't work for them. CHOICE was informed about the decision after the industry and the media were fully briefed.

This is the first significant decision by the consumer minister since taking office and overturns a Government promise to support greater transparency in consumer pricing through GroceryChoice.

Within days consumers would have had access to timely and accurate information across the leading supermarket chains on which to base their purchasing decisions. This has been a remarkable achievement given that of the big supermarkets, only Aldi and FoodWorks were brave enough to support the project.

CHOICE chief executive Nick Stace said "I am shocked and disappointed at the decision by the consumer minister to side with supermarkets rather than consumers. Supermarket prices are higher in Australia than many other developed countries and CHOICE agreed to deliver GroceryChoice because we believed we could make a difference for consumers.

"In five days' time the start of a revolution in supermarkets was about to begin with consumers given up-to-date information on 1000 products, rising to 5000 within weeks. To pull the site five days before launch shows that we were on the money and the supermarkets are worried about losing out to consumer demands.

"This is a bad day for consumers but a day that makes CHOICE more determined than ever to campaign with consumers for a more competitive grocery sector and lower prices.

"The minister's suggestion of an industry-based website to provide grocery price data is like putting Dracula in charge of the blood bank."

'Foot above the accelerator, not the brake'


In a generally positive assessment of the Australian economy the International Monetary Fund has implored our Reserve Bank to be "more cautious than normal" when deciding whether to tighten interest rates, describing international conditions as "fragile".

The Fund has backed an OECD forecast that this year's downturn will be milder than predicted in the Budget and next year's recovery stronger.

Whereas two months ago the IMF was expecting the Australian economy to go backwards 1.4 per cent in year-average terms in 2009 it now expects a contraction of only 0.5 per cent. Whereas it was expecting an anemic recovery of 0.6 per cent next year it now expects 1.5 per cent.

Treasury Secretary Ken Henry yesterday confirmed that he too expected growth to be "somewhat stronger" than forecast at Budget time...

...but that it was "too early" to upgrade the budget figures.

"It may be that there is some upside to our forecasts, but really it is too early to tell,'' he told local government representatives in Canberra.

The IMF has given the green light to further government stimulus packages if needed saying Australia has more "fiscal space" than most countries to boost its economy and is one of the very few to have mapped out a plan to return to surplus.

"If additional fiscal stimulus is deemed necessary, our analysis suggests that the impact on growth is highest for public investment spending," the consultation report says. "Transfers targeted to low-income households have a faster yet still large impact, and could be the most appropriate measure if a prompt demand impetus is required."

But report says the IMF would prefer interest rate cuts to stimulus spending "as the first line of defence," and asks the Reserve Bank to be "more cautious than normal in tightening," saying a lift in rates can wait "until there are clear signs that a sustainable recovery is underway".

Both Westpac and the Commonwealth Bank yesterday penciled in rate hikes next year nevertheless after at least one further rate cut this year. Westpac expects the Reserve Bank to cut its cash rate from 3.0 per cent to a low of 2.50 before tightening, the Commonwealth to 2.75 per cent.

Financial markets are pricing in a 4.0 per cent cash rate by next August, a full one percentage point higher than at present, implying a rebound in the standard variable mortgage rate to around 6.75 per cent.

The Roy Morgan consumer confidence index yesterday jumped to its highest level since February 2008 and the Investment & Financial Services Association's investor confidence index to its highest point since August 2007.

Published in today's SMH and Age

Thursday, June 25, 2009

Storm clouds over Canberra

As I walked back from the CEDA conference last week:


Want to get things done?

Try printing this:

Oh, and here's how to use it.

HT: LifeHacker

Australia to perfom better than any other advanced nation

So says the OECD and here are its forecasts (click to enlarge):

Australia is set to soar out of its economic downturn sooner and more sharply than forecast in the Budget according to updated forecasts from the Organisation for Economic Co-operation and Development understood to have the backing of the Australian Treasury.

The OECD says the Australian economy should shrink by a mere 0.3 per cent this year, less than any other OECD economy and far less than the contraction of 1 per cent that underlies the forecasts in the May Budget.

Next year the economy should roar back 2.4 per cent, also more than assumed in the Budget and more than any other OECD economy apart from those recovering from collapse in 2009...

Treasurer Wayne Swan greeted the updated forecasts released overnight in Paris as evidence that Australia was "outperforming every other advanced economy in the face of the recession".

The revised forecasts show Australia's unemployment rate reaching 7.9 per cent late next year rather than the 8.25 to 8.5 per cent range assumed in the Budget. They also suggest a milder buildup in government debt than forecast at Budget time as increased tax revenues kick in more quickly.

The difference between the Treasury's May forecast and the OECD's June forecast is not thought to represent a difference of opinion between the two organisations. Treasury and Reserve Bank staff worked closely with the OECD in preparing the report. Rather the change is thought to indicate the speed at which the global economy is improving.

The OECD update is the first in two years to revise up projections rather than revise them down.

The Organisation now expects developed economies to shrink by just 2.6 per cent this year, down from the 3.4 per cent it forecast in March. It expects the United States economy to shrink by 1.7 per cent instead of 3.5 per cent, and Japan to shrink by 3.6 instead of 4.4 per cent.

"Activity now looks to be approaching its nadir," said OECD cheif economist Jorgen Elmeskov. "Thanks to a strong economic policy effort an even darker scenario seems to have been avoided."

While cautioning that risks remained, Mr Elmeskov said that "significantly," the risks were "more balanced than before".

"Indeed the assumptions on which these projections are based could prove too conservative," he said.

The OECD identifies China as the driving force behind the more-rapid-than-expected global recovery crediting "massive government stimulus" measures with lifting China's expected growth this year from 6.3 per cent to 7.7 per cent and to 9.3 per cent next year.

In a blow to Australia's Opposition, the OECD specifically commends the infrastructure spending and cash bonus payments opposed by the Coalition in the Senate describing them as "welcome" and "boosting" Australia's domestic demand.

It cautions policy makers not to ease up on efforts to stimulate their economies and says Australia's Reserve Bank has room to cut its interest rates further.

"With a nascent recovery hopefully in sight it would be tempting to relax the extraordinary policy effort of the past nine months," it says. "Tempting, but wrong. Not only because post-crisis policy strategies need preparing but also because there is still more policy can do to ensure a faster and more robust recovery."

Referring specifically to Australia the report says the Rudd government needs to "maintain the expansionary thrust" of its policy.

