GFC confusion, part 4: blame derivatives
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).
Minimum wages frozen
Last week I argued in the Canberra Times against the minimum wage, pointing out that last years minimum wage increase lead to no higher disposable income and 16,000 jobs lost (or not created). I went on to write:
The commission will decide next month by how much it will increase the minimum wage. The economic situation facing the commissioners is very different to last year, but the basic trade-off remains the same. Whatever gains it gives to workers will be substantially reduced through tax and inflation, and will lead to relatively lower employment.
Instead of concentrating on minimum wage, the government could use the tax and transfer system. Tax cuts and transfer payments directly help workers and they don’t destroy jobs.
Today we have the good news that the Fair Pay Commission has decided to freeze the minimum wage at $14.31/hour, thereby giving low-skilled workers a greater chance to find and keep work. In their summary of the decision the Commission explains that:
In the current environment, the ability of employers to offer sufficient work has been curtailed and there is a heightened risk that an increase in regulated minimum wages would reduce employment and working hours
Excellent. Thank you Ian Harper for putting the interests of low-skilled workers ahead of the moral posturing of the latte left. The Commission goes on to note that the next minimum wage review will be done by Rudd’s new “Fair Work Australia”. We can only hope that they will continue the current pro-job approach.
GFC confusion, part 3: caused by savings glut
There is a theory running around some quarters that the financial crisis and world recession were caused by too much savings from countries like China and Japan. The theory runs that this excessive savings had to go somewhere so it wound up in a property boom in America, which eventually was unwound, giving us the crisis.
But this diagnosis totally fails to explain the main problem.
Good news & bad news
The good news:
According to Indur Goklany, “Deaths from droughts, which were responsible for 59 percent of the death toll from extreme weather and climate events from 1900-2006, dropped by 99.9 percent since the 1920s. Flood deaths, which accounted for another 35 percent of the 1900-2006 figures, declined by 99 percent”. Us humans are an adaptive and tech-savvy bunch of animals, and we should be proud of our ability to deal with our natural environment.
The bad news:
According to Gabriel Alvarez, who has looked at the impact of the subsidies to renewable energy in Spain, and concludes that “since 2000 Spain spent e571,138 to create each green job” and also that “for every renewable energy job that the State manages to finance, we can be confident that on average 2.2 jobs will be destroyed, to which we have to add those jobs that the non-subsidized investment would have created”.
Libertarian blog feed
I’ve just updated the www.libertarian.org.au mainpage, which provides an RSS feed for Australian libertarian blogs. At the top are the two “god-father” libertarian blogs (Catallaxy Files & ALS blog: Thoughts on Freedom), but I’ve also tried to add every other libertarian blog that I could find with an RSS feed.
As Fleeced noticed recently, there is the new Extreme Capitalists blog with Dan Farmilo & John Tate.
Some other recent additions include Julie Novak, Louise Staley, Catholicism and Liberty, MothyPress, Danny Haynes, and The Western Lines.
I’ve also re-added some blogs that had gone quiet, but have had some action recently, including the Australian Gun Owners Blog and anti-me crusader PRODOS.
Also on the list is the IPA Review, Electronic Frontiers, Jarrah Job, Pimpin’ for Freedom, WChurch, Real World Libertarian, Libertarians against war, Inside the mind of Tim, Andrew Norton, Jennifer Marohasy, Chris Berg, Institutional Economics, Skeptic Lawyer, Austrolabe and Henry Thornton.
If you know of any other Australian libertarian blogs that should be included, please let me know.
And please feel free to make a comment about the oz-lib blogosphere. My one suggestion for oz-lib bloggers is that part-time bloggers should consider combining with other like-minded people to create a more dynamic blog with more readers.
Words without meaning
Monty Python introduced us to the “Knights that say ni”. What is “ni”? Why do they say it? No reason. They’re just being lovable idiots for our amusement.
Perhaps that is the strategy of those social policy commentators who are the “Knights that say social cohesion”?
It is useful to have a word that means everything and nothing at the same time. This ’social cohesion’ creature has magical powers. Without actually meaning anything it is able to justify high tax and high welfare and also provide a warmer inner-glow for users of the word. By simply saying it and nodding your head wisely you are able to elevate yourself to a higher moral plain.
Steve Fielding’s question
Senator Steve Fielding from Family First has recently discovered that there is a debate about the science of global warming. Specifically, he has a question about why co2 emissions have continued going up over the past eight years, but temperatures have not. It’s a reasonable question. And there is a reasonable answer.
Too often the climate change debate is bitter and people are intolerant of the comments from the “enemy”, so it was good to see a calm, friendly, rational comment from Ian McHugh, explaining how the last eight years could simply be “noise” and it does not disprove man-made global warming.
I certainly hope that warming has stopped. But with climate trends it is necessary to take a long-term approach and it inappropriate to draw strong conculsions from just eight years of data.
