Lessons from America

Cory-Bernardi

The methods of successful grassroots political activism in America should be adopted by Australian conservatives, writes Senator Cory Bernardi.

The sight of over 300,000 Americans gathering on the anniversary of Martin Luther King Jr’s "I have a dream" speech to express their own dream of restoring honour to their government has some important lessons for us all.

Firstly, it serves as a reminder that people power can actually make a difference, not just at the ballot box, but by influencing the behaviour of their government.

The political left have been doing this for decades by vocalising their manifesto to audiences small and large. Most recently, this has been exposed through the Greens’ leaked emails calling for volunteers to defend Bob Brown on talkback radio and orchestrated newspaper letter writing campaigns in support of their radical policies.

Those on the right of the political spectrum have typically been less engaged in the public propaganda war as many of our supporter base are more interested in getting on with life, making a go of their business or career, and spending time with their family rather than public advocacy.

The most notable exception was the mass protest that led to the Liberal Party opposing Labor's Emissions Trading Scheme. The full implications of that decision are still to be determined, but it is fair to say that change has met with considerable success.

However, the rise of the independents and informal votes suggest that many Australians are still sceptical of the major parties, feeling that they do not fully reflect their concerns, hopes and aspirations.

While some politicians and political parties might feel threatened by this voter discontent, I consider it an incredible opportunity to overcome political apathy.

This is the second lesson from the amazing United States rally.

If government take the electorate for granted, or use pithy clichés as an excuse for prudent policy, there is an opportunity to engage a new group of Australians in political activism.

Those that Sir Robert Menzies described as the forgotten people we might today categorise as the disillusioned people. They are those who don't vote or those who remain unconvinced of the merits of the major parties.

Of course there are many hundreds of thousands of Australians who vote for major parties in spite of their reservations about their ability to fulfil our nation’s needs.

These groups too need to raise their voices and engage in the public advocacy of ideas that have stood the test of time. In essence, the conservative majority need to be engaged in public debate about the virtues and values that have been undermined through a preponderance of leftist orthodoxy.

That is the lesson of the American 'tea party movement' for Australia. To effect real change you need your voice to be heard. Unfortunately, the individual common sense voice is oftened drowned out by the organised collective, demanding a radical policy agenda.

Whatever the outcome of this election, I hope that the conservative mainstream of Australia will use it as a launching pad to challenge the organised voice of the radical left. Once that occurs, the next challenge will be to have the voice of the people accurately represented in the media.

Senator Cory Bernardi is the Shadow Parliamentary Secretary Assisting the Leader of the Opposition and a Senator for South Australia. This article is courtesy of his personal blog which can be found athttp://www.corybernardi.com.

Short and sweet

Short sellers are a convenient government scapegoat during a crisis, writes Dr Joseph Clark.

There is still some confusion over short selling. This confusion leads people to support bans and restrictions on short selling which make very little sense. I think some of the concerns stem from simple misunderstandings and so I’m starting a public education campaign.

The simplest type of short sale is a forward sale agreement. If I enter a contract to sell a bicycle one week in the future I have made a short sale. If I own a bicycle at the time I enter the contract it is a ‘covered’ short sale. If I don’t own a bicycle at the time I enter the contract it is a ‘naked’ short sale.

Almost all commercial contracts involve a short sale because the delivery of goods comes after the contract is entered. Many are naked short sales, usually because the seller needs the cash to pay suppliers before they can provide a product.

From this perspective short sales are not very strange or scary. On the other hand if short sales are ‘selling securities you do not own with the intention to benefit from a fall in the price’ they sound quite strange and dodgy, possibly dangerous.

The confusion comes from convoluted explanations of repurchase agreements. A short seller will borrow a security for an agreed rental rate and immediately sell it for cash. When the time comes to give the security back to the lender he will purchase it at the market price. The lower the price when he repurchases the more money he makes.

Many people feel uncomfortable with this. Part of the discomfort probably stems from the process, which seems a little complicated. Part stems from the fact that it seems a bit dodgy to sell something that someone just lent you. Another part stems from the fact that the short seller wants the price to go down: he desires the misery of others. He might even attempt to manipulate the price downwards to further his evil agenda.

All this silliness can be dissolved by looking at another example of a short sale: a cash loan. If I borrow $10 for a week and use it to buy lunch I am short $10. I have borrowed the cash at a set rental rate, sold it immediately at the market price, and need to repurchase it before the loan is due. It is exactly the same process as short selling a stock, except now it is much less strange and scary.

