US political sabotage of derivative regulation

January 23, 2011

‘An Economic Philosophy That Has Completely Failed’

William Black
Huffington Post

I get President Obama’s “regulatory review” plan, I really do. His game plan is a straight steal from President Clinton’s strategy after the Republican’s 1994 congressional triumph. Clinton’s strategy was to steal the Republican Party’s play book. I know that Clinton’s strategy was considered brilliant politics (particularly by the Clintonites), but the Republican financial playbook produces recurrent, intensifying fraud epidemics and financial crises. Rubin and Summers were Clinton’s offensive coordinators. They planned and implemented the Republican game plan on finance. Rubin and Summers were good choices for this role because they were, and remain, reflexively anti-regulatory. They led the deregulation and attack on supervision that began to create the criminogenic environment that produced the financial crisis.
The zeal, crude threats, and arrogance they displayed in leading the attacks on SEC Chair Levitt and CFTC Chair Born’s efforts to adopt regulations that would have reduced the risks of fraud and financial crises were exceptional. Just one problem — they were wrong and Levitt and Born were right. Rubin and Summers weren’t slightly wrong; they put us on the path to the Great Recession. Obama knows that Clinton’s brilliant political strategy, stealing the Republican play book, was a disaster for the nation, but he has picked politics over substance.
I explained in a prior column how the anti-regulators made the crisis possible and caused the loss of over 10 million jobs.
Anti-regulation proved to be a profoundly negative sum “game” in the financial sphere. Both principals — the home borrower and the lender — lost (negative Pareto optimality). The unfaithful “agents,” however, made out like bandits.
Effective financial regulation is essential to protect honest firms and consumers from the frauds — it is distinctly positive sum. The primary purpose of financial regulation is to limit fraud. President Obama, Summers, and OMB do not understand this fundamental aspect of financial regulation — limiting fraud. Consider this portion of the President’s letter:
“This is the lesson of our history: Our economy is not a zero-sum game. Regulations do have costs; often, as a country, we have to make tough decisions about whether those costs are necessary.
Voluntary transactions should be positive sum — both parties are typically made better off. Fraud causes negative sum transactions. Regulators are the “cops on the beat” in finance. If cheaters prosper, then “private market discipline” drives honest firms and officers out of the marketplace. Vigorous financial regulation is essential to the effective prosecution of elite criminals. Many of the best financial regulations impose virtually no cost. The traditional underwriting rules, for example, would have been exceeded by any honest, competent bank. Indeed, the rules reduced costs to honest firms. The rules imposed material costs only on dishonest managers — and that reduces costs to hones firms and managers. Net, underwriting rules produce enormous net-benefits. That is equivalent to saying that they have a negative cost. The underwriting rules designed primarily to reduce fraud also reduce losses from incompetence, unrecognized risk, and mistake. This means that financial rules designed primarily to reduce fraud are essential to convert the negative sum (fraudulent) transactions that would prevail absent regulation into positive sum (honest) transactions. Because fraud can impose severe “negative externalities,” this transaction-based analysis dramatically understates the net cost savings of effective safety and soundness regulation.
Obama’s proposal and the accompanying OMB releases do not mention the word or the concept of fraud. Despite an “epidemic” of fraud led by the bank CEOs (which caused the greatest crisis of his life), Obama cannot bring itself to use the “f” word. The administration wants the banks’ senior officers to fund its reelection campaign. I’ve never raised political contributions, but I’m certain that pointing out that a large number of senior bank officers were frauds would make fundraising from them awkward.
President Obama’s explanation for his regulatory review program warrants detailed analysis in multiple columns. He decided to place it in the Wall Street Journal as a symbol of his efforts to placate Wall Street (only two sentences of his letter refer to small businesses).
My first column discussing his regulatory review program focuses on gaps in financial “safety and soundness” regulation. This is an area I lived, research, write about, and teach. (If you look at my bio you will see that public administration experts write about my experiences as a regulator.) Obama entitled his letter: “Toward a 21st-Century Regulatory System.” Where have we heard that mantra before? When President Clinton signed the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 Larry Summers proclaimed that the GLB Act was “a major step forward to the 21st century.”
Clinton’s two great deregulatory failures were the GLB Act and the Commodities Futures Modernization Act of 2000 (CFMA). The CFMA deliberately created a regulatory “black hole” for credit default swaps (CDS) by removing the CFTC’s authority to regulate CDS and a regulatory black hole in the trading of energy derivatives that helped Enron’s cartel produce the California energy crisis of 2001. The titles of both of these deregulatory acts included the word “modernization” and the great lie was that the acts they were repealing were archaic. The claim was that we needed a regulatory system designed for the 21st-Century. Summers, Obama’s principal economic advisor, framed Obama’s latest deregulatory foray.
Summers and Rubin remain unwilling to admit that their anti-regulatory financial policies were disastrous. Here’s what Obama said in late 2008 about the decisive role that anti-regulatory dogma played in causing the ongoing financial crisis.
“John McCain has spent decades in Washington supporting financial institutions instead of their customers,” [Obama] told a crowd of about 2,100 at the Colorado School of Mines. “So let’s be clear: What we’ve seen the last few days is nothing less than the final verdict on an economic philosophy that has completely failed.”
Obama’s subtitle is designed to illustrate stupid regulation: “If the FDA deems saccharin safe enough for coffee, then the EPA should not treat it as hazardous waste.” The example is supposed to be self-evident, clearly only regulators could do something so stupid. But the facts are inconvenient to Obama’s scorn — and this is his shining example, the best that the scores of OMB staff that review thousands of regulations could come up with to support this major administration initiative. This is the dumbest rule they found. Obama’s statement about saccharin may seem logical, but it is not. Animal studies originally showed that saccharine was carcinogenic in doses that a heavy consumer might experience. The EPA, therefore, classified the disposal of large amounts of saccharine as toxic. Subsequent studies are now interpreted as showing that saccharine is unlikely to be carcinogenic at such dosage levels. The EPA’s classification of saccharine as a hazardous substance for waste disposal purposes based on its carcinogenic effects in small doses was logical. The logic does not work automatically in reverse. An ingredient can be safe to consume by an individual consumer in extremely low doses yet hazardous in far larger doses. To sum it up, the supposedly dumb rule Obama chose as his lead example did not kill any meaningful number of jobs, was based on the best science then available, and wasn’t dumb.
Consider the overall logic of Obama’s approach to regulation. Under his logic during the campaign, the imperative need was to end the anti-regulatory dogma that was the disastrous product of “an economic philosophy that has completely failed.” When he became President, however, Obama placed Summers and Rubin, the leading Democratic Party purveyors of that completely failed philosophy, in charge of the administration’s financial regulatory policies.

The administration’s policies are largely anti-regulatory. The most important indicators of this point are the things not in the President’s regulatory review program. Obama says that the lack of financial regulation made possible the financial crisis, but his regulatory review program does not require the administration to search out areas of inadequate regulation. Here is the closest Obama comes: “Where necessary, we won’t shy away from addressing obvious gaps….” Huh? The vital task is to find the non-obvious gaps. Why, two years into his presidency, has the administration failed to address “obvious gaps”? The administration does not need Republican approval to fill obvious gaps in regulation. Even when Obama finds “obvious gaps” in regulatory protection he does not promise to act. He will act only “where necessary.”