"Despite relatively favourable developments" the report says, Australia's conditions "remain fragile," with a further downturn likely later this year.

Published in today's SMH and Age


Wednesday, June 24, 2009

The worst is over

So concludes the OECD

Here's the "editorial" in its just released June Economic Outlook, by acting chief economist Jorgen Elmeskov:


OECD activity now looks to be approaching its nadir, following the deepest decline in post-war history. The ensuing recovery is likely to be both weak and fragile for some time. And the negative economic and social consequences of the crisis will be long-lasting. Yet, it could have been worse. Thanks to a strong economic policy effort an even darker scenario seems to have been avoided. But this is no reason for complacency; the need for determined policy action remains across a wide field of policies.

The downturn has been global in scope, even though its financial epicentre was in the OECD area. Indeed, trade and financial linkages prompted a synchronised collapse in activity and trade after financial markets froze in the second half of 2008. De-coupling turned out to be a mirage on the way into the recession. But on the way out it looks as if recovery will take hold in a staggered manner across countries reflecting, not least, the extent of policy stimulus and the force of headwinds coming from the need for balance-sheet repair.

More specifically:

 A recovery already appears to be in motion in most large non-OECD countries. This is particularly so in China, against the background of substantial monetary and especially fiscal stimuli. At the same time, these countries do not suffer from the kind of balance-sheet damage that afflicts many OECD countries.

 Signs have multiplied that US activity could bottom out in the course of the second half of this year. Such a recovery would reflect tremendous policy effort. However, as the growth impulse from fiscal stimulus fades and the need for balance-sheet repairs continues to hold back growth the recovery could be uncharacteristically weak and insufficient to bear down on unemployment at around 10% of the labour force.

 Japan's economy is also showing signs that the trade-induced contraction is close to the end, thanks not least to fiscal stimulus. Again, however, the recovery is likely to be slow and huge economic slack is likely to further entrench deflation.

 Signs of impending recovery in the euro area are not yet as clearly visible, reflecting country-specific combinations of bursting housing bubbles, export set-backs and damage to financial sectors. The eventual recovery may also be slow in this region, including because rising unemployment makes consumers more reluctant to spend...

Overall, this Economic Outlook is the first in two years to revise up the growth projections compared with the previous version -- most clearly for the non-OECD and the United States but also to some extent for Japan. But more significant than the upward revision to growth is the change in the distribution of risks around the projections. These are now more balanced than before. Indeed, the projections are built on the assumption that conditions in financial markets stay broadly unchanged for the remainder of this year before normalising in the course of 2010 and this assumption could prove too conservative. But new tremors in the financial area cannot be excluded either, and adverse bond market reactions to the sharp increase in government indebtedness also represent a downside risk.

The recession has already led to a substantial rise in unemployment, with more to come before recovery is sufficiently strong to reverse the trend. The weakness in product and labour markets is likely to put downward pressure on inflation over the projection. But, as in other periods of sustained large slack, its disinflationary impact may be limited and most countries are projected to stay clear of sustained deflation.

Concern has been expressed about potential inflationary impacts of central bank injections of liquidity. As long as slack is large, this risk is likely to be modest. Moreover, many of the instruments for liquidity injection are expected to be self-correcting as financial conditions improve. Nonetheless, discretionary action will at some point have to be taken to withdraw liquidity as financial markets normalise. The timing and calibration of such action will be tricky, requiring central banks not only to exercise good judgement but also to have at their disposal flexible instruments to perform these operations.

With a nascent recovery hopefully in sight it would be tempting to relax the extraordinary policy effort of the past nine months. Tempting, but wrong. Not only because post-crisis policy strategies need preparing but also because there is still more policy can do to ensure a faster and more robust recovery. Some countries have taken action to remove the uncertainty associated with impaired assets on bank balance sheets but others may have to follow. Likewise, and especially in conditions where the picture of bank balance sheets provided by existing accounting rules is hazy, stress testing has a role to play in providing confidence. Getting the full benefit out of stress testing requires that the tests be seen as challenging, be made public, and be associated with demands for recapitalisation where needed.

Eventually, however, the panoply of government interventions to stabilise the financial system should be rolled back. This will likely call for some degree of co-ordination across countries to avoid fear of competitive disadvantage blocking progress. Crucial for the future, regulatory and supervisory changes will have to be brought in to limit the risk of new financial crises. Some of these changes are likely to hurt profitability and be unpopular with regulated firms. And some may face resistance because they alter existing bureaucratic structures. Hence, such reforms need to be undertaken before the memory of the crisis has faded too much.

Government budgets also provide a very important cushion for economic activity in the downturn, principally through the workings of automatic stabilisers and discretionary fiscal easing. The result has been a dramatic, but unavoidable, run-up in government deficits. Indeed, with the incipient recovery likely to be weak, it is important that decided fiscal stimulus actually be implemented in a timely manner and that the fiscal impulse not be withdrawn at a pace that jeopardises recovery.

But very substantial fiscal consolidation will eventually be required in many countries. Some governments have already announced medium-term consolidation plans and others will have to follow. Early announcement of such plans, even if their implementation is conditional on actual economic developments, will help to anchor medium-term expectations of savers and investors and thereby keep down the cost of financing much higher debt levels. Consolidation requirements clearly differ across countries, but analysis in the special chapter of this Outlook on “Beyond the crisis: Medium-term challenges relating to potential output, unemployment and fiscal positions” shows that even countries with large deficits in the near term can reach fiscal balance over the medium term, or at least get a good part of the way, provided that consolidation measures are taken which are strong but not without historical precedent.

Consolidation, when recovery is sufficiently firm, should aim to avoid collateral damage to economies‟ long-term growth prospects. That means relying as far as possible on rolling back public expenditure that is not growth-enhancing, and when tax hikes are necessary to concentrate on broad-based taxes that involve minimal distortion to economic decisions of producers, consumers and investors.

Avoiding negative impacts from consolidation on long-term prospects is particularly important because the crisis itself is likely to have such effects. Some of the increase in unemployment is likely to turn structural and the capital stock could be durably lower as a result of the crisis. It is to be hoped that past reforms in labour markets will limit the extent to which unemployment turns structural.

But even so, further labour market reforms aimed at keeping the unemployed in contact with the labour market and prepared to take emerging new jobs will be crucial. At the same time, it is essential to guard against crisis-driven intervention in product and financial markets undermining the long-run health of the economy. And the pressures for protectionist measures, which can take many forms, must be withstood. Indeed, moves towards liberalisation such as through the Doha Development Agenda would not only benefit long-term growth but would also provide a very helpful boost to confidence in the current situation.

