Matt Nolan

RBNZ to cut rates today?

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So a whole bunch of central banks have cut rates overnight (ht Rates Blog, Big Picture). Australia cut 100 basis points the other day.

If the RBNZ ever cut rates inter-meeeting, it would currently sound like a fair time. In order to avoid it sounding like a panic they could say:

  1. Funding costs have risen markedly, and the Bank’s goal is to keep funding pressures consistent with their goal in September until the next meeting – ergo, we need an OCR cut,
  2. The Bank wishes to keep a certain interest rate differential with the rest of the world. With the rest of the world (virtually) cutting 50 basis points more than we had anticipated in September, it seems appropriate to lower our OCR by 50 basis points now.

Today is the 9th of October – the meeting is in 19 days. I think there is a fair chance the RBNZ may be pushed into cutting today, or at least announcing it.

I don’t have a problem with them doing it – as long as they are willing to lift rates relatively once (if) funding pressures ever come off.

Update: Ipredicit puts up a prediction stock on a possible cut today!!! (ht Nigel Pinkerton)

Update 2: The collapse in our currency (the TWI has fallen to 60 – we are talking 2003 levels) may prevent the Bank cutting. However, I am not sure how much attention investors are actually giving to our OCR at the moment – as a result, the cut may not have a big impact on the dollar (relative to global events).

Update 3: Good articles by David Hargreaves. Looks like the RBNZ will not go after this statement.

Matt Nolan

RBA cuts 100 basis points

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100 basis points slashed by the Reserve Bank of Australia. There cash rate is now 6%. A 50 basis point cut was expected, 75 seemed possible, 100 is epic.

At the start of the recent freeze in credit markets a 75 basis point cut by the RBNZ seemed highly unlikely – but possible. Now a 75 basis point cut is looking increasingly likely – and 100 basis points also seems possible. To put this in perspective – the Bank may have felt that a 50 point cut in October was on the cards following the September cut. Financing costs have now moved up so much that it is (sort of) like the previous cut never happened – implying we need a 100 basis points of cuts just to get where the Bank was aiming, maybe 😛

Does this indicate that the economic situation for Australiasia has deteriorated rapidly – yes and no.

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Matt Nolan

Are economists allowing us to wander towards the Great Depression II

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This was the feeling I got from Justin Wolfers at the Freakonomics blog and Dani Rodrik on his blog.

Both of these authors seemed to imply that our profession has:

failed to explain in clear language just what it is that credit markets do, and hence why it is so important that we fix them

However, I’m not sure I actually agree with this.

The above statement states that there is something “broken” in the credit markets – something that can be fixed.

Now when I hear the term broken and fixable in terms of a market, it tells me that there is some type of market failure – a market failure that can be solved through government intervention.

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Matt Nolan

Credit crisis outlines

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Over at Marginal Revolution, Tyler Cowen provides the world with a couple of useful posts:

  • His views on the credit crisis (here),
  • A couple of outlines of the crisis (here) – the first outline (here) is top notch and easy to understand.

I still feel that the main area where government intervention could be beneficial stems from the existence of an asymmetric information problem which is driving us towards a Pareto inferior equilibrium. In English, I think that buyers expectations have become sufficiently poor to put the credit market in a “downward spiral”.

However, in a broader sense I can buy Tyler Cowen’s point that the crisis is more complicated than we can possibly imagine – implying that it is difficult to actually pick how much of a decline in global economic activity will occur, and it is impossible to tell how much of an improvement is associated with solving the asymmetric information problem. However, isn’t this always the case with policies ex-ante?

Matt Nolan

Assets and the market for lemons

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I have spent so much time blabbing about asymmetric information without every explaining what I meant. As a result I feel that everyone deserves a little explanation. Thanks goes out to Akerlof and the lemons hypothesis.

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Matt Nolan

Does the credit crisis indicate the failure of the “free market”

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Matt McCarten was someone I enjoyed listening to when I was a young Alliance supporter many years ago – however, even in the heyday of teenage communist sympathies I would not have agreed with his conclusion that the recent credit crisis is undeniable evidence that voluntary trade does not work.

Now Kiwiblog and Anti-dismal have already gone to task explaining why they don’t believe this is a fair criticism of free trade, and good on them I think they are on the money (David Farrar focuses on why the criticism doesn’t sit well while Paul Walker paints the case for regulation being the cause of the problem – more here). The Hive also mentions dis-satisfaction with his choice of historical comparison. However, even after reading these posts you may still harbour some confusion surrounding the fact that I said voluntary trade instead of free markets.

Ultimately, his criticism of the “invisible hand” draws out something incredibly naive about the point of view that the free market is bad. Supporters of the free market are not so much saying that corporations should be allowed to manipulate information and “defraud” the public as they are saying that voluntary trade among groups is a good thing.

If two people choose to trade, it must be in their benefit and therefore giving people the freedom to trade is an important part of a society – this is what free trade represents.

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