We know that Summers, Rubin, and Geithner rarely believe that financial regulation is “necessary.” Even if Obama decides it is “necessary” to act he only promises to “address” “obvious gaps” — not “end” or “fill” them.
In the financial sphere, Obama has allowed “obvious gaps” to persist and, by listening to Summers’ continued embrace of an “economic philosophy that has completely failed” he has even made the gaps worse. Obama’s regulatory review program does not promise to fix any of the anti-regulatory actions taken or allowed to fester and grow under his administration. I provide twelve specific examples of these obvious gaps in financial regulation which have persisted and grown during this Obama’s first two years in office. (There are more than a dozen gaps, but it is premature to address some of them, e.g., Basel III, the Volcker rule, and the new consumer financial protection agency, because there is so much uncertainty about the rules that will emerge.) The gaps addressed here are those where Obama has not even proposed to take an action that could prove effective.
The “Dirty Dozen”:
1. Executive compensation is so profoundly perverse that it is intensely criminogenic, but the administration has opposed the FDIC’s modest efforts to reduce the problem. (Both Treasury officials on the FDIC Board voted against the FDIC proposed rule to limit the perverse incentives of modern executive compensation.
2. Professional compensation is equally perverse. Bank CEOs created the perverse incentives that produced “echo” epidemics of fraud by appraisers, loan brokers, and mortgage bankers. Bank CEOs deliberately create a “Gresham’s” dynamic in order to create the perverse incentives that have routinely allowed them to suborn successfully “independent” professionals and turn them into fraud allies. As long as the CEO can hire and fire the independent professional he can succeed in suborning some of the professionals — and “some” is ample. Then Attorney General Cuomo’s investigation, for example, found that Washington Mutual kept a black list of appraisers — but appraisers were black listed if they refused to inflate the appraisals. (It is critical that the reader understand the significance of this finding. Only the lender and its agents can extort the appraiser in order to secure an inflated value. No honest lender would inflate, or permit the inflation of, appraised values. Appraisal fraud is a superb “marker” of accounting control fraud.) Dodd-Frank has some provisions seeking to improve appraisals and credit rating agencies, but the essential “gap” that must be closed now is the ability of the CEO to pick the independent professionals.
3. Honest accounting is the prerequisite effective financial regulation. The administration stood by while Bernanke, the Chamber of Commerce, and the specialized bank lobbyists used Congress to extort the Financial Accounting Standards Board (FASB) to pervert the accounting rules so that banks would not have to recognize their losses. The administration knows that perverting the accounting rules in this manner harms the public in many ways. Not recognizing losses creates fictional bank income and capital. Banks that are deeply insolvent and unprofitable are able to claim to be solvent and profitable. This allows the banks to evade the Prompt Corrective Action law and makes it more difficult for regulators to prevent expensive bank failures. It also allows the controlling officers to pay the officers tens of billions of dollars in bonuses that the officers have not earned. The same accounting scam makes the administration’s (self) vaunted “stress tests” a sham. Obama can end the banks’ accounting scams and end these anti-regulatory disasters at any time because banking regulators have the power to impose regulatory accounting principles that would restore honest accounting and restore effective bank regulation. I shouldn’t have to keep emphasizing this, but honesty in accounting is also essential to integrity – and integrity is essential to everything.
4. The accounting scams combined with the Fed’s secret bailouts of insolvent U.S. and foreign banks also allowed the administration to enter into a cynical gambit on TARP. The continuing Fed’s subsidies are far larger than TARP. Bank CEOs were eager to get out of the TARP restrictions on executive compensation. The administration was eager to claim (A) that it had resolved the banking crisis, and (B) that it did so for a pittance. The accounting cover up of bank losses combined with the Fed subsidies were the perfect (political) answer that met the banks’ and the administration’s greatest desires. The combination allowed the banks to repay TARP. The banks got to hide their losses, receive large subsidies and cheap liquidity from the Fed, and report fictional profits that allowed them to repay the TARP funds and pay large bonuses to their officers. The administration got to make the absurd claim that it had resolved the largest banking crisis in U.S. (measured in absolute dollars) for a pittance (roughly20 billion). (The real economy and real estate losses in the many trillions of dollars produced20 billion in bank losses. “Too good to be true” hardly does justice to the absurdity of Geithner’s claims that he “resolved” the failures virtually without cost.) The combination of covering up and secretly subsidizing the SDI’s losses also explains the SDIs’ unwillingness to lend to the real economy. It’s safer to borrow funds from the Fed at next to nothing, buy bonds, and clip coupons. This perverse dynamic is one of the important factors, along with fraud, that has made the economic recovery so weak. We are following the failed Japanese strategy.
5. The Fed is an “obvious gap” in regulation. The Fed has consistently sought to prevent the Congress and the public from learning the disgraceful facts of its bailouts and subsidies of the most undeserving rich in modern history. TARP did not resolve failures. The failures have been covered up and subsidized by the Fed. There is an urgent need to regulate the Fed. The Fed has a consistent record of regulatory failure and is actively hostile to transparency. During Obama’s term in office, Bernanke appointed as the head of all Fed examination and supervision an economist with no experience as an examiner or regulator. The economist is a strong proponent of the anti-regulatory economic philosophy that completely failed. Greenspan used him as the agency spokesman before Congress supporting the passage of the Commodities Futures Modernization Act of 2000 – the Act that created the multiple regulatory black holes that allowed the frauds that caused the California energy crisis of 2001 and contributed to the frauds that drove the ongoing financial crisis.
6. The Fed’s regional banks have private directors with untenable conflicts of interest. The U.S. has already reached the policy decision in 1989 that such conflicts pose an unacceptable danger of producing ineffective regulation when it enacted FIRREA, which removed any conceivable authority of the private directors over the regulatory process.
7. “Too big to Fail”: The administration could end the obvious gap in regulation known as the “too big to fail” doctrine at any time by adopting regulations that would stop the systemically dangerous institutions (SDIs) from growing and shrink them to the scale they would no longer pose a systemic risk within five years. (These regulatory gaps interact – many of the SDIs are insolvent yet are paying extraordinary bonuses to the officers that caused their massive, unrecognized, losses.) Instead, of shrinking the SDIs, the administration encouraged the SDIs to grow even larger and pose greater systemic risk. The administration opposed efforts to amend the Dodd-Frank bill to require the end of the SDIs. Remember, it is the administration that is telling us that there are 20 U.S. banks so large that as soon as the next one fails it is likely to trigger a systemic crisis. It is insane to roll the dice twenty times a day waiting for the next world crisis. The SDIs are one of those “obvious gaps” that the administration doesn’t find it politically correct to “address.” Effectively regulating the SDIs would be the antithesis of the administration’s campaign to ingratiate themselves with the SDIs.
8. Absence of bank prosecutions: The administration could end the scandal of the lack of prosecution of the accounting control frauds that created the epidemic of mortgage fraud that hyper-inflated the largest bubble in history and drove the financial crisis and the Great Recession. Effective prosecutions against elite bank frauds are possible only with effective regulation and supervision. We know that the banking regulatory agencies – which made well over 10,000 criminal referrals in response to the far smaller S&L debacle (producing over 1000 felony convictions in “major” cases against elites – made no, or a handful of criminal referrals in response to this crisis. The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) made zero criminal referrals during the crisis. The FDIC apparently made a very small number of criminal referrals, probably not against elites. It is unknown whether the Fed made any criminal referrals. There is no evidence it made any significant criminal referrals. The banking regulators’ dereliction of their duties to make criminal referrals is so complete that the FBI formed a “partnership” with the Mortgage Bankers Association (MBA) – the trade association of the perps – rather than with the banking regulators. Unsurprisingly, the MBA claimed that the banks were the victims of borrowers and junior officers rather than the CEOs who knowingly created the perverse incentives that drove the epidemic of mortgage fraud.
9. Near universal failure of banks to file criminal referrals: Only 25 banks – during an “epidemic” of mortgage fraud – made any significant number of criminal referrals, and none of those referrals appear to have been made against the senior bank officers that caused those frauds. Federal rules mandate that the banks file criminal referrals against suspected mortgage fraud, so the data demonstrate endemic regulatory violations by banks. The data also demonstrate that the banks overwhelmingly did not want the FBI to prosecute the mortgage frauds. There is one obvious reason why the banks’ CEOs would be willing to violate a legal mandate to file criminal referrals. I have not found any evidence that the banking regulatory actions have brought enforcement actions against the banks committing these obvious, endemic violations of the law. The mortgage bankers and brokers were not federally insured and therefore were not subject to the rules mandating that they file criminal referrals when they found suspicious activities likely indicating mortgage fraud. The mortgage bankers and brokers, however, were permitted to file criminal referrals. Their nearly universal failure to do so was irrational for honest lenders and brokers – but optimal for control frauds. The administration has allowed the collapse of the criminal referral system within the regulatory agencies, and almost all lenders to continue on its watch. It could fix the scandal of elite bankers being able to loot with impunity without adopting any rules. Each collapse constitutes an “obvious gap” that urgently requires Obama’s attention.
10. The Mortgage Electronic Registration Service (MERS) is unregulated. MERS, at best, was a system designed to evade county recorder fees. No one – and that includes MERS’ controlling officials – knows the true condition of the mortgage instruments that MERS is supposed to be registering. At best, it is a scandal that threatens the stability of homeowners and holders of instruments that are supposed to be secured by mortgages. MERS is an “obvious gap” in regulatory protections that demonstrates once more the wealth and job destroying consequences of the “completely failed” anti-regulatory philosophy that Obama promised to root out.
11. The foreclosure scandal revealed an “obvious gap” in regulatory protections – no one regulates the foreclosure process. (The underlying epidemic of accounting control fraud by the nonprime mortgage lenders generated the “echo” epidemic of foreclosure fraud.) Bank of America, the second largest financial institution in America, acquired Countrywide in order to secure its personnel and its mortgage servicing portfolio. Countrywide was notorious for its fraudulent and predatory mortgage lending practices. Placing its employees in charge of servicing – the banking operation that controls the foreclosure process – guaranteed epic abuses. (Bank of America also managed to generate pervasive foreclosure abuses out of the staff it had prior to acquiring Countrywide.) Bank of America personnel, and personnel of other major servicers, eventually confessed that their foreclosure actions relied on massive, universal perjury (a felony). These “robo signing” crimes occurred at a frequency of roughly 10,000 monthly at more than one large servicer. Our most elite banks have confessed to committing hundreds of thousands of felonies.
12. Fannie and Freddie. These entities are twisting slowly in the wind. Private and regulatory leadership have been ineffective and have lacked courage. I’ll mention only two areas. Fannie and Freddie used some of the most abusive foreclosure law firms in existence. Citicorp’s key mortgage credit guy testified many months ago before the Financial Crisis Inquiry Commission (FCIC) that 80% of Citi’s mortgages sold to Fannie and Freddie were sold under false “reps and warranties.” The Citicorp official’s warnings to his superiors about this extreme incidence of fraud did not lead to corrective action, so the official cc’d Rubin on key correspondence. Naturally, Citi responded by firing the whistleblower rather than the frauds. If Fannie and Freddie put the bad paper back to Citi, then Citi would be insolvent and Rubin would face serious risks. Fannie and Freddie have put only relatively small amounts of Citi’s paper back to Citi. (Note that the extreme incidence of fraud, and a similar incidence has been shown in Countrwide mortgage paper, again demonstrates how completely failed the anti-regulatory model is.) I have explained previously why Fannie and Freddie, because of their large holdings of nonprime paper from many originators and their dealings with credit rating agencies, offer unique data bases and opportunities for research to document exactly what wrong and how the fraud epidemic, bubble, and financial crisis grew and spread. This is a more subtle, but enormously important and dangerous regulatory gap.