The effect of short sales is unambiguously positive in terms of market efficiency. Markets work by agglomerating information from many buyers and sellers. Some people think a security is underpriced: they buy it and push the price up. Some people think it is overpriced: they sell (if they own it) or short sell (if they don’t). If short selling is banned a part of the market is not permitted to express their views on the price. The result is biased prices, at least temporarily.

The net effect of bans and restrictions on short sales is not necessarily higher prices. Prices eventually reflect value, even if they are initially imperfect. Market participants might rationally respond to a short selling restriction by selling any stock they own, anticipating the upward bias. The net effect on prices might be up or down, but volatility will certainly increase.

There are also broader issues of property rights and freedom of contract at play. Bans on short sales are enacted by preventing current holders of stock from lending it. The ban lowers the value of their property by denying them a rental income. This is simply an appropriation of property rights without just compensation.

Short sale bans have been popular government reaction to financial crises. Hoover condemned short sellers for their role in the 1929 crash and investigated their role in prolonging the depression. Various restrictions were introduced. In 2007-8 governments around the world responded to a market downturn by banning or heavily regulating short selling.

Short sellers are a convenient scapegoat for a crisis. Restrictions create the appearance of government action during a public panic. A witch is burnt; the villagers are appeased. Nothing changes. When the harvest fails again there will always be someone else to blame.

Joe is a commodities trader for an undisclosed investment fund. He also teaches macroeconomics at the University of Queensland.

Abbott needs fingers off the Tigger trigger

Terry Barnes writes for The Age today:

Much has been said about how Abbott has grown in stature as an alternative prime minister. Relatively little has been said about how Abbott would actually operate as PM if he gets the nod from the group of crossbenchers who now hold the key.

Abbott himself has given mixed messages. "I can't promise that everyone is going to agree with everything I say and do and I can't promise that I will never make a mistake, but I'll have a cabinet, a staff, a party room, a Parliament, a judiciary and a media to keep me on the straight and narrow. So I'm sure they'll manage one way or another," he told The Age. This is Careful Tony.

But earlier, Abbott had told undecided voters at the Rooty Hill RSL: "If I'm the prime minister, I don't get overridden by my cabinet colleagues." Like the hyperactive tiger in Winnie-the-Pooh, this is Tigger Tony.

Abbott's political life is an unceasing struggle between Careful Tony and Tigger Tony. Generally, Careful Tony wins out and in the campaign he triumphed remarkably, but Tigger is never far away.

via www.theage.com.au

Click through the link above to read the full article. Terry is an editor of Menzies House.

A Faceless Strategy with a Public Face

Ben-Scott For a strategist that prides himself in statistical evidence and research methodology Karl Bitar listened too much to what he wanted to hear rather than what he needed to hear, writes Benjamin Scott.

“Just keep stirring the pot, you never know what will come up”, once quipped American political strategist Lee Atwater. Always a man to listen to the Republican supporter base and add a V8 engine to that research, these techniques delivered more than one American President for the Republican Party.

The Australian Labor Party is currently looking at a once pristine and all-Australian made V8 political machine which has been reduced to a Korean 4-cylinder.

It has been interesting to observe the ramifications of this as state apparatchiks and has-been hacks accuse the state and federal Labor organisations (and each other) of gross campaign incompetence. Much of this has been directed at current National Secretary or ‘Chief ALP faceless man’ Karl Bitar.

Karl Bitar is an interesting individual. An economics and research methodology graduate from the University of Sydney and former statistician at the Department of Education, Employment and Training during the Keating years, he knows plenty about political pain.

It may be surprising but the criticism levelled at him following the 2010 Federal Election surprises me. This is a political animal trained in the most hostile of political environments, with crumbling political power in his home state of NSW to a potentially disastrous scenario playing out in Canberra, yet he sought to ‘sandbag’ electorates and is now widely accused of doing so.  What is the big surprise here?

The big surprise was in the very sub-standard and inadequate results his usually impeccable research has produced for past ALP victories. Specifically for this occasion is the failed research they produced on his target…Tony Abbott.

From day dot, the ALP research and campaign machine sought to portray Tony Abbott as ‘unelectable’. This was a fatal mistake and it was a mistake that was recognised by their political opponents from a very early stage. This seemed to create a permanent ‘feedback loop’ to the remaining research and strategy for the ALP campaign. In political campaign terms, that in itself is like a cancer and is almost just as impossible to stop.