More generally, as the acute crisis abates, it may be time to reflect on the overall economic policy paradigm. One ingredient that will be crucial is structural reforms to foster long-term growth and make economies more resilient in the face of shocks. But the role of macroeconomic policies in the run-up to the crisis will also need to be analysed and appropriate changes to macroeconomic policy frameworks made.

In particular, it will need to be understood whether and, if so, how monetary policy can contribute to avoiding the build-up of financial and asset price vulnerabilities; what role macro-prudential policies can play in this regard; and how fiscal policy can best be set in ways that allow margin for response when crisis hits.

In summary, it looks as if the worst scenario has been avoided and that OECD economies are now nearing the bottom. Even if the subsequent recovery may be slow such an outcome is a major achievement of economic policy. But this is no time to relax -- ensuring that the recovery stays on track and leads towards a long-term sustainable growth path will call for major policy efforts going forward.

17 June 2009
Jorgen Elmeskov
Acting Head, Economics Department


Happy birthday internet! Australia has been connected for 20 years

[AusNOG] Happy 20th Birthday Australian Internet

Geoff Huston gih at
Tue Jun 23 20:27:03 EST 2009
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On the night of the 23rd June 1989 Robert Elz of the University of
Melbourne and Torben Neilsen of the University of Hawaii completed the
connection work that bought the Internet to Australia.

It was a 56kbps satellite circuit, and the Australian end used a Proteon P4100 router.

Since that day we've evidently connected some 56.8% of the population,
or 12,073,852 Australians, to the Internet (according to user
statistics published by the ITU-T)

I think thats a pretty impressive record, and worth noting!


Geoff is a top guy - one of the fathers of Australia's internet. I hung around with him when he was in the ANU Maths department during those pre-internet days when I worked for the Treasury.

HT: Troppo

So, how should we treat what the OECD is about to say about Australia?

Its Economic Outlook will be released tonight

Here's a look back in time - to ABC's AM program in 2001 and in the late 1980s:

AM Archive - Thursday, 9 August , 2001

Reporter: Peter Martin

LINDA MOTTRAM: Australia has been described as remarkable and our economy strong enough to withstand bad times in both the US and Japan, in the latest annual review from the Paris-based Organisation for Economic Cooperation and Development.

The OECD is predicting that we're headed for an economic growth rate of almost four per cent but it also hints that Australian interest rates may have to climb very soon. Economics correspondent Peter Martin reports.

PETER MARTIN: The Australian budget is sound. Our labour market is more flexible, and our markets are more competitive. The result, says the world's largest economic cooperation agency, is remarkable...

They're the sort of conclusions Australia's treasury might reach itself. Australia's treasury has for years employed a representative at the OECD in Paris. Part of that person's job has been typically to get the OECD to write what the Australian treasury wants.

Andre Morony did that job at the OECD in Paris from 1984 to 1986. On his return to Australia in the late 1980s he told AM how he worked to ensure that the OECD's apparently independent report was a good one.

The representative would argue his case logically as far as he can and therefore it's very hard to say whether the OECD is swayed by the logic or by the big stick that the treasury representative has behind him, which is the veto.

LINDA MOTTRAM: Andre Morony, who was the Australian treasury rep at the OECD in the mid 1980s.

Tuesday, June 23, 2009

Making sense of the Senate's emissions trading debate

It's possible

Tim Colebatch in The Age:

"The Government supports its emissions trading scheme, but would like to see it defeated when it comes before the Senate this week. The Opposition opposes the scheme, but will be doing its utmost to ensure that it is not defeated.

The Greens support emissions trading, but want to vote to defeat this version of it. As for the Senate independents, no newspaper article could adequately summarise their positions.

Climate Change Minister Penny Wong will introduce the scheme to the Senate, but accepts it has no chance of being passed. Rather, the issue is whether it is defeated, thus becoming the first half of the trigger for an early election.

The Government would like to have the option of calling an early election, particularly on emissions trading, which the polls suggest most voters support. The Opposition does not want to give it that option, and so plans to tie up the legislation in endless debate...

The Coalition's deputy leader in the Senate, Eric Abetz, will start by moving today for the legislation to be delayed for six months. That is expected to be defeated, with independent Nick Xenophon siding with Labor and the Greens to block it.

Senator Xenophon plans to move for a shorter delay to allow more Treasury modelling; but with the Opposition and Family First's Steve Fielding opposed, that also will fail.

The Coalition then plans to move a long list of amendments, and will mobilise its 37 senators to ensure long debates, so that no final vote can be taken by Thursday when Senate rises for its winter break.

Under the constitution, a Government can ask for both houses of Parliament to be dissolved for an early election if its legislation is defeated twice by the Senate. The Coalition has 37 of the 76 senators, but a double dissolution would dramatically change the balance of the Senate. The threshold for winning a seat would be lowered from 14.3 per cent of the statewide vote at a normal half-Senate election to 7.7 per cent at an election for the full Senate, helping smaller parties win seats.

If Australians were to vote just as they did in 2007, I calculate that the Coalition would lose four seats and Labor one. Senator Fielding would lose his seat in Victoria but Family First would gain one in South Australia.

The Greens would gain a net three seats, Senator Xenophon would gain a running mate, and the final seat in NSW would go to Patricia Newell of the Climate Change Coalition, partner of broadcaster and columnist Phillip Adams.

In Victoria, the Greens would jump from zero seats to two on 2007 voting, taking one seat from the Coalition and narrowly defeating Senator Fielding for the final seat on Labor preferences.

These estimates are only a rough guide, because each election is different. But double dissolutions are great for smaller parties, on both sides of politics. In Victoria, Family First ended up with 5.5 per cent of the vote in 2007 — far short of the 14.3 per cent it would need at a normal half-Senate election, but close to the 7.7 per cent that would re-elect Senator Fielding in a double dissolution."

Published in the Age June 22, 2009


Can't yet see the point of Government 2.0?

Here's the NSW Baby Names Explorer.

Click on, and have fun!

Oh, and here's the story:

Declaring the fight for Freedom of Information laws largely over the Finance Minister Lindsay Tanner has held open the prospect of a new system of government in which Australians not only have access to legislation as it is being drafted, but also take part in the drafting process through blogs and wikkis.