Bill Black is an Associate Professor of Economics and Law at the University of Missouri-Kansas City, a white-collar criminologist, and a former senior financial regulator. He is the author of The Best Way to Rob a Bank is to Own One.


Feed Gittins to the freedom fighters

October 7, 2010

I doubt there is a more shamelessly partisan socialist commentator in the mainstream press than Ross Gittins. Usually I am merely amused by his column but his attack some months back on conservative, so called Libertarian think tanks had me on the front foot, flexed and ready to box a few rounds.

He mentions by name the Institute for Public Affairs and the Center for Independent Studies.

He had quite a bit to say about libertarianism which I’ll address in another post. But for the moment I’ll stick to just one of his criticisms.

Gittins suggested that conservative think tanks have no place commenting on economic matters as they are biased by their political philosophy. These think tanks are Liberal conservative in orientation and support the protection of individual and economic freedom and oppose excessive intrusion of the growing socialist State into our lives. At least half of Australia is very supportive of these principles. I think of them as freedom fighters.

I’m not sure what his problem is with political philosophy but I suspect he has no problem with economic commentary from individuals or think tanks biased by a socialist political philosophy.

Ross Gittins would have you believe that only economists are equipped with the understanding or intellectual power to comment on the economy. He disparages and slurs conservative non-economists for having an opinion. He really means that anyone who disagrees with his partisan leftism should be silenced. Eliminating all non-economists from the debate is a useful start and helps thin the ranks of opposition.

Gittins’ thesis is ludricrous.  He proposes an all-knowing caste of financial shamans; an unchallengable economic academic priesthood. Certainly PM Gillard and Treasurer Swan are not economists. Indeed neither has any economic or financial training or qualifications. That’s fine.  Neither does Obama, but his Harvard law degree carries some cachet. Tony Abbott has degrees in economics and law and went on to further study at Oxford in politics, philosophy and yes, economics. Clearly the ALP disagrees with Gittins’ view regarding who should be allowed to comment on the economy, let alone be given the responsibility for running it.

But where does this leave the rest of Australia, other than economists and politicians? Knowledge is cumulative, and any intelligent person who reads the papers will have a fair grasp of conventional economic principles, for better or worse.  Indeed anyone who has ever studied economics at school or as an adult as an autodidact, will understand the terminology, basic relationships and hopefully the contentious problems and irreconcilable differences within economic thought. Ross Gittins has written some enjoyable articles on the fallacious underpinnings of economics. But doesn’t this just scuttle his own argument about the omnipotence of economists?

It is the job of politicians, treasury, the Reserve Bank and commentators to inform the public. This involves education, explanation and erudition. It should not involve Gittins’ belittling extermination of dissent from his received wisdom.

Again, Gittins believes that conservative think tanks have no place commenting on economic matters, saying they are intrinsically political organisations and therefore by implication, without economic standing.

This is incorrect on two fronts. First, though he mentions it en-passant, it ignores the very well trained and articulate PhD economists within their ranks that inform these think tanks, and more importantly it is blind to the fact that economics and politics are inextricably linked. The contentious arguments within economics manifest as differences in political thinking. Differences concerning how the economy works mechanically, determine management objectives, priorities and desired outcomes politically. And the differences are many.

All Australians have some understanding of economics. They run businesses, read papers, listen to politicians, work, save and invest. They also vote. And their decision is mostly predicated on their perception of economic matters. Perhaps Mr Gittins would prefer that only economists are allowed to vote.

Might I suggest that very often economists are very often the worst people to ask about the economy. As they say, an economist is someone who can explain today, why their prediction yesterday was incorrect.

Economists have their role, but in general they are salaried boffins who observe, study and pontificate. No more than that. The difference in economic understanding between an informed businessman and an economist, is in no way comparable, for example to that between a non-doctor and a haematologist on the subject of bone marrow transplantation. The haematologist is a true expert. An economist cannot claim similar standing, as our understanding of the function of complex economic systems is quite inferior to our understanding of human physiology and pathology.

Economists do not commonly start businesses or risk capital. They do not generally manage businesses, customers or employees. In short they are cocooned in a way that produces its own intrinsic biases.

