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Monthly Archives: October 2010

The Economist, a most worthy publication, has written a favourable piece on the Tea Parties:

I think its well worth a read simply because we, as non-Americans, aren’t usually exposed to these views. Having been to America and somewhat immersed myself in this sort of stuff, I find their ideology very interesting. That is, the small government ideology that the Economist talks about.

Where it all falls down is when you realise that many in the Tea Party movement – probably the majority, if you believe the reams of survey data – are small government in fiscal matters but big government in social matters. They don’t believe in separation of church and state – look at how they argue, almost facetiously, that the builders 9/11 Mosque have first amendment rights – but they shouldn’t exercise them out of respect for the victims of 9/11. What the hell kind of libertarian are you people? Firstly, its not a typical Mosque – its a religious community centre dedicated to supporting comity between religions and promoting peace and tolerance. What could be more respectful of the victims of 9/11 than to deny the Muslim terrorists what they wanted – a war between Christianity and Islam? Secondly, its not even the 9/11 Mosque – there are brothels closer to the WTC than the 9/11 Mosque. For a more in depth look at the hypocrisy of the Tea Party movement, witness the Classically Liberal blog, one of my favourite blogs. CLS is a libertarian writer, so he knows his stuff and has the cred to go with it. That post perfectly sums up the situation.

More importantly, the Tea Partiers don’t truly understand a lot of what they’re saying. Like Liberals in Australia complaining about ‘the Debt’, when Australia has a tiny amount of government debt relative to GDP, they apply the right principles but apply them wrongly. An adherence to constitutional government is all well and good – but the Constitution also grants the Supreme Court the power to determine what the law is. And the Supreme Court rejected most of what the Tea Partiers are arguing nowadays back in a case called McCullough v Maryland back in 1819. Do you believe in precedent?

Plus, as President Obama pointed out, the filibuster rule creates a de facto requirement of 60 votes to pass any contentious legislation – which has no foundation in the Constitution. And yet, what Tea Partier has objected to that?

Equally, none of them are economists – or they wouldn’t be woefully complaining about the TARP and the bank bailout as much as they do. The bank bailout was absolutely necessary to save the US economy from further pain. In the end, it probably cost the US Government less money than if they failed to enact it – since social security benefits etc would skyrocket under a Great Recession scenario. In any case, the US Government actually made a profit on the bailout package, if you exclude AIG and the small banks.

Normally when one hears another uttering the words, “I have a 9 point plan”, its McHugh J elaborating upon an over-complex test for something or other, or a politician laying out a set of motherhood statements.

This time, that person is Joe Hockey, Shadow Treasurer. Now, as much as I normally make fun of Joe Hockey for being lazy on policy and details (a huuuuge flaw in a Shadow Treasurer or Treasurer), the policy makes sense:

1. Let’s give the ACCC power to investigate collusive price signalling (that is, oligopolistic behaviour), which is exactly what Graeme Samuel has called for;

2. Let’s encourage APRA to investigate whether the major banks are taking on unnecessary risks in the name of trying to maximise short-term returns that conflict with the preferences of those that backstop the system, namely taxpayers;

3. Let’s formally mandate the RBA to publish regular
rather than irregular
reporting on bank net interest margins, returns on equity, and profitability so that we can all determine whether the major banks are extracting monopolistic profits; that is, whether taxpayers are effectively subsidising supernormal returns;

4. Let’s investigate David Murrays proposal for Aussie Post to make its 3,800 branches available as distribution channels for smaller lenders. To be clear, the Coalition does not endorse Australia Post assuming balance-sheet risk and getting into the banking business itself;

5. Let’s ask the Treasury and the RBA to investigate ways to further improve the liquidity of the residential and commercial mortgage backed securities markets, which are an alternate source of funding for smaller lenders, including consideration of the Coalition proposal to extend the Governments credit rating to AAA rated commercial paper in those markets to improve liquidity;

6. Let’s explore further simplification of my beloved Financial Services Reform Act, to make the business of actually getting out and doing business easier and simpler;

7. Let’s direct APRA to explore whether the risk-weightings on business loans secured by residential properties are punitive. Many small businesses tell me that they do not receive sufficient financial benefit from pledging their family home to secure their borrowings;

8. Let’s commission a resolution to the debate about whether the banks should be able to issue .covered bonds., in the same way other jurisdictions allow their banks to, which provides a more affordable line of credit;

9. And let’s wrap up all of this work into a full review of the financial system
a Son of Wallis, or Grandaughter of Campbell, whatever you will.