Mr Tanner has appointed Melbourne economist Nicholas Gruen to head a 15-member task force to draw up a blueprint for what he is calling Government 2.0, reporting end of this year.

And in a sign that the task force is serious it's opened a blog at staffed by volunteers.

"I can see why some people might feel uneasy about using volunteers," says Dr Gruen. "But volunteers hand out meals on wheels and no-one complains...

I've got four experienced bloggers saying they want to do it already, and I am having a competition to design the banner and logo."

"There's no prize, just bragging rights."

Two years ago New Zealand redesigned its Police Act by putting the draft legislation on a wikki and inviting comments on each paragraph.

Mr Tanner told the Age that he would be interested in doing that from next year, but for legislation involving things such as sudden tax changes or national security measures it would probably never be possible.

"But if we engage with people who have views and knowledge, and take advantage of the so-called wisdom of crowds, we can get a better result."

Dr Gruen points to a UK website entitled saying it has enabled ordinary citizens to point out and discuss the condition potholes in their streets without the government needing to send out inspectors.

"It's also about moving in a parallel track to Freedom of Information laws," says Mr Tanner.

"While they are important for controversial issues, for other issues there is every reason to make the mass of non-controversial information the government holds freely available."

"During the Victorian bush fires a private company created a mashup – a website that combined data from a range of sources – to track the location of fires on a map in real time, reducing the demand on emergency information services. That's the kind of thing I want to flourish."

But Dr Gruen says it won't be easy. "When you sign up to the public service you are warned you're liable for two years in prison if you hand out Commonwealth information. Lawyers stop government departments putting video clips on YouTube. The NSW railways doesn't want web developers to have access to its timetables" he says.

Among Dr Gruen's favourite sites already making government information freely available is one in which the NSW Registry of Births, Deaths and Marriages enables intending parents to check the popularity of childrens names in each year from 1900.

Published in today's SMH

Swan delivers... stimulus of sorts

Wayne Swan has delivered for the the Ipswich car dealership at the centre of UteGate, but not in the way that's been alleged.

As the Treasurer insisted to Parliament yesterday that his lobbying efforts on behalf of the ute dealer were not out of the ordinary and had come to naught, the Bureau of Statistics reported that ute sales exploded during the month of May, with the number of orders for new utes, buses and trucks up an extraordinary 11.3 per cent - the biggest monthly jump in almost a decade.

In his May 12 budget Mr Swan bumped up the tax deduction for small businesses buying updated equipment from 30 per cent to 50 per cent and gave them until just December this year to finish their shopping.

The tight deadline and the generous deduction appears to have made the measure as effective in supporting car dealers as bonus payments and First Home Owners Boost were in supporting retailers and home builders...

NSW recorded the biggest boot in ute, bus and truck sales in the nation, with orders up 28 per cent in the month, accompanied by a 17 per cent boost in orders of four-wheel drives and a 13 per cent boost in sales of passenger cars.

"There's been a rush of mum-and-dad businesses to buy new cars before the December 31 deadline," says TD Securities economist Annette Beacher.

"Yet again government fiscal policy is behind another upbeat monthly result, and we expect more good car sales in June and July."

Vehicle sales of all types were up 5.4 per cent nationwide in May - the biggest monthly jump in almost half a decade, although still down more than 12 per cent over the year.

"The problem isn't affordability but consumer conservatism," said CommSec economist Savanth Sebastian. "Car prices have been generally flat while wages have been climbing."

"Our estimates suggest that car affordability is at its best levels since the mid-1970s. It now takes a worker on the average wage just 31 weeks of earnings to buy a Ford Falcon sedan. Just 5 years ago it would have taken an extra 6 weeks."

In separately-released news petrol prices have climbed to their highest in eight months. The Australian Institute of Petroleum says the average Sydney price climbed a further 1.8 cents last week to 124.7 cents per litre.

"The really bad news is that the Singapore oil price jumped by almost 37 per cent last month and this is yet to be reflected fully in pump prices," said Mr Sebastian. "CommSec expects pump prices to jump by a further 5 cents a litre in the next fortnight."

Published in today's Age

Monday, June 22, 2009

Meanwhile, lets go behind the scenes at today's alcopops tax "revolt"

Subject: Media Alert: Melbourne factory workers bus to Canberra to save jobs from sham alcopops tax

> Date: Sun, 21 Jun 2009 21:32:12 +1000
> From:
> To:
> Victorian factory workers who will lose their jobs if the "alcopops" bill becomes law will arrive at Parliament House by bus today in a last ditch attempt to save their families' livelihoods.
> Marco Luise, the spokesman for the Independent Distributors workers, said his colleagues had left Melbourne's western suburbs at 4am Monday to get to Canberra in time to beg the Senate not to support the bill, which is scheduled be introduced to the House this afternoon.
> Marco and his fellow workers will hold a press conference on the Parliament House lawn before taking their place in the gallery to watch the debate of the bill that would force their factory to close.
> WHAT: Press conference by Independent Distributors workers threatened by Rudd Government's alcohol excise bill
> WHEN: 1:30pm Monday 22nd June, 2009
> WHERE: Parliament House lawn, Canberra
> TV NOTE: vision of hire bus pulling into Parliament House drive 1:20pm approx; workers will alight to immediately hold press conference
> RADIO NOTE: workers available for live cross or grabs from bus en route to Canberra from Melbourne's western suburbs
> CONTACT: Jayne Dullard, CPR, xxxx xxx xxx (on bus: call for scheduling update & worker interviews)
> Jason Aldworth
> General Manager Financial Communications
> Level 4, 100 Collins Street
> Melbourne VIC 3000

The weirdness just got weirder

The ABC's Chris Uhlmann reports:

"The email at the centre of the OzCar affair has been found and is a fake, the ABC understands.

This morning Australian Federal Police officers executed a search warrant at the house of Treasury official Godwin Grech, whose evidence to a Senate inquiry on Friday ignited the OzCar scandal.

The email was purported to show the Prime Minister's office making representations to the Treasury on behalf of car dealer John Grant, Kevin Rudd's friend and political donor.

AFP cars are at Mr Grech's house in southern Canberra and IT specialists are investigating the email, which is
believed to have been sent from Treasury to his home account.

Police are now interviewing Mr Grech about the email."

Saturday, June 20, 2009

So, who exactly is Andrew Charlton?

People want to know

The 30-year old wizz kid at the centre of the storm in the Prime Minister's office about lobbying for a Brisbane car dealer is "ruthlessly ambitious, hellbent on pursuing a career in politics and hellbent on one day becoming Prime Minister himself".