We should listen to economists, but overtime we can be selective based on the quality of their offerings. We should test their theories, hypotheses, predictions and advice. We should look at their track record. We should not follow economists slavishly. We should not make it mandatory for the Treasurer or Prime Minister to be an economist. Arguably desirable but not compulsory.

Economic and political discussion belongs to all Australians. It belongs to workers, professionals, managers, entrepreneurs and business owners. It belongs to young people, parents, to carers and to seniors. It belongs to voters.

Ross Gittins  can be disgracefully partisan and insulting, and at the same time self-defeating.

Hyperinflationary “EVENT” inches closer

September 23, 2010

Enough Australian politics for a while. The global economy is far more fascinating. American QE quantitative easing (money printing) has begun again this week.

The excuse given, is poor economic activity and deflationary fears, but the true reason is the recent decline in US Treasury Bond prices and dismal bond auctions. To summarise, if no-one will buy US bonds then the Fed steps in to buy them.  This debt monetisation very directly devalues the US dollar, reflexly elevating the Australian dollar and  US dollar denominated commodity prices such as gold.

This decline in the value of the US dollar has seen ever lower falls over the past 10 years. It is far from over. No doubt we shall witness a few more QE attempted rescues from the Fed in hope that they can muddle along until a real economic recovery materialises. There  is of course no chance of this, barring a major technological breakthrough or full scale war economy.

Far more likely is an eventual end to the long term bull market in US Bonds, a very significant decline in the US dollar index (USDX) and a collapse in confidence in the currency. This will manifest as  hyper- inflation. Not  just a severe inflationary episode secondary to excessive economic activity that grinds on quarter after quarter, but an overnight EVENT of enormous proportions.

Perhaps it will be painted over by a geopolitical event, but it will be monetary in origin. Along the way US equities will rise strongly in nominal terms thus soothing the public but when rates rise hard as they eventually will, there will be nowhere to hide in financial assets.

History suggests this a likely scenario.

All borrowings now should be long term fixed rate, as rates could rise very quickly in this environment. Holding relatively low fixed rate debt will be very desirable when the inflation rate is north of the interest rate.

Julia by a nose

September 7, 2010

As expected at “Conservative Observations”, Julia Gillard is the new PM.

This is the worst of all possible outcomes for Australia, but probably the best that could have happened for Tony Abbott’s career. He will be emboldened by winning more votes and seats than Labor.  He will keep building momentum and eventually win a clear majority, mandate and political longevity.

Julia will find governing very tiresome indeed. She is surrounded by five snarling lions: the ALP right, the Greens, the independents, the coalition and the economy. Most Prime Ministers work as a ringmaster. In this current context, she will be perpetually engaged as a lion tamer, but with a short whip and a broken chair.

It is going to be messy. Let’s hope it is also brief. We can then get back to the polls before too much damage is done by this Labor-Green coalition; the most left wing government in our history.

Independents need a little self knowledge

August 28, 2010

Understanding our own strengths, weaknesses, abilities and capacity reflects maturity,  helps us to be effective and to avoid the tragicomic mistakes of vanity and hubris.

The new clutch of independents seem quite deficient in self-knowledge. Currently basking in the limelight of relevance, their vanity is  being actively cultivated.

Accidentally thrust to the fore as potential kingmakers, their egos are being stroked. Such a wonderful change from the anaemia, anonymity and impotence of the lonely independent. They are enjoying a lovely media massage, but there will be no happy ending.

Remember, these are the dysfunctional loners who have been unable to get along within a party and we are now trusting them with the exceedingly difficult job of parliamentary reform. This is a job they were not elected to perform and are ill-equipped to achieve. Asking misfits to assume a difficult leadership role is unrealistic.

The independents are wedging themselves between temporary relevance and electoral oblivion. I suspect that as the warmth of the limelight fades into the cold light of scrutiny and criticism, our smiling but anxious  independents will develop some self-knowledge. They might reflect on their particular abilities,  and realise that holding the major parties over a barrel will be very stressful, and to use the modern parlance, unsustainable.

Rather than let the dysfunctionality of the independents infect the parliament and hobble us with a weak Government for the next three years, Gillard and Abbott should concede nothing. This will hasten the learning process for our independents, and take us back to the polls. Then those who embarrassingly voted Green and deliberately voted informal, can cast a meaningful vote.

This is a difficult time for the global economy. We need an effective Government to strengthen our nation. We need a Government focused on action and outcomes, not internecine minority politics. We do not need a weak,  multi-party, Italian style political farce.

Australians did not vote for a hung parliament. Australians did not vote for Katter, Wilkie, Windsor and Oakeshott to rule as a new gang of four. Very soon these men will understand, that even as a group, they are incapable of handling this responsibility. Casting around for big boys to hold their hand, like Ken Henry, Bruce Hawker and Arthur Sinodinos,  suggests they are already feeling the pressure.

Let’s go back to the polls.

Gillard to be next PM

August 23, 2010

I believe that Julia Gillard will regain the Prime Ministership.

In the arm wrestle with the independents, Labor will unfortunately do whatever it takes. Julia will soothe, praise and cajole. Power over principles.

Abbott will negotiate but his honesty and honour will prevent him ever hearing the real conversation.

Let’s hope we go back to the polls.

Let the Liberals return us to good Government

August 19, 2010

Decision time for all you swinging voters.

First let’s look at health as a way to contrast, compare and highlight the differences between Liberal and Labor.

Gillard will increase the health bureaucracy, and promote the use of “virtual consultations”.

Abbott will spend $1.5 billion dollars on the long neglected area of mental health. He will reduce bureaucracy. He will devolve administrative responsibility back to local boards. He will give communities, and professionals the flexibility and authority to change, improve and deliver services. He will commit to increasing the number of beds, doctors and nurses.

This highlights to me the difference between real action and virtual action. “Real Julia” is actually “virtual Julia”, with virtual action, virtual policy and virtual health.

On the environment:

Gillard will be the first in the world to introduce a radical massive carbon tax, that will damage our economy and do little or nothing to reduce global climate change. Abbott will achieve emissions targets and involve youth and community participation in direct action to improve land quality, reduce pollution, and improve energy efficiency.

Economic policy is a major point of difference:

Gillard will continue to spend, tax and mismanage. Abbott will manage effectively, cut waste, reduce debt, reduce tax and foster entrepreneurship and business.

When, as many predict there will be another, much more severe round of the GFC, we will need a profitable mining sector, not shackled by a massive new tax.

We will need a robust economy not hobbled by a massive and unilateral carbon tax.

We will need a Government that will reduce debt quickly, spend prudently and effectively and improve the economic well being of all Australians by growing our economy, creating jobs and securing our reputation as a preferred destination for foreign capital and talent.

On industrial relations:

The coalition is happy to guarantee that WorkChoices will not be reintroduced. Much of WorkChoices was so sensible that Julia Gillard kept a great deal of it within Fair Work Australia, much to the disgust of the unions.

In the area of immigration and population:

Gillard will waffle about offshore processing.  Abbott will take control and discourage vulnerable people risking their lives on leaky boats.

Gillard will waffle about sustainable population, without defining it or acknowledging that population is a balance of births, deaths and immigration. Abbott will promote and encourage Australians to have children and seek to attract useful skilled enthusiastic people to come to Australia, embrace our culture and become proud citizens.

On broadband:

Sure everyone wants faster internet. Gillard will spend a mindboggling minimum of $43 billion dollars and a minimum of 8 years on a project that has superficial appeal, but will almost certainly become a technologocal white elephant, be a loss maker for taxpayers, and a Government monopoly producing higher fees for consumers than a competitive model. It is actually lose-lose-lose for Australians. It could be a loser technologically, and will definitely be a loss maker as a public asset and a loser for consumer pricing.