Nanny strikes again
Australia is a free country. That means you can do whatever you like, so long as it’s peaceful and voluntary. If you want to buy a pencil, no problem. If you want to play monopoly with your family, that’s OK too. You can even go for a walk in the park, phone your mum, brush your teeth or wear an Hawaiian shirt. You can do all of this and the government won’t get involved at all.
But of course, we don’t want to get carried away with freedom. So Australia isn’t totally free. To protect us from ourselves, the government has banned various forms of drugs, various forms of marriage, various things you can say, various types of sports, various types of home renovations, various types of food, opening various sorts of business and plenty more.
Yeah, yeah… I can hear the cynics saying that freedom means the freedom to ‘make mistakes’ and that even under teh most totalitarian regimes people were ‘free’ to do as they were told.
Not all cops are good
Not all cops are good. Discuss…
Conflict is bad, and sometimes there is no easy option. Sometimes the police will have to use force. But the problem with police is they have the power to do whatever they like and get away with it. A few extra punches, a kick in the head, push people around. Nobody can stop them and there is no recourse to justice, unless they’re unlucky enough to be caught on camera.
For every incident caught on camera, thousands more happen.
This is not to say that all cops are bad. Sometimes the police are put in difficult situations, and sometimes force is necessary. Some cops do a great job and treat people as fairly as they can. But in any profession there are the good and the bad… the problem with the police is that the bad apples can so easily get away with it.
The best solution to this that I can see (besides strong checks and balances) is to introduce greater competition in the “security market”. This would provide an incentive to provide a better service, for a lower cost, and allow greater diversity.
The easiest way to introduce competition in the Australian system is to allow each local council to choose thier police provider. To start with, the suppliers would be “NSW Police”, “Qld Police” and the other current options. Over time there may be more alternatives. The competing police would be paid for each area they covered, giving them an incentive to provide better and more efficient service so that they could grow. Better cops would get paid more. Worse cops would be driven out of the system.
The last gasp of a fading fool
I’m not sure if anybody takes Gerry Jackson seriously. I know I shouldn’t waste my time on him, but his articles are just so jaw-droppingly dishonest and absurd that he deserves another kick in the pants. There is a distinct possibility that he doing a parody of an ignorant old fool. If so — it’s a very good likeness.
In his latest rambling rant Gerry tries to defend his monetary confusion. And fails miserably.
After constantly attacking other free-market thinkers such as Davidson, Lindsay, Berg, Manners, Evans, Moore and many others, Gerry starts his article (as he usually does) with a whinge about how nobody is nice to him. Don’t worry Gerry, Bird and Mad-Doug still love you.
Amusingly, his first actual point is a straight out lie:
“…an overvalued currency acts like a subsidy on imports and a tax on domestic production. Humphreys states this is not possible where floating exchange rates are the rule.”
I never said this. Indeed, I directly said that the reserve bank could over-value the exchange rate by running a contractionary monetary policy. He is either grossly dishonest or unbelievably stupid. Or both.
The scary left
“As citizens we should all use the same health care system. Poor and rich should have access to the same health care services from teh same providers … the well-off and the poor should not have separate providers … All should share the one, high quality system.”
This is a very scary mentality. The authors of the above (McAuley and Menadue, quoted by Buckmaster) want to enforce total equality when it comes to health services. Note that their prioerity is not to improve health, but simply to make sure that it is always equal.
Enforced equality is so important to them, they repeat it four times in the same paragraph.
The above position is not simply an argument for government intervention in the health industry. And it is not an argument for improving the health care for poor people. Both of these are common and reasonable suggestions.
It goes far beyond that, and calls for the government to actually ban the purchase of extra health cover. The authoritarian policy suggestion of McAuley and Menadue would limit the amount of health cover that a person could buy to the government-approved level, with obvious negative consequences to health outcomes.
This policy cannot be defended on the basis of concern for poor people. The only defence for this policy is that the proponents simply want to hurt richer people and prevent them from buying extra health services. And the likely long run consequence would be worse health care for everybody.
Mostly when I disagree with people on the left I can sympathise with their goal, but disagree about their approach. In this instance though I think the thought process is offensive and dangerous.
The Australian recession
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.
The honest Downer
The Liberal party is often a disappointment. In government they ran the highest taxing administration in Australia’s history. And often they appear to have little understanding of the philosophy of freedom. Sometimes this is because they actually have no understanding. But sometimes they really are (classical) liberals who are simply forced to hide their views for political expedience.
I think this is a shame, because by hiding their views they make it harder for liberals to win the battle of ideas. But the up-side is that after they leave politics they have the chance to tell us what they really think.
Alexander Downer was Australia’s Foreign Minister from 1996 to 2007 and at the time he gave few hints that he believed in individual liberty & responsibility. But in an op-ed he wrote last month he gives an excellent slap-down to the whinging dependent “idiot Aussie” who get in trouble overseas and want the government to come to their rescue.