I am particularly fond of point (1), (3) and (5). What’s more, this plan coheres with good economic policy and with the notion that banks should do what banks do best – which is risk allocation in the economy. And he does that whilst acknowledging (in point 2 and 5) that this theoretical position has been modified by the government’s bank guarantees.

I do have a slight quibble about (5) in that it extends ‘too big to fail’ to smaller banks -> but, as I have argued, something has to be done to make them competitive with the big banks and the securitisation market is likely to be key to that.

Point (8) is rather interesting too. I know its been a big debate in the finance community, but I’m not aware of the pros/cons. As you may know, I worked in equity markets and not in debt markets.

Of course, a 9 point plan won’t work unless backed up by a 90 page policy paper, but its a good start. Especially after his gaff earlier last week.

In case you hadn’t noticed, this blog has re-entered the phase where I get massively bored and continuously spam it with short and rather meaningless posts.

So here’s a quick spray:

The ASX/SGX merger might be the first casualty of the hung Parliament. My one great fear when I learned who would hold the balance of power in the lower House was that the only common ground between the Greens and the rural independents would be their protectionist streak. And it seems like the ASX/SGX merger will be blocked by Andrew Wilkie, Adam Bandt, Tony Crook and Bob Katter. The two wiser independents, the fiscally conservative Rob Oakeshott and  the pragmatic Tony Windsor have reserved their decision until after they have heard from the regulators. Unfortunately, without the support of either these crucial independents or the Liberal Party, the merger will be stopped dead in its tracks.

As I have said, the merger is not a shoe-in. Whilst there are unlikely to be any anti-competition concerns (the ASX is effectively a monopoly anyway, and a merger between two regional stock exchanges only increases competition on the global stage) for the ACCC to worry about, there may be ‘national interest’ concerns. This is a relatively new area of law, or rather an ancient power awakened by New Agers dabbling in the forbidden lost art of protectionism. Under the Foreign Acquisitions and Takeover Act, 1975, the Treasurer, acting on the advice of the Foreign Investment Review Board has the power to block foreign acquisitions which are “against the national interest”.

Whilst the ‘national interest’ test contains many valid concerns (as I have briefly outlined here), those of you who are legally trained should instantly see that it is the most amorphous test imaginable. Those of you who are economically trained can see the litany of semi-racist, colonial arguments that will be put into play.

In addition to the Treasurer’s power under the Act, however, the Government must also pass certain regulations to effectuate the acquisition of the ASX, which is a major financial regulator in Australia. Under a hung Parliament, prima facie, that bill will fail without the support of both Houses.

With some luck, the Liberals will lift their game and support the merger. And with even greater luck, the Labor Party will do the same – which is in doubt, given dark mutterings from various senior ministers.

Readers will know that I have been closely following Premier-Elect Barry O’Farrell’s campaign to lose the upcoming NSW election. That campaign has unfortunately hit another stumbling block, with polls showing that Kristina Keneally’s government is the most unpopular Labor government of all time, in every state and in every circumstance. She is even more unpopular than the Jack Lang government which acted so illegally that the Governor was forced to step in and dismiss him.Yes, that’s right, Ms KK couldn’t be more unpopular if she was Ms KKK.

Ms KK has played a cunning plan to ensure that she loses this election. Her poll numbers plummetted after a policy perfectly designed to lose her votes – losing millions in federal funding because the unions told her to.

And with 11 Labor MPs jumping ship so far, it may be that Ms KKK will lose the election simply by having insufficient MPs to reach the 50% mark. If Mr. O’Farrell is determined to lose this upcoming election, which we know he is, he will really have to lift his game.

One of the big stories of today was the merger announcement between the Australian Stock Exchange and the Singaporean Stock Exchange. Like all merger agreements between well-known Australian companies and any Asian investors, it was greeted with cries of fear.

On ABC News Breakfast, Phil Kafcaloudes pointed out that the story featured on at least 6 pages, and the AFR ultimately concluded there was no solid reason to fear foreign investment in this case.