And that's the assessment of one of his friends.

It might also be Kevin Rudd's assessment. When launching Andrew Charlton's book about the Howard years Ozonomics in 2007 the then Opposition Leader joked about the 27 year old's arrogance.

Shortly after winning office Mr Rudd offered him a job.

A networker par excellence Andrew Charlton managed to get his book endorsed by celebrities as diverse as The Chaser's Dominic Knight and the Nobel prize winner Joseph Stiglitz.

He had previously co-authored a book with Stiglitz (his friends say Charlton did the bulk of the work), translated into 13 languages.

He has also worked for short stints as a United Nations economist, an OECD economist and as an economics columnist for the Sunday Age...

Political while at university, he was elected to the Sydney University Senate and became part of a campaign to unseat its Chancellor Dame Leonie Kramer.

Although initially not strongly committed to either side of politics, "as soon as he did commit to the Labor Party he became something of a partisan zealot".

These days "highly political", and "absolutely committed to the Prime Minister," for two years he dated Katherine Keating, daughter of the former Labor Prime Minister Paul Keating.

His role in Kevin Rudd's office is hands-on. He has been personally involved in decisions about how to react to the unfolding global financial crisis every step of the way, including decisions about the government's bank guarantees and the establishment of OzCar, the special purpose vehicle for car dealer financing now under the microscope.

Malcom Turnbull may be sincere when says he was offering Charlton "helpful advice" at this week's Parlaimentary Mid-Winter Ball when he told him not to lie in order to protect the Prime Minister. Charlton has a future.

Friday, June 19, 2009

As our government racks up its credit card bill...

we're paying ours down, for the first time

Our credit card debt is falling for the first time on record.

Reserve Bank figures released yesterday that Australians each owed an average of $3080 on cards in April, some $37 less than a year before. It's the first year in which credit card debt has fallen in the 14 years figures have been collected.

A separately-released Melbourne Institute survey finds that more of us are saving relative to those going into debt...

...with the so-called Household Financial Conditions Index climbing from 28.3 to 31.5 since March.

"This survey was conducted this month after most tax payers had received a one-off stimulus payment, said Institute research fellow Michael Chua. "That could account for the boost in conditions."

Australians are rapidly turning away from using credit cards to obtain cash, with the number of cash advances falling further in April to an 11-year low. Only 1 in 6 cardholders used their cards to obtain cash in April, down from 1 in 5 a year previously.

Import figures also released yesterday suggest we are spending ever more cautiously. Imports slid a further 5 per cent in May to be down 15 per cent over the year.

Which jobs are going?

White Collar ones

UNEMPLOYMENT among men in normally prosperous inner Melbourne suburbs is approaching double digits after the loss of thousands of professional positions in the finance sector.

A breakdown from the Bureau of Statistics shows that in suburbs including St Kilda, Prahran and Richmond, male unemployment hit 9 per cent in May, on a par with the 9.4 per cent recorded for men in Melbourne's outer west.

But unlike in the outer west, unemployment among men in the inner suburbs has shot up from levels as low as 2 per cent and 3 per cent in just a few months.

The jump reflects a collapse in full-time employment in Victoria's finance sector...

The Bureau says one in every ten full-time jobs in the finance sector have vanished over the last year - a loss of around 9000 full-time positions. Part-time employment has slipped 4000.

By contrast, employment in Victoria's retail sector has actually grown, surging 3500 between November and February at the time the government's first stimulus package was having its greatest impact.

The combined effect has been to even out unemployment rates across the state with most regions reporting rates between 5 and 8 per cent. As recently as late last year the rates ranged from 2 to 7 per cent.

At the same time the average number of hours worked per week has fallen to a new record low of 33 hours 42 minutes as full-time jobs have been replaced with part-time ones and hours cut.

Almost an entire hour of work per week has been lost since last May when the average totalled 34 hours 36 minutes.

"Employers are keeping people on but are trimming hours and pay to keep costs down," said CommSec economist Craig James. "They no doubt fear that if they cut good staff, they may not be able to get the same skilled workers in the future."

Commonwealth Securities no longer expects Australia's unemployment rate to reach the peak of 8.5 per cent forecast by the Federal Treasury.

"Employers are acting smarter," said Mr James. "They will be well placed to crank up activity when things pick up."

But he acknowledged that in the meantime the hours lost would hit purchasing power.

"Consumer spending will be restrained by the drop in take home pay. But the impact will be much milder than in the past when many more workers lost their jobs and purchasing power dried up."

Thursday, June 18, 2009

The importance of being Leigh or Booth...

...rather than  Vargonova

Having a name such as Francesco or Francesca can be a disadvantage when it comes to landing a job according to a new Australian study, unless you're applying for it in Melbourne.

A new landmark ANU study has found that having a foreign-sounding name, even an Indigenous-sounding name, makes it less likely you'll be called back. Unless your name sounds Italian and you're in Melbourne, in which case it can actually be an advantage.

Researchers Alison Booth, Andrew leigh and Elena Vargonova sent out 4000 fake job applications to employers advertising on the web for entry-level waiting, data entry, customer service and sales jobs changing only the racial origin of the supposed applicants' names.

Applicants with Chinese-sounding names fared the worst, having only a one-in five-chance of getting asked in for an interview compared to applicants with Anglo Saxon names whose chances exceeded one-in-three...

Typically a Chinese-named applicant would need to put in 68 per cent more applications than an Anglo-named applicant to get the same number of calls backs, an applicant with a Middle Eastern-named applicant 64 per cent more, and Indigenous-named applicant 35 per cent more and an Italian-named applicant 12 per cent more.

But the results varied by city.

Sydney employers were generally more discriminatory than those in Melbourne or Brisbane, except when it came to Indigenous names where they were more accepting.

But only in Melbourne was there a type of non-Anglo name that was actually loved. Melbourne employers were 7 per cent more likely to respond well to someone with an Italian name than they were to an Anglo name.

Asked to guess why, Dr Leigh hastens to point out that the 7 per cent bias in favour of Italian-sounding names is not statistically significant.

"But what it does allow you to say is that there is no statistically-discernible discrimination against Italian names in Melbourne. They are as well regarded as Anglo names."

"This could be because Melbourne has a higher share of Italians than other Australian cities, and has had for a long time. Discrimination tends to be higher when you have a recent influx of arrivals, as Sydney has from China and the Middle East."