Please remember that this Government did not submit the NBN to Treasury for cost-benefit analysis, because it would almost certainly fail on every metric. Perhaps it would be an appropriate piece of  infrastructure to build using surplus funds, but to build it with borrowed money, is unjustifiable.

On parental leave:

No question here. Tony Abbott has cleverly drafted a plan that will do more for mothers and families. It will encourage, and in many cases allow working women to have children. It is an excellent example of the ability of  conservatives to find innovative, effective and even progressive solutions to modern problems.

Julia Gillard is a steady politician but Labor’s policies are unchanged. Labor had lost it’s way under Rudd and is still in the fog under Gillard. The coalition plans are more intelligent, prudent, progressive, sensible and deliverable. Lets bring back sensible good government.

Of Fundamental Importance

July 30, 2010

Elections are a whirlwind of promises and a maelstrom of media moments, massaging of interest groups and the careful treading of the high wire of the political centre.

Perhaps this a good time to revisit that which is truly important.

Despite the perpetual bleating about the similarity of the major parties, there are very significant differences in economic emphasis, understanding, competence, capacity, philosophy and policy between the major parties.

Fundamentally the most important thing we require  of our Federal Government is to set the economic platform. Economic prosperity promotes job creation, social cohesion, social equity and the resources to defend ourselves and protect our environment.

The most important economic job for the Australian government  is to foster economic growth by facilitating business profitability. First of all the Government’s finances must be under control. Debt should be eliminated, and Government spending reduced. Infrastructure projects should be funded from surplus to foster productivity (thus eliminating the surplus). The tax burden should be minimised. International capital and talent would then gravitate to our growing, debt free  economy and our undebauched currency.

It is my opinion that we face a coming crisis of confidence in the major global currencies; the US dollar, Euro and Yen.

Let me explain.

Professor Joseph Stiglitz is an economic nobel laureate and co-author of a book with Andrew Charlton, Mr Rudd’s youthful economics advisor. Predictably he is currently touring Australia extolling the ‘magnificent economic management of the Rudd Government. Even he, a paragon of the left, acknowledges that the USA and probably the world is headed for a severe double dip recession.

When this occurs there will be no option but to unleash a further round of unlimited quantitative easing (money printing), as there are no more shots in the locker of monetary policy. The endgame will be a hyperinflationary currency crisis. (See my previous essay, “International Rescue and our Inflationary Future”). The pundits sadly, only think in terms of demand-pull inflation. But a currency crisis will be cost-push. It will be a fast, shock and awe affair and there will be no time to adapt when it occurs. This is the scenario for which we must prepare. We can debate the likelihood of this hyperinflationary problem, but it is far more likely than a climate catastrophe.

Again, the most important economic job for the Australian government  is to foster growth by facilitating business profitability. The way to accomplish this is to eliminate debt, reduce Government spending and reduce taxation. International capital and talent will gravitate to our growing, debt free  economy with our undebauched currency. Labor will borrow $1oo million dollars a day. The coalition will strengthen our economic foundation.

Australian Values

July 23, 2010

Julia Gillard recently referred to Australian values.

Crikey commented and asked some questions:

” The Prime Minister Julia Gillard recently said that hard work and education, regarding everyone as equal, showing respect and plain speaking are Australian values.

Do you agree or disagree that this is a good definition of Australian values?”

Can any specific set of ‘values’ seek to represent us as a nation? And if so, why does Gillard supposedly reflect them better than Abbott, or Brown? Or Steve Fielding for that matter?

We want to know what you think about that oft-bandied-about term ‘Australian values’? Is it bunkum or is there something to it? ”


I think they were expecting comments suggesting that the concept of distinctly Australian values is complete tosh. Surprisingly most of the replies embraced the concept and found fairness and egalitarianism to be particularly Australian.

Here is my comment to Crikey:

I understand values to refer to those principles that we cherish or “value” and which inform our thinking when difficult choices and decisions must be made.

Julia’s comments are a mixture of values and laudable banality. “Treating everyone as equal” is an inelegant way of referring to the principle of human equality. “Showing respect” and “hard work” may be desirable conduct but are not principles. Belief in the importance of education is of course universal.

Australian values are informing principles on which we can all agree and which resonate within the context of our shared experience.

The diggers who died at Frommelles, no doubt shared a belief that Western democracy was threatened by German aggression and were willing to fight for freedom and democracy (and the interests of Britain and the Commonwealth).

In our modern life we would still agree that personal freedom is paramount and that tyranny and oppression are to be resisted. While we may see this principle as universal, clearly there are others who do not.

Financial prudence begins with Government

July 15, 2010

A recent letter to the Financial Times was illuminating. Complaining about European plans to regulate short selling and credit default swaps it read;

“Perhaps if Europe’s political elite stopped trying to get markets to fund their grandiose designs and social engineering projects they would not need yet more regulation to control markets. In fact, financial markets are reacting exactly as they should do in the face of this profligacy and attempt to bribe the electorate with borrowed money.”

It makes the very good point that financial standards and the global financial programme are set by Government and by implication their not-so-independent extensions, the central banks.  In a system where the G8 Governments indirectly control the global  financial economy,they must take responsibility for setting  standards.

I have previously detailed at great length the role of Alan Greenspan and Robert Rubin in the genesis of the GFC, while rebutting Kevin Rudd’s essay on the subject. But it is important to remember that ultimately central bankers operate under a regime with political pressures and the fallibility of human decision making.

While supporting some regulation of derivative products, I have never believed banks to be primarily at fault in the derivative disaster. The inability of US and European Governments to exercise fiscal restraint was potentiated by the derivative induced credit growth explosion and a vicious cycle ensued. The broker in this unhappy event was the relevant central banker, Alan Greenspan.

Despite being explicitly and officially warned about potentially dangerous derivative market problems, Greenspan in his role as a regulatory advisor, saw no cause for concern, and he lobbied very hard to block any regulation of OTC derivatives. He has now recanted, but too late. He believed he was fostering American progress as a world leader in financial innovation and facilitating a new era of business prosperity. In fact he was slashing of the bonds of fiscal prudence for both Government and banks.

Germany and France and many other nations are reacquainting themselves with fiscal restraint now that the banking crisis has become a sovereign debt crisis. Proposed improvements in financial sector regulation are naturally being resisted only by the industry. Some derivative regulation will happen and is needed. Naturally we should hope that it is appropriate, minimal and effective.

We have witnessed a a financial crisis caused by derivative induced credit-growth. And we are now living through a delusional and global attempt to correct it by creating more credit and spending more money. The cause and the attempted cure are both the province of government. Banks were accomplices but acting within the law.

It is the green shoots of government prudence not business growth that are sprouting. Unfortunately I do not believe this will last very long. The next painful episode will almost certainly produce fresh increases in quantitative easing and monetary stimulus.

Gillard will be a fast learner but still fail the exam

July 15, 2010

How fascinating to observe human nature through the political lens.

Full of bright self-confidence Ms Gillard has sprung from her cage believing she can solve every difficult political problem by the simple focused application of her mind.

Such vanity. But how utterly human. Sharp reality check number one, for Julia. Border security is a thorny issue. Real world problems are not solved by a light bulb moment, policy on the run, a quick chat and a photo opportunity.

But the important question is not of human foibles, for there are plenty on both sides of politics. The question concerns content. 

Janet Albrechtsen never fails to impress with crisp common sense, expressed very persuasively.

“While Julia Gillard has taken deliberately bold moves to change direction over the mining tax, immigration, population and climate change, there is no sign that a Gillard government will free itself from the costly fantasy that took hold under Kevin Rudd about the omnipotence of big spending government brimming with expensive and grand designs.”

