Club Troppo

In a little over a week I’ll be heading for Europe and back via Bejing.  So I need around 40 hours of really good iPodian entertainment.  Suggestions are gratefully received.  In the spirit of  reciprocity, I can tell you that “Not without you” on life matters is a wonderful thing to listen to as two people are interviewed who loved each other when he was nine and she was seven. They were in an institution. When they were observed being too friendly they were removed from each other and not permitted to see each other again. After pining away for some period of time, each got married, had unhappy lives and then as pretty old people, they ran into each other again. And now . . . they’re married!

Anyway Troppodillians, I even have a gift to give the winner of this little comp – one or a number of free passes to a Comedy Festival do in Melbourne – more details soon.

I’ve been enjoying Brad Delong’s agro for a while. Luigi Zingale is a very smart guy with some interesting proposals.  I’m reading an excellent article of his right now on “The Future of Securities Regulation“. But Delong is not impressed with his line that ‘we have a banking crisis, so we should be fixing that, rather than expanding demand’.  Delong’s argument has been to agree that we have a banking crisis, indeed in an earlier post the crisis took four of his five points, with falling spending being the fifth one – the one that brought the need for stimulus into play.  

Anyway, in a long and (so it seems to me) accurately argued subsequent post, Delong concludes. . . 

Thus, as best as I can tell, Luigi Zingales’s argument comes in four steps:

1. Our problem is in the banking system.
2. Keynesian deficit spending will not fix the banking system.
3. Keynesians say that even though Keynesian deficit spending will not fix the banking system, it will keep unemployment from rising much higher while we do other things to fix the banking system.
4. The weakness of this Keynesian argument is–LOOK!! THERE IS HALLEY’S COMET!!!!

The following is taken from http://economistsview.typepad.com/economistsview/2009/03/ken-rogoff.html—.

It is a comment by Paul Krugman to the many people, such as Ken Rogoff, who are anxious to pin our economic problems on the deficit. He says:

The stimulus package wont prolong the recovery period it will shorten it by jump starting the economy in important areas and keeping it going until the private sector can take over (think of the government spending and tax cut as a bridge over trouble assets). –Stabilization policy does not have to change the size of government in the long-run.

What Krugman is saying is that, in the short term, the stimulus package does not create additional (temporary) public debt. It only makes certain that (in the short term) GDP and employment are much larger – but debt is much the same. It helps to stabilize both debt and output.

By attacking this strategy, what people like Rogoff are doing is to use the deficit as an ideological pretext to run a political agenda e.g. to attack the welfare state.

This is surely the best response one could make to Malcolm Turnbull. My own response is on http://www.onlineopinion.com.au/view.asp?article=8568—. It is rehash of an earlier Club Troppo piece.

Well, I guess, given their inability to access funding it doesn’t really matter.  But remember those days when Aussie Home Loans and Wizard were slugging it out as the two mortgage securitisers taking it to the big banks – together they shaved around two percentage points off the bank’s margins. They were using a perfectly sensible and prudent funding model – which is to say they were having banks like Macquarie and ANZ package up their loans and sell packages of them to bond holders – they were securitising their loans.  Two things have happened to securitisation.

1.  The bond market that underpinned securitisation has collapsed because perfectly good bonds – like Australian bonds – have been tarred with the ‘toxic assets’ brush.  The bond markets don’t seem to be able to tell the difference between US sub-prime loans with their soaring default rates and Australian loans and their remarkably low default rates. Actually they can tell the difference, they won’t buy the former at all.  They will buy the latter, but not at prices that make them competitive.  Why is that you may ask.
2. Securitisation was a market that was in a state a bit like banking in the 19th century – which is to say that it is treated just like any other commercial operation. Banking isn’t like that.  It has a panoply of ‘business as usual’ supports to liquidity with central banks going lender of last resort, and as we’ve seen since the GFC * got going a wide array of improvised, often given away supports to both liquidity and even solvency.  Securitisers have had only a tiny bit of this help and as a result have collapsed. 

So readers may be interested to know that Aussie was very well placed for the GFC in the sense that it had seen the limitations of securitising and had moved into the muchy lower risk activity of mortgage broking though it did do some residual securitising under its own brand. Wizard was sold to GE Money but GE Money has largely exited the field selling Wizard back to Aussie. (This is a simplification of what’s happenned).  And now Aussie is telling Wizard franchisees where their new franchise is. The details, from excellent finance newsletter, The Sheet, are over the fold.  