"Or it could be because many of the jobs we pretended to apply for were waiter and waitressing positions in bistros, bars, cafes and restaurants."

Asked whether the study had found that Australian employers were racist, Dr Leigh said it was clear they discriminated on the basis of the racial origin of applicant's names. "There is no other reasonable interpretation of our results," he said.

The fake applications had made clear that the supposed job sekers had completed secondary schooling in Australia, making it unlikely that the employers had assumed the non-Anglo applicants could not speak English.

A similar study carried out in the United States found that applicants with black-sounding needed to submit 50 per cent more applications than whte applicants to get the same number of interviews, suggesting that Australian employers were more prejudiced, except when it came to Italians and Australians with Indigenous names.

Wednesday, June 17, 2009

Hockey jettisons his credibility

"To convey the impression that this minor rate rise is just the first of many, Hockey was willing to bamboozle the public with a patently false economic argument. His argument about the effect of government borrowing on interest rates is simply wrong." - Gittins.

Gittins' full column is here.

Great reading: What went wrong

"If this crisis hasn't changed at least some of your views about how the world works, then I reckon you haven't been paying attention – or, alternatively, your views are so tightly held as to be impervious to the arrival of new information."

- David Gruen, executive director, macroeconomics at the Commonwealth Treasury.

PDF above, and the full thing below

Reflections on the Global Financial Crisis

David Gruen
Executive Director
Macroeconomic Group
Australian Treasury

Address to the Sydney Institute
Tuesday 16 June 2009

It is a pleasure to be here at the Sydney Institute talking about a topic that has consumed a good proportion of my waking hours, and a few of my non-waking hours, over the past eighteen months or so.

Let me begin my remarks by paying tribute to Gerard and Anne Henderson for their many years of dedicated work, building up and nurturing this fine Institute. In the years up to 2002, when I lived in Sydney, I used to come to Sydney Institute functions when I could, and I have always been impressed by the range and quality of speakers they have attracted, and the discussions and debates they have fostered.

Turning to the topic at hand, I confess to being continually amazed, and shocked, by the still evolving global financial crisis. If this crisis hasn't changed at least some of your views about how the world works, then I reckon you haven't been paying attention – or, alternatively, your views are so tightly held as to be impervious to the arrival of new information.

The global financial crisis is a huge event and a huge topic, and with the limited time available, I will be selective in my comments.

Let me start with a sound bite, from January this year, from Alan Blinder, Princeton Economics Professor and former Deputy Chairman of the US Federal Reserve:

"Nobody thought this might happen. Things can go wrong. But the number of things that have gone wrong, and the ferocity with which they have gone wrong I think was beyond the imagination of almost everyone."2

That is a sentiment with which I agree. There were economists who warned about aspects of this crisis, and I am going to touch on some of them in my remarks today, but almost nobody thought that something as severe as this was remotely likely.

I don't intend to give a blow-by-blow account of the financial crisis, nor a detailed analysis of the reasons for the crisis. But I thought it would be helpful to provide a list of the factors or causes that I think made a material contribution to the crisis.

I have divided my list into those causes that were directly related to the US housing market – the proximate causes – and those that should be considered wider causes of the crisis.

I have been mindful to keep my lists as short as possible, but I have still ended up with thirteen items on one or other of my lists.

Let me start with five proximate causes.

First, global imbalances implied a huge flow of funds from developing countries (particularly in Asia) to developed countries (particularly the US).

Second, low global real interest rates contributed to strongly rising asset prices and, eventually, to house price bubbles in the US and several other countries. Global real interest rates were low both because of the global savings-investment balance (the 'global savings glut'), and because of expansionary monetary policy, particularly in the United States.

Third, there was incoherent financial regulation in the US mortgage market. There were at least four relevant regulators in the prime mortgage market and, in the subprime mortgage market, many of the largest lenders were not subject to any supervision by bank or thrift regulators.3

Fourth, there was long-term public sponsorship of home ownership for low-income households in the US, many of which ultimately could not afford to own homes.4

Fifth, there were serious flaws in the 'originate to distribute' model for mortgages. This model involved mortgages being bundled up and 'securitised' and, in the case of many financial instruments based on sub-prime mortgages, given inappropriate AAA credit ratings and then spread to the winds, via global capital markets. The consequence of a loss of integrity in the relationship between original borrowers and final investors was that eventually no-one was doing due diligence on borrowers' ultimate capacity to repay their loans. In theory, risk was supposed to be spread to those most able to bear it; as events turned out, it was instead spread to those least able to understand it.5

Let me turn now to the wider causes, of which I have three.

First, financial instruments became so complex that eventually literally no-one understood fully the nature of the instruments they were buying and selling.6

Second, there was a range of perverse incentives in financial markets – too much pay for short-term returns, and not enough downside for losses. Many individuals faced strong financial incentives to take risks with other people's money – risks that generated good returns most of the time, but with a small probability of disaster.7 When the disaster struck, it was a disaster for the other people whose money had been put at risk, for the financial firms that had put it at risk, and for the wider financial system.

Third, large banks and the financial system more generally, mainly in US, UK, and Europe, gradually became more highly leveraged (more loans for each dollar of bank assets).

This final cause is one of the most important, because it rendered the global financial system much more fragile than most people realised. And so it is worth spending a little time fleshing out in some detail why the financial system gradually became more highly leveraged.

This leads me to a third list, which enumerates the reasons why the financial system gradually became more highly leveraged. There are five items on this list.

First, the 1999 repeal of the US Glass-Steagall Act – which had been enacted in the teeth of the Great Depression in 1933 – allowed commercial banks to run large investment banking businesses.

Second, regulatory frameworks encouraged banks to shift loans 'off balance sheet' and encouraged growth in the 'shadow banking system', largely outside the regulatory net.

Third, times were good and it was therefore very profitable to become more highly leveraged.8

Fourth – and this is another implication of low global real interest rates combined with investors continuing expectation of high returns – financial firms were searching for innovative ways to generate higher returns, and more leverage was a natural way to achieve this.

But surely that meant that financial firms were taking huge risks to their own solvency? This leads to the final reason for the increased leverage, and therefore the crisis: a widespread failure of risk management. Banks thought they had a better understanding of financial risk than ever before, based on sophisticated mathematical models of risk and return. The banks' new risk-return models were indeed sophisticated, but as it turned out, they were also fatally flawed.9

As a result, as house price bubbles collapsed in the US, UK, and several other countries, the cascading of problems from one counterparty to another, and from one financial market to another, generated a shock well outside the experience of the banks' risk models and this, combined with their high degree of leverage, bankrupted large parts of the global financial system.