What is currently occurring amongst the ALP structure after this federal election is akin to removing a terminal cancer in a vital organ. If they fail, the ALP is facing a fatal outlook for future state and federal elections.

Perhaps the most ironic part of this clinical assessment is the fact that Karl Bitar is amongst the most intelligent and ruthless strategists the ALP may ever see. So why is he being crucified? The answer lies in research only just delivered to him. That he was listening to people who wanted to win rather than people who were telling him how to win. In other words and in a very crude sense, he listened far too much to ALP supporters rather than those voters in the marginal seats of QLD, NSW and WA that he was seeking to ‘sandbag’.

Of all things spoken about Karl Bitar both past and present, I doubt political commentators will accuse Mr Bitar of listening to the ALP base too much. But in reality, that is exactly what he did.

Benjamin Scott is the Inaugural Vice President of the Young LNP in Queensland, was an LNP campaign strategist in the last election and a former staffer to politicians at all levels of government. He now works as a Government Relations and Communications Manager in the private sector.

Stirring the Possum – A pox on all your houses!

David-Russell The Larrikin (David M. Russell) is back with the latest installment of Stirring the Possum.

Pathetic! What a complete and utter bloody shambles that was! If this election was a used car it would be left abandoned outside the sales yard with the word LEMON splashed across its bonnet, boot and side doors in hand-applied yellow house paint. Sadly, it doesn’t matter who gets to be the next Prime Minister of Australia because it is doubtful whether any more than a few sectoral niches of our society will be happy with what eventuates over the next year or two. Worse, the damage to the fabric of our nation has not yet even begun.

There may be strident cries from some quarters that this negative sentiment is a slight on our democracy. That is not the intention though it might be a deserved outcome. Democracy is a flawed beast even though it is the best system we have available to us. Doesn’t mean we have to love what it delivers us, though.

The major parties all deserve to hang their heads in shame. The campaigns they waged were shallow and shambolic. The smarties (those faceless, smarmy, conniving, treacherous, power-hungry and malevolent misfits who hold sway behind the scenes) will swear blind that attack ads work. They do not. Well, not for the bulk of Australians at this point in time. For those who do get sucked-in by their vitriol: please try to grow up and get over it.

Attack ads are effective in the same way as having your leg torn asunder by a rabid dog: it’s very effective at stopping you from ever walking again but it doesn’t make you love the dog. More to the point, we are over spin. This is an issue whose time has come. But, first . . .

It was a sad day when western societies became so arrogant that we felt we could deride vision. Anyone remember the eighties when the epithet “oh, that vision thing . . .” was slung around with gay abandon? We were so smug. But chooks come home to roost and we now find that we crave some decent vision.

Tony gave us some real action with a five point plan but it utterly failed to tell us what kind of Australia he believes in and how he might remake this country in whatever image he holds dear. Poor dear Julia just threatened to keep moving us forward like cattle entering an abattoir. Yes, it would provide us with a sense of purpose but we really didn’t have a good feeling about the eventual outcome.

And those bloody Greens! Yeah, yeah, one in ten of us is crazy enough to support them. But numerical support alone does not deliver legitimacy. That Brown chappie, who is as populist as a whore strutting a sidewalk, needs to be held to account. He professes to offer the Greens as a mainstream party. Indeed, he demands a level of respect due to a mainstream party. Hubris, Mr B. Shame on you! If you want that level of respect, develop an appropriate policy platform that would inform Australians just how you would govern the nation if you held that power. Terrifyingly, we have no such knowledge of your objectives. In its absence be judged as the niche splinter group you really are.

But WE – us poor, common folk – must now live the nightmare of soon having the Greens able to determine just how every piece of legislation that goes through our national legislature will be not only framed but detailed. This from the folks who guarantee five weeks’ paid recreation leave for every worker every year. Anyone game enough to think how many people will lose their jobs when employers start to add up that cost? For god’s sake, Greens, this is the real world, not some fantasy island on which you can dream-up Willie Wonka’s chocolate factory and have it power the national economy.

The regrettable aspect of this election is that it has formalised uncertainty in our system of government. Sure, it is the legitimate outcome of the democratic process. But it is not good for the country. For those who argue that good times are ahead because all issues can and now will be debated on their merits, I am envious of your delightful dream world. For a start, decision-making will be delayed. Procrastination will become an indelible part of our governance. When nobody has a clear mandate, indecision is entrenched.