While Julia Gillard may make a quick study of  political leadership she will never escape the toils of her own ALP left faction philosophy.

Janet Albrechtsen is correct that Gillard could learn much from the reasoned logic of Hayek and Friedman, if only she were prepared to accept it.

Unfortunately Julia Gillard will never do as Margaret Thatcher did in a cabinet meeting, when she threw down a copy of Hayek’s “Constitution of Liberty” and declared, “this is what we believe!”.

Labor’s rational strategy….and Julia’s next move

June 24, 2010

The ALP right faction deserted Kevin Rudd, not because he couldn’t “connect” with the electorate or because the people had stopped listening.

Rudd was dumped because the mining industry was too powerful an adversary for him to handle. The industry’s arguments are accepted by the public and the Government’s arguments distrusted and dismissed.

To continue attacking the mining industry was folly, hubris and electoral suicide. Everyone in the ALP  knew this, including Rudd, but he was caught in a political trap of his own creation.

Now Julia Gillard has a decision to make.  Should she attempt to argue the same agenda more effectively,  or should she break with the poisonous old policy?

I predict here and now that if she jettisons the Resources Super Profits Tax,  she will be very very difficult to beat.

This leadership spill is most unfortunate for Tony Abbott who performs so much better against Kevin Rudd than Julia Gillard. Rudd had no idea how to handle Abbott’s forthright approach and became increasingly brittle. Rudd is intimidated, threatened and stressed by Abbott. Gillard is not.

Tony Abbott treats Julia Gillard with a softer touch, as he probably finds it unseemly to go hard against a woman. This could be a positive for Mr Abbott, as he is far more effective when he is relaxed and conversational. Tough testosterone fueled oratory tends to close the ears of voters.

Ms. Gillard’s condescending, dismissive tone and her accusations of dishonesty and secret agendas will bait Mr Abbott, every day until election day.  If he bristles, succumbs and bites back, it will be very damaging.

Labor would like to increase mining taxation but the Labor right wing would prefer to forget the tax grab and cling to power.

Clearly this was inspired by the factions, not Gillard. Once events had passed a critical juncture she would have had no option but to acquiesce to the inevitable. I cannot believe her claim that she was the architect who decided that a change of leadership was necessary. Her repeated claims of loyalty have been too convincing. It is more probable that post-coup, she believes it is preferable to pretend to be the architect of the plot. She believes it preferable to accept the negativity of actively assassinating the leader and thereby quash talk of her being passively controlled by the factions.

Removing Rudd was not a panic that developed its own momentum and spiraled out of control. It was a supremely rational strategic decision that accomplishes two things that improve Labor’s chance of re-election.

First, it removes an increasingly  dysfunctional leader, loathed by his own colleagues and recently very effectively mauled by such luminaries of the left commentariat as David Marr and Robert Manne. His replacement is the most effective, consistent and reliable performer in the parliament on either side, and demonstrates superb clarity and balance in debate. The first woman PM status is also an electoral winner.

And crucially, it allows Labor to start afresh in negotiations with the mining industry under the face saving, circuit breaking excuse of “new leadership”. In addition, the mining industry has been handed a scalp, as a sacrificial peace offering. Gillard’s immediate, olive branch opening of the door to the mining industry, and “gesture of goodwill”, confirms this tax as the critical issue within the Labor mind. Emissions trading, asylum seekers, health and education have been irrelevant distractions in this decline and fall.

It may take a while to achieve it plausibly, but Julia will find a way to make peace with the mining industry and dump the mining tax. Possibly this will take the form of a plan for “extended fulsome consultation”,  which will continue into the next term, so that the industry is soothed and the tax a non-issue for the election.

Today is no victory for the coalition. A puffed up, ineffectual and frightened mouse has been replaced by a lioness.

The battle begins anew.

Economics professor explains tax reform

June 17, 2010


Have a read…
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100.
If they paid their bill the way we pay our taxes, it would go something like this;
The first four men (the poorest) would pay nothing.
The fifth would pay $1
The sixth would pay $3
The seventh would pay $7
The eighth would pay $12
The ninth would pay $18
The tenth man (the richest) would pay $59
So, that’s what they decided to do..
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20”. Drinks for the ten men would now cost just $80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers?
How could they divide the $20 windfall so that everyone would get his fair share?
Read the rest of this entry »

RSPT summary offences

June 1, 2010

(published in Quadrant online)

Apparently the polls show that people in favour of the new mining tax are falling for the Government’s single spurious argument about mining companies taking profits offshore and the need to extract a “better deal” for taxpayers from the resources they “own”. These polls show that the reasons given against the new tax are far more varied and some commentators are suggesting that opposition is therefore confused.

May I suggest that, yes, there are many arguments against the new mining tax. And no, there is no confusion.

So here is a summary of the case against the RSPT.

With a nod to Henry Ergas, the arguments can be divided into those against the idea, against the design and against the tactics used for its introduction.


1. The unfairness of Selective Corporate Taxation: Selectively taxing an industry at the peak of its earning potential, during its cyclical upswing, sets a dangerous precedent. Which industry will be next? It will be the most profitable one of course, whatever that may be.  Tax should be seen to be fair. Corporate tax should apply evenly to all companies. Tax is too complicated in this country. Most of us were hoping for the Henry Tax Review to make suggestions that simplified our tax law. Different systems for different industries is adding complexity. In addition, it is perverse that we should declare eternal fealty to the concept of free trade and the global level playing field, yet seek to discriminate at home between industries and have one corporate taxation system for mining companies and another for other businesses. Extrapolate this to recognise its absurdity. With the blood of increased corporate tax revenue in the water, I don’t trust Kevin Rudd to refrain from creatively mauling another profitable sector. And then another. This could end in a frenzy of new “better deal for the Australian people” taxes.  Kevin Rudd is what he is and he cannot deny his nature. He spends, he borrows and he raises taxes.

2. The stupidity of reducing the profitability of our most successful export industry: Mr Rudd’s plan is to injure the golden goose, enough to fund his deficit, hoping he does not kill the goose in the process. This is a dangerous game. A mining boom caused by Chinese demand during a global financial crisis is a gift we should acknowledge and appreciate.  Ken Henry says that the mining boom did not keep us out of recession, but no-one in the entire country believes him. I wish he would keep saying this because it makes him look so much the fool, in addition to the impertinence, impatience and bullying arrogance that is already apparent. His other “pearler” was that even taxing 100% of profit would have no effect on prices! Does this man have any connection with reality? Does he believe everyone else to be an idiot who will accept any stupid comment simply because it has come from his dismissive tongue? His surly and combative tone betrays his understanding that all the informed observers know he is completely partisan and his argument mere deception.

3. The adverse impact on our share market and Superannuation: This is of course stating the obvious. Increased tax will result in reduced earnings which will reduce company valuations and share prices will fall. Every Australian’s super will feel that pain. Mr Rudd could help all Australians get a better deal from the mining of Australian resources by facilitating mining company profitability. That way the people get the money. Under Rudd’s plan he gets the money.

4. The blindness to the trashing of our sovereign risk profile: Unsurprisingly the boffins at Treasury and the salivating cabinet were blind to the impact the RSPT would have on the perception of the stability of Australia as a destination for investment capital. If they were not blind to this adverse impact then clearly they just did not care. Markets and managers value stability, certainty and predictability.

5. The shamelessness of this overt tax grab: Clearly it is designed to patch up Rudd’s deficit in a bid to recover lost credibility running up to the next election. The urgency is palpable.

6. The outrageous ease with which this Government continues to damage our economy and sovereign risk profile for political ends: One might even suggest that this represents overt and unforgivable misconduct.