We are all now living through the global recession that followed inexorably from this near-collapse in the global financial system.

Before leaving these lists, there is one item that deserves further comment – the role of expansionary US monetary policy. Some have suggested that, rather than simply being a contributing factor, expansionary US monetary policy in the early 2000s was the main cause of the crisis.

Expansionary US monetary policy undoubtedly contributed to rising US asset prices, including house prices, at the time. Indeed, that is the point of the policy – rising asset prices constitute one of the ways that expansionary monetary policy works.

But I have less sympathy with the argument that monetary policy should explicitly 'lean against the wind' of a suspected inflating asset price bubble, which is implicit in the criticism of US monetary policy at that time.

In my view, to lean against the wind and do more good than harm requires a level of understanding about the likely future path of a suspected asset bubble that is simply unrealistic. Without that understanding, attempting to use monetary policy to lean against the wind is as likely to be destabilising for the wider economy as it is to be stabilising.10

Let me now leave discussion of these lists of contributing causes of the crisis, and turn to a couple of interesting and important questions: Where were the voices warning of the possibility of such a financial disaster? And why were those voices, such as they were, largely ignored?

There were, in fact, quite a few warnings issued. Let me start with Gerald Corrigan, ex-President of the New York Fed, who said ahead of the crisis:

"In recent years the pace of change and innovation in financial markets and institutions here and around the world has increased enormously as have the speed, volume and value of financial transactions. The period has also seen a greatly heightened degree of aggressive competition in the financial sector. All of this is taking place in the context of a legal and a regulatory framework which is increasingly outdated and ill-equipped to meet the challenges of the day. This has led to … concern that the fragility of the system has increased, in part because the degree of operational, liquidity and credit interdependency has risen sharply."

But Corrigan was speaking in January 1987, and the crisis he foretold was not the current crisis, nor the collapse of the tech bubble in 2000, but the stock market crash in October 1987. Sometimes the lessons learnt from earlier crises were only partially learnt, and then subsequently ignored when the crisis turned out to be more benign than originally feared.

More recently, a number of high-profile, credible economists and policy makers, in positions of influence and very much part of the mainstream, have issued prescient warnings about the nature of the financial risks to which the world was being exposed.11 Let me mention just a few of them.

It is perhaps appropriate to start with developments in the US subprime mortgage market. Ed Gramlich, Governor of the US Federal Reserve Board from 1997 to 2005, was a frequent and energetic critic of the dangers inherent in the explosive growth of that largely unregulated market. Putting the words "Gramlich subprime speech" into the search engine on the US Federal Reserve Board's website brings up over 16,000 documents, including many many speeches by Governor Gramlich in the first half of this decade, warning of the dangers of what was then going on in the US subprime market.

Turning to the wider global financial system, there were several high-profile mainstream economists and institutions warning of impending danger. Economists Robert Shiller and Nouriel Roubini, as well as the Bank for International Settlements all provided notable warnings to this effect well in advance of the crisis.

But rather than quote from each of them, let me report on another particularly memorable warning that went unheeded.

Each year, the US Federal Reserve Bank of Kansas City runs a two-day conference on a topic of contemporary macroeconomic policy interest. These annual conferences have become arguably the most prestigious macroeconomic policy conferences held anywhere in the world. This is partly because they are held in magnificent surroundings in Jackson Hole, Wyoming, but more importantly because Alan Greenspan made a habit of attending them while he was Chairman of the US Federal Reserve Board.

Conscious of Chairman Greenspan's imminent retirement, the organisers of the 2005 Jackson Hole conference chose the topic 'The Greenspan Era: Lessons for the Future'. One of the papers commissioned for that 2005 conference was presented by Raghu Rajan, Director of Research at the IMF, and before that Professor of Finance at the University of Chicago. The title of his paper was: 'Has Financial Development Made the World Riskier?'

There are a couple of interesting things about Professor Rajan's paper. The first is that it was remarkably prescient about the possibility that financial market developments and the incentives at play in financial markets might be increasing the fragility of the global financial system and rendering it more prone to catastrophic collapse.

Time permits only few quotes from the paper, but they give a sense that Professor Rajan was definitely onto something.

"While the [financial] system now exploits the risk bearing capacity of the economy better by allocating risks more widely, it also takes on more risks than before. Moreover, the linkages between markets, and between markets and institutions, are now more pronounced. While this helps the system diversify across small shocks, it also exposes the system to large systemic shocks – large shifts in asset prices or changes in aggregate liquidity.

… [There is now an] incentive [for investment managers] to take risk that is concealed from investors … Typically, the kinds of risks that can be concealed most easily … are risks that generate severe adverse consequences with small probability but, in return, offer generous compensation the rest of the time.

…While it is hard to be categorical about anything as complex as the modern financial system, it is possible that [recent] developments are creating more financial-sector-induced procyclicality than in the past. They also may create a greater (albeit still small) probability of a catastrophic meltdown. Unfortunately, we won't know whether these are, in fact, serious worries until the system has been tested."

Prescient words indeed. But apart from its prescience, the other thing of interest about Professor Rajan's paper was the lukewarm reception it received from the crème de la crème of the macroeconomics policy fraternity who had assembled in Jackson Hole to comment on it.

By and large these commentators were not very sympathetic to the idea that the seeds had been sown for a potential financial system disaster just around the corner. They looked at the same financial system and saw instead the benefits of the wide diversification of risk, and the capacity of self regulation of the market to achieve an acceptable degree of financial stability.

Why were these commentators not able to see what Professor Rajan was seeing? Of course, hindsight is a wonderful thing. But I think it is fair to say that they, along with most economists, were influenced by the mainstream intellectual fashions of the time.

As Barry Eichengreen (2009) puts it:

"It was not the failure or inability of economists to model conflicts of interest, incentives to take excessive risk and information problems that can give rise to bubbles, panics and crises. It was not that economists failed to recognize the role of social and psychological factors in decision making or that they lacked the tools needed to draw out the implications. … Rather, the problem was a partial and blinkered reading of that literature. The consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions. Equally reprehensibly, the producers of that theory, benefiting in ways both pecuniary and psychic, showed disturbingly little tendency to object. It is in this light that we must understand how it was that the vast majority of the economics profession remained so blissfully silent and indeed unaware of the risk of financial disaster."