Watch the world drift away from a focus on our input to global initiatives. When other nations realise Australia’s new decision-making dyslexia, they will tune us out. If we do not know our own mind clearly then our viewpoints are weak. Some will suggest the consequences will be negligible. That is not a convincing concept. We have been privileged for the past few generations to have played well above our weight in global forums but that now stands threatened.

The greatest damage will be that caused to our economy. Markets – like them or loathe them – guide our destiny. Our global economy is a capitalist convocation and our individual prosperity depends not just on good governance but a sense of well-being to infuse the financial sector. When those guys get nervous, the rest of us pay a high price. Global markets will look at us askance from here on but local markets will be even more scared of the uncertainty. Like a horse frightened by stirrings in the night, they will spook easily and that portends real pain in the hip pocket for most of us.

It should not have been so. Our major parties have lost sight of their core premise: to proffer a system of good governance that will benefit the vast majority of our people. They have become focused on power at the expense of philosophy and it is not a good thing. The clash of ideas and ideals is what creates great nations. The clash of initiatives and invective is the stuff of fools.

Australia has been sold a pup and we have a right to be angry. Yet we are a forgiving mob and whoever realises their mistakes first, stands to reap a bountiful harvest. There have been few other occasions in our history that the people have been so focused on achieving a better outcome. Does anyone have the requisite leadership?

Visual vs Invisible

Andy-SempleEnvironmentalists are wasting their efforts on climate change when there are immediate problems that deserve greater attention, writes Andy Semple.

Plastic bags, plastic bottles, plastic toys – even the flawed 2007 fashion must have – Crocs – end up in the Garbage Patch – a "plastic soup" of waste floating in the Pacific Ocean that is growing at an alarming rate and now covers an area twice the size of NSW, scientists have said.
Though the garbage patch provides a visible reminder of how humans can trash the environment, the vortex isn't carpeted with a surface layer of plastic.
Much of the plastic has broken down into tiny pieces that saturate the water and become a toxic part of the marine ecosystem.
But unfortunately the ocean is a big place, and once it's out of sight, it's out of mind.Of course the climate change alarmists and snake oil sales men like Al Gore tell us the only ‘pollution issue’ that really matters is Anthropogenic Global Warming.
So rather than worry about pollution we can see with our own eyes like the plastic soup of waste floating in the Pacific Ocean we are now spending an inordinate amount of resources worrying about an odourless, tasteless and invisible gas – CO2 – a gas that is so important for the cycle of life, that without it, ALL life on this planet simply would not exist.
Seems we humans are well on our way in choking the ecosystem rather than heating it up.Charles Moore, an American oceanographer, came across the sea of waste by chance in 1997, while taking a short cut home from a Los Angeles to Hawaii yacht race. He had steered his craft into the "North Pacific gyre" – a vortex where the ocean circulates slowly because of little wind and extreme high pressure systems. Usually sailors avoid it.
He was astonished to find himself surrounded by rubbish, day after day, thousands of miles from land. "Every time I came on deck, there was trash floating by," he said in an interview. "How could we have fouled such a huge area? How could this go on for a week?"
Mr. Moore said that because the sea of rubbish is translucent and lies just below the water's surface, it is not detectable in satellite photographs. "You only see it from the bows of ships," he said.
Enormous numbers of fish and birds die after eating tiny plastic morsels mistaken for prey.
According to the UN Environment programme, plastic debris causes the deaths of more than a million seabirds every year, as well as more than 100,000 marine mammals. Syringes, cigarette lighters and toothbrushes have been found inside the stomachs of dead seabirds, which mistake them for food.
Plastic is believed to constitute 90 per cent of all rubbish floating in the oceans. The UN Environment programme estimated in 2006 that every square mile of ocean contains 46,000 pieces of floating plastic.Eighty percent of the waste stream is land-based, explained Moore, "It's coming from rivers, streams, drains, gutters, and beaches within a mile or so of the shoreline."
Dr Eriksen, a research director of the US-based Algalita Marine Research Foundation, which Mr. Moore founded said the slowly rotating mass of rubbish-laden water poses a risk to human health, too.
Hundreds of millions of tiny plastic pellets, or nurdles – the raw materials for the plastic industry – are lost or spilled every year, working their way into the sea. These pollutants act as chemical sponges attracting man-made chemicals such as hydrocarbons and the pesticide DDT. They then enter the food chain. "What goes into the ocean goes into these animals and onto your dinner plate. It's that simple," said Dr Eriksen.
Because it is out of sight very little is being done about it. Quite correctly, a massive amount of money was thrown at the recent BP Oil spill which in the context of a proposed global Cap & Trade scheme looked like a pimple on the ass of an ant and here lies the problem. Governments and Environmentalists of all persuasions are so hell bent on the scourge of AGW that they have dropped the visual pollution ball. Unlike the theory of AGW, there is absolutely no doubt that the plastic soup mess was created by humans and it’s about time we cleaned it up.
If you’re looking for a good reason to cut down on plastic consumption, here it is.