7. The ludicrous definition of a super profit: 5.7% is approximately the return one earns from a savings account.

8. The injustice of applying the new tax to existing projects: These projects were modelled and worked up on the basis of a given set of regulatory and financial circumstances. This willingness to tax retrospectively leaves management aghast worldwide.

9. The arbitrary selection of the 40% tax level.

10. The uselessness of the 40% rebate of losses: This is meaningless to companies seeking capital. The bank is not interested. Neither are the companies. As Tom Albanese, Rio Tinto CEO said last weekend, “we plan for success not failure”. I also wonder if the Government realises that they would be synthetically making themselves a counterparty to every junior mining company’s  derivative based project financing deal?

11. The greed implicit in the conversion of a State royalty tax into a Federal profits tax that does not flow back to the States, as does the GST.


12. The rudeness of imposing radical change with zero preliminary stake-holder consultation.

13. The robust rhetoric impugning the good faith of the mining industry while simultaneously distorting and  misrepresenting the facts.

13. The feigned ignorance of the very considerable benefits Australians currently receive from mining companies: Jobs, training, infrastructure development, foreign investment, export profits, Australian re-investment, community development in rural and remote regions, and the very large amount of tax these companies already pay, on a relatively level playing field with all other firms.

14. The hypocrisy of the Government exercising emergency powers to combat media advertising that argues against the proposed legislation.

The Rudd, Swan and Henry arguments for the new mining tax are an insult to our intelligence. The RSPT is not in Australia’s best interest, but it is most definitely in the self interest of the Rudd Government.

The idea of the new mining tax tax highlights this Government’s ignorance. The design highlights this Government’s incompetence and their tactics highlight this Government’s dishonour.

Mr Rudd is now emboldened by desperation and the survival instinct. His decisions are increasingly reckless, risky and unpredictable. His judgement is increasingly absent and his mandate more fragile by the day.

Respect for Malcolm Fraser

May 26, 2010

Mr Fraser has resigned from the Liberal Party saying it is now a true conservative party and no longer recognisable as the party he joined 50 years ago.

This is slightly mystifying, as Mr Fraser was the terror of the left and a steadfast champion of conservative Liberal principles as Prime Minister.

In particular his opposition, while Prime Minister, to financial market deregulation is classically conservative. The mindset of classical conservatism is to oppose radical change, and favours slower paced evolutionary progress. Later of course, it was a Labor Government that deregulated the finance sector, beginning with the floating of the dollar. Lately, commitment to free markets, free trade and deregulation has become conservative or “neoliberal”.

Perhaps the labels are a moveable feast, but let’s be in no doubt that he was a conservative leader, in the Menzies tradition. Robert Menzies clearly  explained, that when he chose the name ‘Liberal’ for the party he founded, he did not use it in the American sense. Menzies emphasised that the Party was essentially conservative in nature but more modern and progressive than its British counterpart.

I remember Michael Parkinson asking  Mr Fraser how he would describe himself in one word. His answer was “Liberal”. Perhaps he didn’t mean it in the Menziean sense.

Mr Fraser’s work running CARE Australia has probably been a centreing influence.  With respect, he seems to have drifted further to the centre than the Liberal Party has drifted to the right. People change. It is part of being human.

It is interesting to speculate about Malcom Fraser’s motivation for his frequent criticisms of the Party since leaving office. I am sure he always felt more critical barbs from the left over the dismissal than he ever felt from the right over his supposed inactive, caretaker Prime Ministership. Was his leftward slide a mea culpa for the dismissal and a poke in the eye to ingrate colleagues? I wonder.

I admire and respect Mr Fraser for his contribution to Australia. I find it difficult to criticise a former Liberal Prime Minister who rescued our nation from the worst Government in its history.

In principle however, I believe it would demonstrate more bottom, as the English would say, if he stayed within the party and continued to exert his moderating influence. Perhaps age, weariness and too many rebuffs have taken their toll.

Rudd is Rattled

May 26, 2010

The artillery has been moved up to the front line to distract the debate away from the mining tax disaster and onto the passports issue.

Mr Rudd breathlessly talks about breaking the code of silence on the activities of our security agencies.

Stephen Smith’s foreign ministerial equanimity is abandoned and he wildly blazes away in Parliament instead of playing his usual straight bat defense.

Passports are a distraction and the more the Government harps on about Julie Bishop’s comments, the louder will be the questions about Australia’s involvement in Israeli-type passport copying. Moral consistency is important.

The massive new mining tax is the main game.

With this tax, Mr Rudd hopes to placate the left who are thunderous with rage over the ETS backdown. He hopes in vain to paint the Coalition as supporters of corporate tax avoidance and he hopes the projected revenue will pull him out of the deficit quicksand and secure his re-election.

All Mr Rudd’s  ambitions hang on this new tax.

His is caught between a political need to compromise or capitulate on the tax and the paramount importance of the tax to his economic credibility.

Mr Rudd’s  job is to improve the prosperity of Australians by facilitating business success in this country, not to sacrifice the profitability of the mining sector which has been our national saviour through the global financial crisis. The Australian people understand this. They know that cash handouts and school halls did not keep us out of recession.

Mr Rudd’s plan is to injure the golden goose, enough to fund his deficit, hoping he does not kill the goose in the process. This is a dangerous game.

Again, the Australian people are already deriving a very great deal of benefit from mining companies, who provide employment, foreign investment capital, export profits, infrastructure development, re-investment in Australia, as well as the company tax and royalties they pay to Federal and State Governments.

Without a healthy mining sector, our GDP growth, balance of payments, terms of trade, budget and trade deficits would all look very sick. The two speed economy would be one speed. Slow.

After 20 years of bust they are now in the boom part of their cycle, and the Government is seeking to take half their profit above savings account interest.

Usually, no observer would question Mr Rudd’s  political shrewdness but this new mining tax reveals a hole in his knowledge of global business, his blindness to the sensitivities of management and markets, and a worrying lack of judgement.

I suspect the cumulative pressure caused by his failures in border protection, the education revolution and health reform is taking its toll. Combined with the albatross of the home insulation deaths and the weight of the deficit around his neck, this pressure is affecting his clarity.

You might expect a man with such recent form to pull back and re-evaluate.  But this is not so with Mr Rudd who quixotically saddles up and charges into massively unpopular selective corporate tax reform, damaging our star performing sector and the reputation of the whole country as a destination for foreign investment.

Mr Rudd is often wrong but never in doubt.

Resource Super Profits Tax Redux

May 24, 2010

(published in Quadrant Online)

The Rudd Government has been “startled by the universal rejection” of its proposed Resource Super Profits Tax, as business editor at The Australian, Andrew Main puts it.

The Government is now discussing the possibility of removing the 40% rebate and lifting the 5.7% profit threshold. No intelligent mine manager will fall for that dummy pass. Once this industry specific tax is legislated, we can expect the Government to change the tax rate according to its whim. There will be no certainty for business when mining taxes change as often as the taxes on beer and cigarettes.

For a nation so committed to a level playing field in world trade, it is paradoxical that we will no longer have a level playing field for companies at home.

Mr Rudd’s ideology compels him to raise taxation and invent new taxes. He seems determined to impose this new tax and there will be no certainty for business until the next Coalition Government repeals it.  Unfortunately the Rudd Government will have caused a great deal of damage by then. The international competitiveness of our mining industry will be reduced. The perceived sovereign risk of Australia will be increased. Mining activity and growth will be subdued. Mining company valuations will decline as will the broad share market indices, which are over-weight the mining sector.

With compulsory Super, every Australian is an owner of BHP, Rio Tinto and to some degree the whole mining sector. This new tax will reduce the value of every Super fund. Australian Super funds ride on BHP’s back.  Mr Rudd is raiding our Super to pay for his deficit.