In order to understand these arguments in more detail, I seek your indulgence for a brief diversion into the history of economic thought. It may all sound rather esoteric, but it will end up being rather important for the story I am telling.

The important developments date from the late 1960s and into the 1970s. At that time, leading finance economists began to realise the power of the 'efficient markets hypothesis' to explain the apparently chaotic behaviour of financial markets.12 Around the same time, macroeconomists were becoming disillusioned with the state of their discipline in the face of the stagflation that was then gripping the developed world. Partly in reaction to that disillusionment, theoretical macroeconomists embarked on a grand project, the aim of which was to build macroeconomics on solid microeconomic foundations.13

Stripped of econospeak, that means that what macroeconomists say about big policy issues – economic growth and inflation, booms and busts – should be grounded in the study of individual behaviour. Put like that, the project sounds eminently desirable. Indeed, how could anyone object? And indeed, the project has been enormously influential on mainstream macroeconomic thinking ever since.

The problem comes when we discover how individual behaviour is to be understood. The individuals who populate this theoretical world have characteristics that most of us might find a little quaint, to say the least.

These individuals are assumed to be far-sighted and rational, and to understand, in extraordinary detail, the economic world in which they live and make decisions.14

It is true that they are subject to continual economic shocks, which are genuinely unforseen. But in responding to these shocks, these individuals are blessed in ways that the rest of us can only envy. Not only do they craft their responses confident in their complete understanding of the economic structure in which they live and work, but they also sleep safe at night confident that this economic structure will never change.

The financial markets in which these individuals borrow, lend and invest, are efficient and well functioning. They are certainly unencumbered by any of the dysfunction we have seen in global capital markets over the past two years. No perverse incentives, no herd-like behaviour, no periods of irrational exuberance or unwarranted pessimism, no information problems that might give rise to financial market bubbles, panics or crises.

It is as if, as the Titanic was sailing into iceberg-infested waters, those with the requisite skills and training to warn of the impending danger were instead hard at work, in a windowless cabin, perfecting the design of ship hulls ... for a world without icebergs.

As George Akerlof and Robert Shiller put it in an insightful little book written earlier this year:

"So many members of the macroeconomics and finance profession have gone so far in the direction of "rational expectations" and "efficient markets" that they fail to consider the most important dynamics underlying economic crises. … the [theoretical] macroeconomics of the past thirty years has gone in the wrong direction. In their attempts to clean up macroeconomics and make it more scientific, the standard macroeconomists have imposed research structure and discipline by focusing on how the economy would behave if people had only economic motives and if they were also fully rational. Picture a square divided into four boxes, denoting motives that are economic or noneconomic and responses that are rational or irrational. The current model fills only the upper left-hand box; it answers the question: How does the economy behave if people only have economic motives, and if they respond to them rationally? But that leads immediately to three more questions, corresponding to the three blank boxes: How does the economy behave with noneconomic motives and rational responses? With economic motives and irrational responses? With noneconomic motives and irrational responses?

We believe that the answers to the most important questions regarding how the macroeconomy behaves and what we ought to do when it misbehaves lie largely (though not exclusively) within those three blank boxes."

[italics in the original]15

Does any of this matter? I would argue that it has mattered. These developments in mainstream theoretical macroeconomics and finance have influenced the intellectual environment in which policymakers, regulators and analysts operate and form their views. For many, the central ideas from these mainstream disciplines have set the benchmark from which to judge real world developments in markets. And they have influenced the burden of proof: What makes you think that you know better than the market what is the appropriate price for shares/property/risk?

They have added intellectual weight to the argument that, by and large (though clearly not in all cases), individuals and firms in financial markets understood their economic environment, knew what they were doing, and could be left largely, if not wholly, to their own devices. Lightly regulated financial markets, dominated by well-resourced institutional investors with their own best interests at heart should be thought of as largely self-correcting, or so the mainstream view suggested.

As it was put by one of the commentators on Professor Rajan's 2005 Jackson Hole paper that I discussed earlier:

"[In financial markets] the actions of private parties to protect themselves – what Chairman Greenspan has called private regulation – are generally quite effective. Government regulation risks undermining private regulation and financial stability by distorting incentives through moral hazard and by promising a more effective role in promoting financial stability than it can deliver."16

But as the crisis has demonstrated, relying on financial market firms to self-regulate turns out to be the economic equivalent of letting children decide their own diets.17

Macroeconomics as a discipline was born out of the Great Depression. As we have seen, it has undergone a radical transformation over the past few decades. But the global financial crisis should be a wake-up call to the discipline. A new transformation is needed – one more firmly grounded in the real-world behaviour of markets.

Let me conclude with some remarks about Australia.

Interestingly and importantly, Australian policymakers and financial regulators seem to have been relatively immune from the intellectual fads I have been discussing. Certainly, I cannot recall any time over the past several years when an Australian policymaker has extolled the virtues of leaving the financial system largely to regulate itself.18

And the Australian financial system has clearly avoided the excesses seen elsewhere – for a series of reasons.

Australia has a more coherent regulatory structure with a single institution, APRA, as the prudential regulator for the financial services industry. Furthermore, the 'four pillars' policy has contributed to financial stability by eliminating the possibility of takeovers between the major banks, thereby reducing their incentives to become more highly leveraged.

The structure and recent experiences of Australia's financial system have also contributed to its stability. Australian banks have focused on their highly profitable domestic lending businesses, which require them to raise significant offshore funding rather than casting around for foreign financial assets in which to invest. They have therefore avoided buying significant quantities of what are now toxic assets. And finally, past adverse experiences, including banking system losses exceeding 5 per cent of one year's GDP in the early 1990s, and the 2001 collapse of HIH Insurance, have had salutary effects on the attitudes of both the regulator and private firms to risk taking within the Australian financial system.19

Australia has also been well served by the substantial and rapid easing of monetary and fiscal policy in the aftermath of Lehman's collapse last September, as it became clear just how severe the global financial crisis was becoming.

All of these things are counting in Australia's favour, and will continue to do so.

But celebration would be premature. The fall in Australia's terms of trade that is just now hitting the economy on the back of re-negotiated contract prices for iron ore and coal will strip about 3 per cent from national income over the coming year. That is about the same magnitude (though of the opposite sign) as the boost to national output from the government's discretionary fiscal stimulus measures over that time.

It is encouraging to see the gathering signs that the global financial crisis is abating. Australia should continue to do better than the rest of the advanced world. But the global recession, and its Australian counterpart, still has some way to run.