Now, I’m usually wary of opposing foreign ownership on the grounds that its foreign ownership, because those grounds are usually baseless. But we must remember that the ASX is the primary regulator of companies listed on the ASX and I think its the only enforcer of the ASX listing rules. The theory (which has worked excellently in practice) is that the ASX has market incentives to properly enforce the ASX listing rules because otherwise companies would lose confidence in the ASX, less companies would list on the ASX (or attempt to raise capital on the ASX), trading volumes would decrease and the ASX (which makes money based on trading volumes) would lose money.

I think its worth considering how those incentives might change when you have one company controlling two exchanges. For one thing, that introduces a new incentive – the incentive to have aligning listing rules in the two countries (which takes less account of local conditions). And if the head office is overseas, we must ask how much attention they will pay to the smaller stock exchange’s listing rules. Obviously, I don’t know, but its worth considering that rather than dismissing those concerns as mere racism. It is also not unconsequential that the Singapore government is a cornerstone investor of the SGX (although, not a majority stakeholder).

And of course, those concerns must be weighed against the equally important benefits gained from the merger – the primary one being much easier access to the much larger capital markets in Asia for Australian investors and companies.

I think, in the end, those massive benefits (especially for capital raising) will be insuperable. The question for the regulator is simply how to structure the transaction to avoid some of those potential pitfalls I have mentioned.

Edit: On the other hand, what is racist is the reaction of Bob Brown and the Greens, who oppose this deal because of the supposedly bad human rights record of the Singaporean government. That is a ridiculous reason to oppose this deal considering, firstly that the Singaporean government doesn’t have a terrible human rights record. They seem to be basing it off the fact they have the death penanlty and the general authoritarianism of the government. Secondly, the Singaporean government itself doesn’t have a large stake in the SGX. It’s central bank has a 23% non-voting stake in the company

In the case of Re Lysaght (dec’d) [1966] Ch 191, the Chancery Division of the High Court of England and Wales had to decide a rather interesting question.

Ms Lysaght, in her will, bequethed a large sum of money to the Royal College of Surgeons to be held on trust for British -born students “not of Jewish or Roman Catholic faith”. The College, for some odd reason, refused the gift unless that condition was removed.

Justice Buckley, as he then was, held that the College’s intransigence on this minor point was an impracticality which could not be supervened. And it was a terrible shame to defeat Ms Lysaght’s obvious general charitable intention, so a cy pres scheme was instituted. Since the original charitable purpose of a Jew-free scholarship to the Royal College of Surgeons was impractical, the Court allowed it for another charitable purpose, for example, a scholarship to the Royal College of Surgeons.

Jolly good.

I think the best part of this judgment is when Buckley J strenuously argues that it is not contrary to public policy to discriminate against Jews and Catholics (which would render it a non-charitable trust and thus not eligible for cy-pres). He does say that it is “widely regarded as deplorable” and later on as “undesirable” and “unamiable”.

He is also at pains to stress that Ms Lysaght, Heaven rest her soul, is not a bigot. She took great care in writing out the detail of her will – how it should be administered by the Royal College, which lesser religions ought to be excluded, etc etc. It was just a minor administrative detail, which no one really cares about. haha

Disclaimer: The author of this blog is not liable for those who read anonymous blogs with no credentials or legal qualifications and take it as legal fact or use it for the purposes of legal advice.

Hallowed tradition in the halls of Parliament has it that the Speaker, upon nomination to the chair, must bodily resist his election to that august position.

In like manner, Premier-Elect Barry O’Farrell is doing his best to bodily resist becoming the next Premier of NSW, including by use of the nubile bodies of little children:

It is good to see that Mr O’Farrell places such great store by the traditions of our Westminster system of responsible government. Let us hope, that in government, he shall remember that emphasis on responsible government.


Hmm, I had written a short post yesterday laughing at Joe Hockey, and in particular, Don Randall (faceless Liberal backbencher) mistaking Hockey’s policy for that of the Greens (or, as he calls them, the ‘lunatic fringe’) but it seems to have disappeared.