This new tax raises an important point. Australia is governed by elected representatives. They have a duty to protect Australia from the theorising of unelected bureaucrats and boffins like Dr. Henry and Professor Garnaut. Ask their advice by all means. Mine their thoughts. But discard ideas that are clearly damaging.

Academics live inside their heads in hypotheses and theorems, not in the real and complex practicality of modern business. It is not unexpected that PhD economists should come up with wild ideas  full of dangerous unintended consequences.

As Paul Keating said of Dr John Hewson, Dr Ken Henry is a “feral abacus”.  I am not at all surprised that one of the very few supporters of this new tax is John Hewson. I suppose it is possible that Ken Henry has a first class mind, but even if he does, it is of little importance, for he would be just one of many bright economists, all with very different opinions. Remember that the definition of an economist, is someone who can tell you today why their prediction yesterday was incorrect. There is precious little credibility conferred by being a bright economist. One need only look at Alan Greenspan to illustrate that point. ( See my Riposte to Rudd’s essay on the GFC ).

Certainly Ken Henry possesses a forceful, dominant demeanour that has carried him to the top of his department. Perhaps he is bullying the relative milksops, Rudd and Swan, into allowing his claim to historical fame. Though to be fair,  he doesn’t have to try too hard to convince Mr Rudd that a massive new selective corporate tax is a good idea. Falling for this  anti-corporation rubbish is part of Rudd’s Labor DNA.

Give me thoughtful and responsible politicians who listen to the hard earned wisdom of our business leaders. And give me sensible, incremental evolution of our financial and regulatory systems, over any clever economist’s grand reforming strategies.

Dr Henry received this grand strategy from Ross Garnaut’s 1975 resource tax paper. It was a bad idea during the last commodity boom and it is a bad idea for this commodity boom. Notice that this was never proposed during the long intervening commodity bear market. The chronology is diagnostic of a grubby tax grab. Happily for Mr Rudd and Mr Swan, the revenue will help them whitewash the mess they have made of Australia’s balance sheet.

It is an academic economic bureaucrat’s wet dream to devise and implement a new tax. It is the Federal Government’s job to protect us from bureaucratic boffins enthused with a big idea.

Rudd’s Stupidity Tax

May 18, 2010

(Published in Quadrant online)

Lotteries have been described as a stupidity tax levied on an innumerate population. Mr Rudd’s proposed Resources Super Profits Tax (RSPT) is also a stupidity tax.  It will punitively tax mining corporations foolish enough to operate in Australia under a rapacious, ignorant and unpredictable regime.

Miners represent around 30% of the companies on the ASX and 20% by market cap. Mining accounts for 18% of our GDP and 35% of our exports. Mining is an industrial sector in which Australia truly excels but Mr Rudd’s new tax will turn mining profitability itself into a lottery.

Previously I have been sufficiently non-partisan to at least acknowledge intelligence on the Labor side. I am now happy to set down that heavy load and move on. This new super tax on mining is the singularly most insane and quite frankly stupid political proposal I have heard in my life. Even the mine workers don’t want it. You would think that would get Mr Rudd’s attention. Lamentably it does not.

Lindsay Tanner attempted to defend it on Q&A arguing that the resources in the ground belong to the Australian people and can only be sold once.

I have a news flash for Lindsay Tanner and the other geniuses in the ALP. The metals and minerals in the ground are owned by the mining companies. Share prices reflect their reserves in the ground. They buy the leases on the tenements for exploration and production and then pay State Governments a royalty to recompense the Australian people appropriately. Remember that the Australian people do nothing for this royalty reward, and are already rewarded with job creation, foreign investment, export capital flowing into our economy, and the huge amount of corporate tax the companies already pay.

The companies have done the exploration, the building and running of the mines and the marketing and selling of the product. All of these are very high risk business activities. Exploration is a massive risk for investment capital. Mines are extremely difficult beasts to run and the commodity markets are very tough indeed.

This  new 40% tax on profit above the risk-free rate (currently 5.7%) is outrageous. This tax also applies before debt financing is accounted for, making this more a tax on revenue than profit. More than outrageous, this is scandalous. The second half of the proposal entails the taxpayer guaranteeing 40% of any losses made by mining companies. As a taxpayer I object to that and the companies don’t want it either. They are happy to take their own risks, pay corporate tax the same as every other business and keep their hard-earned profit for their shareholders and our super funds.

Lindsay Tanner may think the resources in the Australian dirt can only be sold once, but the mining companies now have to buy them twice.

Mining companies became progressively less profitable between 1980 and 1999 during a long commodity bear market. Commodities have been in a bull cycle for the past ten years and many believe this could last another 10 to 15 years. Now that the planets are aligned for mining companies to make money, the Labor Government is seeking to massively and selectively tax them.

Who will be next? Which industrial sector will be the next to start doing well, and by doing so move into the Labor gun-sights for special taxation?

This Government should be doing all it can to encourage foreign investment in Australia. This new tax will repel investment capital.

This Government should be doing all it can to minimise the corporate tax burden. This new tax maximises the tax burden.

This Government has revealed itself many times as ardently hard left but wrapped in a protective cloak of faux economic conservatism. This new tax rips that cloak away, exposing the pugnacious ignorance and economic vandalism beneath.

Gough Whitlam’s meddling with foreign mining investment in Australia caused an exodus of corporations and capital in the 1970s. Here we have another homage to Mr Whitlam from Mr Rudd.

Heaven help us.

Health Reform illustrates Rudd’s disease

May 6, 2010

The single funding proposal for health is a supermodel of an idea and the Labor party have turned it into the bride of Frankenstein. Kevin Rudd can completely ruin any good idea by mixing it with the programmatic complexity that soothes his union and bureaucratic base. There is no cure for this disease.

Never one to automatically idolise any leader, I have been watching Tony Abbott’s performance carefully.

I have been impressed by three aspects of his leadership:

First  is his ability to clarify complex problems by offering a sensible, simple and well thought out solution. The single federal funder for health with locoregional management, is one example. The paid parental leave plan is another.

Second is his consistency. Both of these plans were laid out in “Battlelines”.

And finally, though he is a conservative leader he is prepared to attack difficult problems with bold, dare I say radical change, which is not typically considered diagnostic of a conservative mindset. He is a bold liberal conservative.

Despite the pathetically transparent attempts to sidetrack him into religious debate, these practical and consistent qualities are resonating with the public.

If I were going to war, I know who I’d prefer to be in a trench with.

I’ll take the practical, principled, consistent problem solver, not the waffling, wind-swaying, blame-shifting, self-aggrandizing complexity peddlar.

Health Debate and Barnaby

March 30, 2010

Well Tony Abbott won the health debate in argument, but Kevin Rudd won on tone. For a man without a policy Tony Abbott did superbly well. Of course he has a policy framework but no sane opposition would reveal detailed major policy so far out from an election. Thankfully he is no Hewson-like neophyte and did not fall for that trap. He is far too experienced.

Rudd was on a charm offensive while Tony thought it was question time. Better to imagine one is speaking to swinging voters in their lounge room. One to remember for next time.

More importantly, my medical colleagues are deeply suspicious of Tony Abbott. Despite the figures he quoted defending his record as health minister, they feel that the greatest denuding of public hospital capability in living memory occurred under his generalship. Well he can say he was just following orders and he can point to his defence of the non-means tested health insurance rebate and he can point to his federalising/localising/ bureaucracy reducing  plans in “Battlelines”, all of which may be true and/or laudable, but of all issues, health is the toughest task for Tony. Even doctors, a supposed rock of the Liberal base, will not easily be convinced he is Health positive.

The Barnaby Joyce reshuffle was sensible, pragmatic and well timed. It keeps the team playing to their strengths, brings back a solid performer in Andrew Robb and garners a little more air time for the coalition in the process. All good.

The caravan moves on. Rudd is rattled.