 

Large great-pacific-garbage-patch
Andy is the founder and Managing Director of Stockbroking firm ANDIKA and the co-founder and Managing Director of boutique Funds Manager Xcelerator Capital Limited. He blogs regularly at www.andylsemple.com

The General Glut Controversy 207 years on

Dr Joseph Clark writes on Keynesian economics and the stimulus packages that sought to remedy the global financial crisis.

The general glut controversy is an ancient feud. It arises from a seemingly absurd question: “Can there be too much of everything?” Until the 1930s the respectable answer was “No”; from the mid 1930s to the 1970s it was mostly “Yes”; then “No” again during the 1980s and 1990s; the early 2000s was “Maybe”; and after 2007 to the present time again “Yes”.

The question is subtle, misunderstood by almost everyone, and of profound importance to many questions of economic policy. Most recently the debate over ‘stimulus’ was implicitly a debate over gluts, though few realised it.

I propose to give a simple account of the glut question, and I expect to fail.

Consider a two person, two good exchange economy. This is what it sounds like: there are two people (we will call them Alice and Bob) who produce two goods (apples and bananas). Alice and Bob exchange apples and bananas at some ratio and choose levels of production to maximise their happiness as they see it.

In this scenario there might at some point be a surplus of apples or bananas: Alice might produce more apples than Bob is willing to buy at the prevailing exchange ratio.

For one reason or other Alice does not sell the apples at a discount (accept fewer bananas for each apple). She either stores the apples or lets them waste. In this case there is a “glut” of apples.

There is a glut of apples but also, and equivalently, there is a shortage of bananas. This follows since there are only two uses for apples: eating them or exchanging them for bananas. Bob did not produce enough bananas to exchange at the prevailing ratio.

It is important that this occurs at the prevailing apple/banana exchange ratio. We assume that prices do not adjust to balance demand and supply, at least in the short run.

In this example it is very clear that a surplus of one good is identically a shortage of another. The same logic would hold if we introduced Carol to produce Cumquats, Dorian to produce dates, and Edward to produce eggplants: there might be a glut in a particular good but it would imply a shortage in others. Overall, gluts and shortages balance out. There cannot be too much of everything; there can only be too much of some things and too little of others. There are no general gluts.

There are a number of equivalent ways to make this statement: “Aggregate demand equals aggregate supply at all price levels”, “There cannot be a deficiency in aggregate demand”, “There cannot be involuntary unemployment.”

Now we introduce money and things change a little. Say that it becomes convenient for Alice and Bob (and Carol and Dorian) to use money for their transactions. Money is a good that has no value except in exchange. The same is true of most wedding gifts. People exchange goods for money and then later exchange money for goods.

Good. So what effect does money have?

There still cannot be a general glut, but there can be a surplus in all goods (apples and bananas) relative to money. At some point Alice might want to hold on to a larger amount of money – to save more. If less money is produced than Alice desires at a certain level of prices then there is a glut of goods (and a shortage of money).

This can be bad for a number of reasons. If Alice hoards money she will not purchase bananas. Bob will not be able to sell his bananas so he will reduce production. He also now has less money to buy apples, so Alice will sell fewer apples. And so it goes. This is known as the paradox of thrift: By saving Alice reduces demand for goods and causes a reduction in output (a recession).

There are two main ‘market’ solutions to this problem. One is to wait for the value of money to adjust (money needs to be worth more against goods). If this happens the problem goes away; money costs more and so Alice will hold less money and more bananas.

The second solution is for Alice to lend her savings to Bob so he can afford to buy apples from her. She might just as well sell him the apples on credit. If she does lend money to Bob she actually creates money in a certain sense because the loan itself can be used as money. (Bob writes “I owe Alice $10” on a piece of paper and Alice uses the piece of paper to purchase dates from Dorian. Meanwhile Bob uses the money to purchase apples from Alice.)

There are also two main non-market solutions. One is to take the money from Alice and spend it on bananas. Then Bob never needs to reduce his production and will have enough money to buy apples from Alice. This is called ‘fiscal policy’.

