You were right and I was wrong.
Not all of you. But people like Joe Cambria, Kirk Fletcher, Sinclair Davidson, Jim Fryar, Tim Andrews and Michael Sutcliffe were right all along. You warned me about the ALP. You said the days of Hawke/Keating/Walsh were over. I didn’t listen. Mea culpa, mea culpa.
Before the last 2007 election I suggested that Rudd would be a dull but safe Prime Minister who wouldn’t do much, and so would be fairly harmless. And there were people like Tanner and Emerson in the background to keep the party sane. These weren’t particularly high expectations… but they have turned out to be a massive over-estimate of the quality of the Rudd government. He has been a huge disappointment.
Good economic news today, with reported unemployment dropping from 5.8% to 5.7%. It is looking increasingly like I was right to be optimistic about the economy.
It’s just a shame that Rudd had to waste billions of dollars on impotent fiscal policy, it’s a double-shame that he will get the credit for a recovery that was always on the cards, and it’s a triple-shame that the hangover from the fiscal policy will lead to a slightly slower economic growth. Still, good news is good news, and low unemployment is worth celebrating.
But a work-mate just pointed out an interesting factoid.
Over the past quarter there has been a rapid increase in the number of people going on the Disability Support Pension (DSP). This makes sense. In a downturn, it becomes relatively more attractive to get DSP payments and so we are hit with an epidemic of “bad backs” and “depression”.
I decided to check the consequences of the “DSP mini-boom” on the unemployment number. DSP recipients don’t count towards unemployment… But without DSP, those people would have been on Newstart Allowance, and would be counted as unemployed.
The conclusion was that without the DSP mini-boom, the unemployment rate would still be 5.8%.
The government has spent billions of our dollars and now the economy is doing (relatively) well. And as every good student of statistics knows, correlation proves causation. Based on this divine truth, the government has claimed credit, and many journalists and pseudo-economists have believed them.
But if expansionary fiscal policy leads to higher growth, then that rule should be true all around the world. So let’s have a look at the outcomes for a range of major economies.
One of the loudest critics of liberal capitalism in Australia, Robert Manne, has blamed derivatives for the crisis. In this he is not alone. In America another prominent anti-capitalist crusader Richard Katz has also pointed the finger at “the explosion of unregulated derivatives in the United Stats and globally” building on the housing bubble.
This is the perfect enemy for the anti-capitalists because the cause of the problem was the financial market itself. Boo. Hiss.
But, like the “blame savings” thesis, the “blame derivatives” thesis fails to explain the main problem.
The idea is that the markets packaged bad home loans into new financial vehicles and these were widely traded around the world. Derivatives are a financial asset that gain their value by leveraging to real underlying asset. They enable people to shift risk to people who are most able or willing to accept the risk. They also allow people to take a more nuanced position in any market. With home loans, the original writers of the debt were able to sell the risk as a derivative, and as home loans have gone bad these derivative holders have faced losses.
But this answer fails to address the initial problem – which is the existence of the bad home loans in the first place. Derivatives don’t create the underlying asset. They are an add-on to any pre-existing asset. Further, derivatives don’t increase the risk or the loss. They simply allow the risk to be traded.
If it was the existence of derivatives that is the main problem, then all derivatives should have the problem and not only those derivatives related to home loans. But that isn’t the case.
True, people wrongly assessed the riskiness of the property-based derivatives. But that isn’t the fault of the derivatives. The real questions that need to be answered are (1) why did people over-invest in property; and (2) why did people incorrectly assess the risk of those loans? The existence of derivatives doesn’t answer either of these questions and so leaves us none the wiser.
(Previous articles in this series are about Lehmann collapse, greed & the savings glut).
The national accounts were released today, with a recorded increase in our Gross Domestic Product (GDP) of 0.4% between Dec 2008 and March 2009. This means that Australia has avoided what is sometimes referred to as a “technical recession” (ie two quarters of negative growth).
The first thing that needs to be stressed is that Australia did experience a “per-person recession”. Population growth is about 0.4% per quarter and the last four quarterly GDP growth figures have been 0.3%, 0.2%, -0.6%, 0.4%… so while the country may be producing more as a whole, each person is producing less.
My optimism about the current recession is on the public record. However, before any optimists gloat about the latest figures, they need to be put in the appropriate perspective.
Guest post from Frank Shostak.
In his interview with the New York Times on May 3, 2009, President Obama said,
I know how to ask good questions of my doctor. But ultimately, he’s the guy with the medical degree. So, if he tells me, you know what, you’ve got such-and-such and you need to take such-and-such, I don’t go around arguing with him or go online to see if I can find a better opinion than his.
We suspect that President Obama has adopted the same approach with respect to managing the US economy. In fact, in the same interview he said that he is very much influenced by the ideas of Joseph Stiglitz, Larry Summers, and Paul Volcker.
During the interview he also expressed his admiration for Robert Reich and Paul Krugman. Although he didn’t say it, we suggest that the US president is also greatly influenced by the ideas of Federal Reserve Chairman Ben Bernanke.
All these famous personalities derive their way of thinking from the writings of John Maynard Keynes and endorse heavy government involvement in the economy.