Infometrics

Diversification and picking winners

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Following the concerns about botulism and Fonterra, there have been increasing calls for New Zealand to be “diversified” or even for the NZ government to “pick winners”.  Gareth Kiernan touches on these ideas, and why we should be careful with them here.  A choice quote:

Although economic diversity is useful in terms of limiting the volatility of GDP growth, it needs to be remembered that “picking winners” is generally a costly and futile exercise – politicians will usually be worse than entrepreneurs at where to invest resources, and are worse at letting poor performers go.

Remember, it is folly to look at the failures of markets and entrepreneurs without recognising the failures of institutions and government (as a large institution) as well.  In that context, aiming to help out certain firms looks more like taking risk off businesses and putting it on the taxpayer – a shift that hardly seems fair.

What do you think?

jamesz

Summers the communicator

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Communication is an essential part of a central banker’s job. Particularly with the increasing use of forward guidance, markets are becoming exceptionally sensitive to the nuances of bankers’ words. With Larry Summers one of two candidates believed to be in contention to succeed Ben Bernanke as Fed Chair, it is worth reminding ourselves of his style of communication. There is no doubt the man is a brilliant economist but he does have a tendency to shoot from the hip:

Summers resigned as Harvard’s president in the wake of a no-confidence vote by Harvard faculty that resulted in large part from Summers’s conflict with Cornel West, financial conflict of interest questions regarding his relationship with Andrei Shleifer, and a 2005 speech in which he suggested that the under-representation of women in science and engineering could be due to a “different availability of aptitude at the high end,” and less to patterns of discrimination and socialization.

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jamesz

Carney’s compromise

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The past week has seen a lot of excitement in the UK with the announcement of forward guidance by the Bank of England. In my day job I’ve been writing and talking (at 1:22) about it a lot lately, although I tend to leave the macro blogging to Matt. However, I’m going to make an exception for this announcement because there was just so much hype surrounding it.

If you want to know what others are thinking, Britmouse has a great round-up of the reaction so far and it is overwhelmingly negative. Views are split into two distinct camps: there are the people who think there is no output gap and rates should rise sooner, and there are the people who think it didn’t go nearly far enough.
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Matt Nolan

LVRs are coming: Let’s think about the causes underlying this

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I see the RBNZ has come out with the details of the LVR restrictions (loan-to-value limits on mortgages) they may well put in place soon.  That is cool.  I’m also a big fan of the “question and answer” style discussion of people’s submissions here.  Brennan McDonald summarises the details here.

However, in the release about this, there were several quotes about LVRs that I had to admit I had issues interpreting.  Either these quotes miscommunicate the justification the Bank is using for such policies, I have completely misinterpreted the quotes, or they communicate it perfectly and I fundamentally disagree with the association they are using.  These ones are not about housing affordability, they seem to strike at something more fundamental.

As a result, I thought I should have a chat about the quotes in question – and why I think our understanding of them, and the causal mechanisms involved, is central to thinking about policy.

The quotes are:

“LVR restrictions on residential mortgage lending can help to dampen excessive house price growth in periods when credit growth is boosting housing demand beyond housing supply,” Mr Spencer said.  “In so doing, they can reduce the risk of a rapid correction in house prices and the economic and financial instability that would ensue.

“In situations where house prices are overvalued, the further that house prices rise, the more likely it is that a disruptive downward correction will occur.  Such a correction would be very damaging if combined with a significant deterioration in economic or financial conditions.”

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Shamubeel Eaqub

Sped up change: Blackberry, Crackberry, gone?

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Blackberry, the phonemaker that popularized smartphones, may put itself up for sale. It has gone from a superstar to a has-been in less than a decade. Its share price has fallen from a peak of US$140 in 2008 to around $10 now. It was severely disrupted by Apple and other smartphone makers. I am one of those who migrated from obsessing over my Blackberry at the dinner table to obsessing over my iPhone at the dinner table – I don’t miss it one bit.

This had me wondering what it means to live in a fast changing world, where loyalties are fickle and preferences turn on a dime. I had a bit of time at the airport in Taranaki. This blog is asking those questions out loud and does not have fully formed answers. I want your views.

Blackberry share price (from Yahoo!Finance)

Blackberry’s fall from grace is Joseph Schumpeter’s “creative destruction” in action.

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Shamubeel Eaqub

First home buyer help – lets repeat others’ mistakes

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National has announced policy to support first home buyers to take on more debt. It will have an entirely predictable outcome: higher house prices and higher debt. This will drastically increase the cost of the homes, which are as of now being sold. I recently took the assistance of a company to sell my house fast Arizona and not only did the house get sold remarkably soon, but the money was transferred to my bank account without any delay. So this policy which has just got introduced could make things for potential home buyers a little difficult.

The only good thing about this policy is that it is relatively small: $64m over four years. That’s $16m per year and assuming 90% gearing, $160m of house sales. That’s just under 0.5% of $36b of housing turnover in the year to July 2013.

To National’s credit they couch it in terms of a short term response and in the backdrop of other work to look at housing and land supply. But it is still a bad policy that inflames demand for housing even further, before they have tangible impact on increasing supply.

First home ownership subsidy/support policies have been tried in USA, Australia and UK. This led to a high amount of borrowing by those who could not afford it. It was also at the heart of the sub-prime crisis in the USA and the subsequent GFC. Read more