The other solution is to increase the amount of money. The new money can either be spent directly by a third party (let’s call him Gerald) or lent on favourable terms to Bob to buy from Alice. This is called ‘monetary policy’.

Which solution is best? It depends.

It depends mostly on how quickly the market mechanisms work. Alice would probably be wise to lend her savings to Bob. She could be convinced to lend at a sufficiently high rate of interest, and things would start getting better. Even if she didn’t it might not be so bad. The price of money would naturally increase (the price of goods would go down). This is ‘deflation’.

On the other hand these mechanisms might not work. Alice might be fearful of Bob’s creditworthiness and so not lend to him (apples or money). The increase in the price of money (deflation) might also create some uneasiness. The price adjustment process will be tricky because it is difficult for Alice and Bob to distinguish between a broad price decrease against money – which does not affect the correct level of production – and a change in the relative price of apples and bananas – which does.

If Alice lends to Bob money at a high interest rate that can be bad too. The rate of interest determines the demand for loans. If production is already depressed an increased interest rate will make things worse, at least in the short run.

On the other hand the non-market solutions also have problems. If we take money from Alice to spend on Bob’s bananas she won’t have that money to spend on Cumquats, or to lend to Edward to finance his new eggplant farm. Maybe these were better uses of her money. Similarly, pushing up the price of bananas means Bob will spend more time producing bananas at the expense of his other activities. Maybe he will buy some land from Carol to expand his banana farm. We might end up with lots of bananas and little else. This unfortunate side effect of fiscal policy is called ‘crowding out’ – Bob’s increased banana production comes at the expense of production and consumption of other things.

Increasing the amount of money also has problems. Ideally the increase would not affect relative prices: everything would just get cheaper and the goods glut would be solved by a manufactured glut of money. But more likely the prices of some goods will increase before others, particularly if the new money is not distributed proportionally to everyone. Creating new money devalues old money. The increase in money is costly for Alice, who will find her savings can be exchanged for fewer bananas than before.

We have expanded our example to a fairly general setting. There are many goods and people, production, a credit market, a government (Gerald), a factor market (for land), a central bank. In our story sticky prices for bananas and a precautionary money demand from Alice caused a recession. It’s debatable whether this was a general glut. If you count money as part of the economy it isn’t, if you don’t then it is.

There are four possible responses in this situation: (1) the market expands the money supply organically (Alice supplies credit), (2) the market reprices money in terms of goods (money becomes more expensive, goods cheaper), (3) the money supply is increased, or (4) money is taken from Alice and used to buy Bob’s bananas.

Back to reality

This story is not too different to Keynes’s motivating example for his General Theory. He argued that at the start of the 1930s British wages had failed to adjust downwards, in part due to strong labour unions. This meant that workers could not profitably be hired at the prevailing wages. These involuntarily unemployed workers earned no money and so were unable to consume goods produced by other firms who then had to fire their workers and so forth. This was in Keynes’s view a central cause of the Great Depression.

Keynes’s solution for this situation was twofold. First, the government should print money to create inflation. Inflation reduces the real (inflation adjusted) wages and induces firms to hire more workers. The cause of the problem is wages not adjusting correctly (price stickiness) and the solution is for the government to change the price by decreasing the value of money relative to goods and services (inflation).

Second, the government should hire the unemployed workers. The type of work is not particularly relevant; the point is to get money into worker’s pockets so they could spend again.

Keynes combined the two solutions in an ingenious scheme: he proposed that the government print money and bury it in a secret location. A mining industry would develop to discover the buried treasure, hiring the unemployed and increasing the money supply in the process.

Keynes was very influential at the time and his recommendations were introduced (though lamentably never burying the money supply underground). The recovery was slow, but it happened eventually. In America, Roosevelt’s New Deal programs began in 1933 (Hoover was already running substantial budget deficits from 1929) and the recovery in employment came in 1939.  A new generation of Keynesian economists and politicians were quick to take the credit and the first golden era of Keynesian demand management had begun.

Faith in Keynesianism was shaken when, during the golden era, inflation blew out and growth slowed. To the surprise of many, high inflation coexisted with high unemployment and low growth – this came to be called ‘stagflation’ (unemployment + inflation). High inflation also led to high interest rates as lenders insisted on being compensated for the lower value of future repayments.

The worm turned eventually. Paul Volker became chairman of the US Federal Reserve in 1979 with inflation well above 10% and unemployment at 7.5%. He set about a savage reduction in the money supply. The federal funds rate reached 20% and the unemployment rate 10.3% in 1981. But by 1983 inflation was down to 3.2%. Interest rates dropped too and a recovery in employment and production followed eventually.