After about 10 minutes as foreign minister I was a little surprised to learn I was “responsible” for miscreant Australians who got into trouble in foreign countries.
No, no, no, don’t get it wrong – drug traffickers, drunks, kleptomaniacs and fraudsters weren’t responsible for their own stupidity – I was.
It’s about time that great nanny in Canberra, the Federal Government, turned around and told people they are responsible for their own decisions.
Amen.
Climate change conference
The Heartland Institute is keeping up its campaign on climate change. Following their 2nd conference earlier this year in New York (sponsored by the ALS), they are now hosting a 3rd conference in Washington DC on 2 June. The ALS will again sponsor the event and will be represented there by ALS board member Tim Andrews. If you are in the area and would like to go, please e-mail me.
Simpsons do Ayn Rand
For those who doubt the joys of the simpsons, below is a simpsons take on Ayn Rand’s second most famous book “Fountainhead”. Enjoy…
The government & the media
Newspapers are in trouble. With the internet now offering fast accurate information about the world there are fewer reasons for people to buy a broadsheet. And so sales are down, advertising is down, profits are down and the newspaper industry is shrinking.
What should the government do? Well, according to some on the left they should do what they should always do — spend more money. However, as France has discovered, despite a highly subsidised newspaper industry… you can’t force people to read newspapers.
Reason TV takes up the issue…
A pragmatic idea for labour market reform
The case for labour market reform is obvious enough. If people have a marginal productivity of labour below the minimum wage, then they will not get a job. The only way to fix that is to (1) increase their productivity; or (2) lower the minimum wage. Increasing productivity is a slow long-run project, so the only short-term option to increase employment is to lower the effective minimum wage (including all the costs of employing somebody, not just the wage).
Equally obvious is the political reality that prevents real reform. One of the reasons that the Liberals lost the last election was the unpopularity of Workchoices — the overly complex and bureaucratic attempt to marginally increase labour market flexibility. The consequence has been that labour market reform has stalled and gone slightly backwards.
In this context, what can be done? I have one minor suggestion…
The hater strikes again
Gerry Jackson says that he supports the free-market, but he spends a lot of time attacking other free-market writers as ignorant, arrogant, selfish, incompetent, dishonest, cowardly and a “bloody disgrace”. He then whinges about being insulted and ignored.
He claims that he is “Australia’s only Austrian economist” when in reality he is neither trained in economics and nor does he understand basic economics. He then mocks real economists by saying they are “self-appointed”.
In his latest hit-piece, Gerry attacks Des Moore, Sinclair Davison, Chris Berg, Ron Manners and my paper on the carbon tax (a paper he clearly didn’t understand). But that is to be expected, so we can continue to ignore the personal attacks in his hate-filled rants. But the article is interesting for how it exposes Gerry’s ignorance of basic economics.
Update on Zimbabwe
The troubles in Zimbabwe are continuing, despite the power-sharing agreement from September last year. While it is easy to dismiss Mugabe & friends as just a bunch of evil thugs, and conclude that the solution to the world is having fewer evil thugs… it is interesting to note that their primary reform that has ruined Zimbabwe was land reform.
The original rule was that when a farmer wanted to sell their land, they must first offer their property to the government at market rates (unless they have a certificate stating the govt wasn’t interested). It’s not exactly a libertarian law, but it was generally well accepted and could have lead to some land redistribution to black Zimbabweans, as was the plan.
But funny things happen to government plans. Occasionally, politicians get in the way. In an accelerated attempt to bring on asset redistribution — a goal so admired by the left — Mugabe started simply taking the land.
Writing for CATO, Eddie Cross (an opposition MP in Zimbabwe) explains the cost of land reform:
The combined costs of the land reform are staggering— they include US$2.8 billion in international food aid on an emergency basis, nearly US$12 billion in lost agricultural production over 10 years, and a potential US$5 billion in compensation—a total of some US$20 billion.
This might not sound like much for for Australians who have just seen a nearly $60 billion deficit… but to put it in context the Zimbabwe economy is only about $5 billion per year.
With unemployment at 94% and inflation running at nearly 90 sextillion% (ie 90,000,000,000,000,000,000,000), Zimbabwe is a shining example of what a government can do to a country when they have the wrong ideas.
The case for optimism
The sky is falling, the sky is falling. Australia is in a recession and unemployment is going up. Treasury estimates a contraction of 0.5% for this year and unemployment hitting 8.5%. Many others think this is optimistic and that we are in for a deeper and longer downturn.
Maybe they’re right.
But I’m an optimistic sort of person and I can see reasons for hope. The basis for my hope is that the Australian economy is fundamentally sound. Our monetary policy has been stable and balanced, our fiscal policy has been (until this year) equally good. Our financial system doesn’t have significant distortions and we have a relatively flexible economy.
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