* That’s Global Financial Crisis, or Geelong Football Club for short.
(Continued)

IIRC Keynesian economist AGL Shackle coined the expression “the world is kaleidic” which is a nice way of saying that one can go from the heights of optimism to the depths of despair by just changing a few things.   Economics and other things with positive feedback loops in them (like politics which of course is part of the ‘system’ within which the economy is embedded) can change rapidly with just a few changes.  Last time we had a really great depression we got the worst war humanity had ever known.  Well we’re not close to that yet, but now that the financial markets are all shook up, now that employment is plummeting at frightening rates in one developed country after another, all sorts of objects are moving around in that kaliedoscope.   

Below the fold is ”Europe in Reverse” by
Joschka Fischer in which the potential unravelling of Europe is sketched out. Oh to live in interesting times.

BERLIN The legendary American investor Warren Buffet once said, Its when the tide goes out that you find out who has been swimming naked. That particular piece of wisdom referred to the situation of companies in an economic crisis. But it can also be applied to countries and economies. (Continued)

I was asked to do this column at short notice today.  I had in mind incorporating a bunch of things I didn’t manage to do. In any event, for the record, here it is.  If I get the time, more on this shortly.

Will the cash splashes lift the economy?

When they were first announced, the Opposition explained that Milton Friedmans permanent income hypothesis showed handouts wouldnt work. Friedman argued that people have this inconvenient habit of thinking before they spend, and they think not of their current income that would be irrational. Rather, they try to smooth their consumption over their lifetimes given their current wealth and their anticipated life income and circumstances.

Friedman understood that his hypothesis was a stylisation of a complex and fraught reality. He wasnt one of those economists who grew so common, who think about the economy as if people really are perfectly rational. He was tilting, sensibly enough, at vulgar Keynesian models which presumed that people had a marginal propensity to consume and would spend some stable portion of any windfall they were tossed by governments.

Still, some who sent Christmas retail spending to a new record amidst all the economic alarm and despondency seem to be behaving with indecent disregard for the permanent income hypothesis. It seems something more prosaic was going on. The handouts were burning a hole in their pockets actually that should be their credit cards but well get back to that. (Continued)

In the February issue of Quadrant, Steven Kates laments the resurrection of Keynes, and warns his readers not to fall for the doctrines of a man who denied one of the key laws of economics. According to Kates, Say’s Law

is a proposition that since 1936 every economist has been explicitly taught to reject as the most certain obstacle to clear thinking and sound policy. Economists have thus been taught to ignore the one principle most necessary for understanding the causes of recessions and their cures. Worse still, they have been taught to apply the very measures to remedy downturns that are most likely, from the classical perspective, to push them into an even steeper downward spiral.[3]

Anyone who takes the trouble to follow up Footnote 3 will find Kates’s thesis unravelling immediately:

3. It might be hard for non-economists to appreciate just how deeply felt the rejection of Says Law is. Such attitudes are, however, not universal. Schumpeter, in full knowledge of what Keynes had written, was himself still able to write Says Law is obviously true. It is neither trivial nor unimportant. ([1954] 1986: 617)

‘Deeply felt’ apparently refers to the economist’s sense of despair that such a hard won insight as Say’s Law was jettisoned at the instigation of this wrongheaded Cambridge demagogue. Schumpeter is presented as a bastion of sanity and a beacon of hope that truth will prevail.

However, it turns out that Schumpeter’s first sentence, when rendered completely, is actually ‘As stated, Say’s Law is obviously true.’ Like every other serious scholar of economic thought — that is, the ones who don’t have an axe to grind — Schumpeter recognises that Say’s Law covers a cluster of distinct but interrelated propositions which the early classical economists, including Say, Malthus, Ricardo and James Mill, tended to muddle, one with the other, in the most excruciating fashion. This particular section of his History of Economic Analysis is devoted to unpicking the tangle and isolating the proposition that constituted a genuine insight — that is, both true and non-trivial.

Next Schumpeter considers Keynes. And guess what? It turns out that ‘Keynes, of course, never meant to contradict the proposition that has been called Say’s Law above. (p.623)’ So what is Kates playing at? (Continued)