After the early 1980s monetary restraint became conventional wisdom. Although the Federal Reserve never adopted an explicit inflation targeting framework (unlike the central banks of Australia, New Zealand, the United Kingdom, the European Union, and others) price stability is now central to their decisions.

The 2007-2010 recession was of a slightly different sort. Innovations in the financial markets had created a very large and interdependent credit market. Concerns over the value of some commonly traded loans (particularly residential mortgages) led to an abrupt and unexpected freeze of the interbank lending market. Banks became worried about the solvency of their counterparties and so cut back lending. Banks who could no longer borrow from each other stopped lending to companies. Several large banks collapsed or were nationalised, many others came close. The same happened with other large companies. The US S&P 500 index declined from 1565 to 676 between September 2007 and March 2009.

The government response was textbook Keynesian. Central banks increased lending and cut lending rates. This increase in the money supply was targeted to offset the decease in the money supply caused by the decreased lending. There was, in the opinion of policy-makers, a glut in assets and a shortage of money to buy them.

The US government began an aggressive program of purchasing loans from private banks. Residential mortgages and corporate loans were purchased for cash and in large size. This was part fiscal policy, part monetary policy. The money to purchase the loans was created, and in that sense it was ordinary monetary expansion. But the money was used to buy assets (loans) which had depressed market prices. Direct purchases by government are usually considered fiscal policy, but in this case they were a bit of both.

There were also more traditional fiscal policies. Increases in unemployment benefits (both size and duration) were common internationally, as was increased spending on infrastructure projects and other government spending that could be bought forward quickly. Again, the rationale is the existence general glut. Savers are rationally thrifty in uncertain times, but their thriftiness decreases spending, which in turn decreases production and employment. If money is taken either through current taxes, future taxes (borrowing), or inflation (money printing) and spent by the government the cycle can be averted.

The apparent stabilization of the world economy in 2010 is widely viewed as a victory for the Keynesians. As in the 1940s Keynesian economists and policymakers are claiming vindication for their ideas and heralding a new era of demand management. As with Great Depression, not even time will tell for sure. It is impossible to know the counterfactual: what might have happened without the stimulus?

But there are many voices of discontent. Large scale involvement in the economy can be damaging in a number of ways. Both fiscal and monetary policy have the capacity to shift production in the economy towards less valuable output. Government programs can crowd out investment and consumption in unpredictable ways. Monetary expansion will be inflationary eventually; in the short run it will punish savers. Whether or not the recovery truly was purchased with spending, the spending must be paid back. Governments have taken on unprecedented levels of debt to fund the stimulus programs; in the years ahead it must be repaid, hopefully with the proceeds of a recovery, but nonetheless.

More generally, it is possible that governments might misdiagnose a general glut. Asset bubbles occur in the economy and when they burst, as they must, there is a level of economic distress. As inflated asset prices return to earth investors will learn that the wealth they believed they had was illusory. Many will be unable to repay their loans and their creditors, too, will have to adjust to a poorer world. But the adjustment is for the good. A recovery reallocates the resources that were devoted to the bubble. Capital is re-lent, labour is re-trained, and entrepreneurial visions are re-envisioned. If the government programs serve to maintain the bubble prices any recovery will be a mirage. Eventually prices will readjust, and the delayed misery will return with interest.

Joe is a commodities trader for an undisclosed investment fund. He also teaches macroeconomics at the University of Queensland.

PC brigade kills debate on burqa ban

Sushi Das writes at The Age:

It is embarrassing to hear people oppose the ban on the burqa out of slavish commitment to multiculturalism. Western apologists who furnish arguments of cultural protectionism in an attempt to atone for past colonial ugliness seem unaware they have jumped into bed with the murderous regimes that enforce the cloaking of women by pain of violence.

It is equally troubling when anyone who dares to challenge the veil is howled down as a racist, a right-wing extremist or simply stupid.

This was the treatment given to Senator Cory Bernardi when he described the burqa as ''un-Australian''. Christian Democrat Fred Nile was accused of chasing the ''bigot vote'' when he introduced a private member's bill to the New South Wales Parliament calling for a ban on face covering in public places.

Such hysterical responses deter people from expressing their views openly. They also encourage mealy-mouthed mutterings that retard the fight for equality for women everywhere. Political correctness kills intelligent debate.

via www.theage.com.au

Whether you support Das' opposition to the burqa or hold a different point of view, I think that most of us can agree with the final line in the excerpt above. Political correctness certainly is the enemy of free and frank discussion.