I think banking reform is quite interesting, but I’m dubious as to how effective the heavy-handed approach suggested by Joe Hockey would be. Any direct attempts to control interest rate rises would be complicated by the fact that the RBA influences the overnight cash rate (ie the interest rate for one day loans) whereas most residential mortgages will be over 5 or 10 or 30 years and the interest rates will be higher. If you tried to constrain increases in residential mortgage interest rates to the increases suggested by the RBA, you would in effect lock in one yield curve. And yield curves are important – they are the reflection of the market’s belief as to future economic conditions and they are the market mechanism for distribution of risk, given those beliefs. If we were to ignore that problem, mandating the residential interest rates (which is what he’s essentially talking about) would mean that the banks would have to recoup their increased costs from either business loans or from their profits. Whilst its always tempting to take away bank profits, you have to remember that this will disproportionately hurt the small banks the most so the big banks will gain an even stronger oligopoly than they already have.

So we are left with the status quo – where banks are allowed to set their interest rates as they please, subject to the rates their competitors set. That, of course, is a major constraint on bank behaviour – competition is what stops the price of anything skyrocketing too high. The other major constraint is that if the ACCC can provably demonstrate that increased funding costs are not forcing up residential interest rates, then the banks could face legal action on that front.

But aside from that, what can we do to stop the banks? The first thing I would do is increase competition in the banking sector. That means increasing the number of smaller banks. Unfortunately, funding costs are greatly increased for smaller banks for various reasons. The major problem is that if I were to open a smaller bank in a country town, I would have a completely undiversified customer base which exposes me to major risks. That’s in addition to the normal problem with starting any new business, which is attracting market share away from existing businesses.

One solution is to effectuate a securitisation mechanism in Australia. We had a small securitisation market in Australia prior to the GFC, with some specialist high yield growth funds purchasing securitised loans on a ad hoc OTC basis. Many of those funds collapsed, as did many mortgage providers based on that model (such as RAMS). The securitisation market has recovered, but not to any great extent.

I think, if Australia is to have effective competition from the smaller banks, they must be armed with an effective mechanism to securise loans internationally. I mean, it would be an excellent way for overseas investment funds to buy into Australia’s booming residential property market. It’s a novel financial instrument which isn’t readily available.

Perhaps the Australian government could set up a government run securitiser (let’s call them Fannie Mae and Freddie Mac) which would centralise the securitisation risk. It could allow a constant flow of purchasers and sellers, to avoid temporary liquidity risks that brought down RAMS. (RAMS had to refinance its debt; and that refinancing period happened to be during the worst of the GFC).

There are, of course problems with this model. I think it may have caused some kind of Great Recession in the US. The key to resolving that problem is ensuring proper information flow – which means very strong disclosure requirements for any loan securitised through this measure.

The only question I have in my mind is whether we have a large enough population to sustain this business model. With only 20m people in Australia and 90% of the mortgage market held by the Big 4 banks, it would be hard to start up an effective securitisation market, which is why the government must be the one to do it.

Joe Hockey yesterday threatened that the Parliament/government has certain policy measures like legislative action to damage banks who raise interest rates above the RBA cash rate rises. He didn’t (and refused to) list any particular measures, but Liberal questioners in the Senate Estimates Committe quizzed RBA and Treasury officials about s 50, Banking Act. THis allows the Treasurer to force banks to set a particular interest rate.

I think this is fascinating from several points of view:

(1) Is this the first hint of the Liberal Opposition intending to govern from opposition, from the floor of a Hung Parliament as I’ve said before

(2) Is this the first hint of the Liberal Opposition deciding to oppose policies for well-considered policy reasonings (as opposed to dumb sloganistic opposition)?

(3) What are the philosophical consequences of a Liberal Opposition baracking for very heavy-handed government?

(4) Is this good economic policy? Effectively, the Liberals are setting a price ceiling on interest rates for consumers. This means, the banks will either voluntarily take a profit cut (which, is always so likely) or raise rates on small businesses. We’ve already seen that small business is being unfairly treated by the banks and this could worsen this problem. And of course price caps create over-supply of funds – which means that there is too much money in the economy, worsening the housing affordability problem -> and potentially creating an Alan Greenspan bubble. Too much money in the economy, flooding into the housing market, creating an asset bubble that cannot easily be burst. That, in my opinion, is an exaggeration of the consequences (after all, the RBA was the one who set those interest rates and this is just enforcing what the RBA originally intended. But it is a fascinating issue from all these points of view.

Source: ABC2 morning news. Sometimes, you get these little insights not on other news sources. I’m especially a big fan of Melissa Clarke for at least two reasons.