I'm glad to say that here on Menzies House we've tried to facilitate this debate, starting with Senator Bernardi's original article, followed by Jake Zanoni's rebuttal, then Muslim writer Ruby Hamad's alternative point of view and only this week James Mangisi's support for a ban.

Let's keep the debate going!

(Posted by Chris Browne)

Strengthening Australia’s Democracy

Joel-ParsonsRadical reform is required to ensure that the many are not held hostage by the few, writes Joel Parsons.

8.5 million first preferences, cast by Australians for either of the parties capable of governing the nation, are currently being held hostage, with a metaphorical shotgun to their head, by three otherwise irrelevant independents, put in their position by a combined total of only 116,900 first preference votes. This is not democracy – this is political hooliganism.

Two party systems are a key part of the balancing act involved in providing stability to a free, democratic society. Consensus politics may work in a hierarchical society without the freedoms we take for granted, but it is anathema to democracy. Athenian-style direct democracy is incapable of providing the stability required to respond to the challenges of modern government – crises as diverse as terrorism, SARS and the GFC.

The ethos of the two party system is inherently conservative – rewarding politicians who humble themselves and work within the system to serve something larger than themselves. To succeed, politicians are encouraged to form long-lasting but broad-based coalitions, and prioritise those parts of their platforms capable of achieving popular support. Critically, the system ensures that at any point between two elections, the government of the day has the confidence of the Parliament – the ability to pass its budget and procure whatever emergency legislation may be required. In emerging democracies, the emergence of an institutionalised two party system from the anarchy of multi-party coalition politics is associated with the strengthening of democratic institutions and a decline in instability.

Where the two party system is weakened, rent-seeking minority parties and “independent” politicians with delusions of personal greatness are given power disproportionate to their legitimacy. Unwilling to do the hard work of building a governing coalition of their own, they refuse to be held accountable for the administration of public policy and yet act as if they have a right to demand that their narrow single issue politics is elevated to the top of the public agenda. Minor parties and independents don't represent the conscience of the nation, nor do they protect hard-won institutions of freedom against the impositions of the majority. Instead, they represent the adolescent screech of those who reject against basic lessons of adulthood: to prioritise your objectives and seek workable compromises with fellow members of your community.

The Australian Democrats great achievements were the diversion of A$1b of proceeds from the sale of Telstra into a slush-fund for environmental pork barrelling, and the creation of an administrative nightmare for Australia's supermarkets and grocers in the form of the exemption from GST for certain basic food items. The Greens voted down the ALP's Carbon Pollution Reduction Scheme for the same reason as an impatient teenage boy might dump his girlfriend – for "not going far enough." By contrast, it was Coalition MPs who fought for decades against the injustice of unions able to run roughshod over small business. Liberal and Labor MPs have just as effectively advocated on indigenous issues as any of the minor parties or independents.

The events of 21 August demonstrate the urgent need for reform of our electoral system. Reform which includes optional preferential voting, so that mainstream voters aren't forced to preference loony candidates; and increased thresholds to get on the ballot, so that toilet paper Senate ballots become a thing of the past; and which preferably also ties public funding for political parties to open, transparent internal processes which neuter the ability of the faceless men of Sussex Street and Trades Hall to parachute their friends into safe Labor seats.

The minor parties, the vested interests and the media may kick and scream. However mainstream Australia, and the history books, will eventually breathe a sigh of relief. An open, stable two party system is in the long term interest of all Australians.

Joel Parsons is a proud Victorian and works in corporate finance advising a range of clients in the mining and chemicals industries, as well as other parts of the extractive resources sector. The views expressed here are his personal views.

Regulators tardy in responding to masters | Money Management

Financial services regulators can't (or won't) meet deadlines for information that have been set by the Parliament:

Australia’s major financial services regulators are still failing to provide the same responsiveness to the questions of the Parliament that they demand of companies working in the financial services industry, according to the Rule of Law Institute of Australia (ROLIA).

The Institute has just completed its second survey of the major Commonwealth regulators investigating how long it takes them to respond to questions asked by Parliamentary committees, and has delivered the regulators another poor scorecard.

Commenting on the outcome of the survey, ROLIA chief executive Richard Gilbert said regulators in general did not answer questions on notice before the due date and, in some cases, delayed answers by months after the due date.

via www.moneymanagement.com.au

(Thanks to reader Steve)