Matt Nolan

Housing price free-fall on the cards?

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In the US, one of the main reasons given for the housing bubble was a result of an “over-supply of housing“.

In New Zealand we did not build that oversupply of housing even though population rose quickly pushing prices up.  This was because it was very difficult to get consents and we had a substantial shortage of builders 🙂

This is why we are unlikely to see a free fall in house prices like the one seen in the US.  Our bubble was only in the expectation of house prices – it did not feed into excessive construction and so when the price corrects it will be less harsh.

Discuss 🙂

Matt Nolan

“More” local investment may lead to less

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The National party has announced that it wants more of the Cullen fund to flow into domestic investment projects.

Now it may seem to make sense to “increase investment” at home – but we have to think about what this capital is doing when it moves around.

If capital at home made the highest return, then we wouldn’t need to legislate a 40% investment – as the Cullen Fund would put all its dosh there anyway. As a result, by “forcing” the fund to keep 40% onshore, we are reducing the return on our investment plain and simple.

Someone might say that “we are making job, and we’re making money” but they would be practically illiterate – just like the buy NZ made campaign. “Employment” and “domestic production” are not a positive externality. If we are investing money overseas and getting more goods back in return, then we are effectively getting “something” for “nothing” – what is wrong with that.

Investing our capital overseas does not throw it down a black hole, and if the return overseas is greater, it is the best way to reduce our current account deficit, or increase our wealth, whatever random macroeconomic aggregate our government is targeting.

Update: Kiwiblog discusses here.

Matt Nolan

Fruit, viruses, and prices

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In the food price index numbers there has been a big deal made about recent increases in the fruit and vegetable category.

The common explanation is that an especially cold winter reduced supply, which has feed into higher prices now.

This explanation seems believable, especially given that a shock during the season does not just influence the supply of product instantaneously, but should influence it further later on. However, it also didn’t weigh up with my observations that:

  1. People around me have been eating a lot more fruit,
  2. The supply of fruit at the supermarket has actually appeared relatively strong.

This is not consistent with the “supply” story we have been told. Although my observations are probably wrong (insofar as they do not match with what has actually happened), I feel that I can paint a story around them. Lets go:

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Matt Nolan

Comic: NZ deposit insurance for finance companies

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Mike Moreu is on the money again! The link is here.

Why is there no haircut for the insurance? Why are the fees not linked in inherent risk?

I agree that in some countries governments need to “recapitalise” banks by buying parts of them. I agree that a deposit insurance scheme can avoid bank runs (and can do so in a way the private sector may struggle with because asymmetric information leads to “too little” insurance). However, effectively charging the safe institutions more for insurance (which is what is happening to the banks) is RIDICULOUS – and will lead to too much risk being taken on in the future, at the taxpayers expense.

Will Taylor

Agnitio Finance: Coming soon

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With the announcement of deposit insurance by the government for all our dodgy finance companies, being an economist who understands the concept of moral hazard (although in this case it would actually be adverse selection given that I would enter into the contract with government with the intent of exploiting an information asymmetry), I thought I would start my own finance company. Here’s what I figured would go on our ads which will feature a very trust worthy has been celebrity telling you how much you can trust us (any suggestions?).

Agnitio Finance will exclusively invest in the highest risk hedge funds available. We will offer an interest rate on deposits of 30%.  While there will be a serious disconnect between the riskiness of our assets and liabilities, don’t worry, we offer extensive deposit insurance, which you don’t actually have to pay for. In fact, you get to share the cost of this insurance with every other tax payer in the country!

Agnitio Finance: Zero Down side

Matt Nolan

What is the labour market

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My recent post on universal student allowances was relatively provocative (I thought it might be a little more provocative – maybe it would have been if I said all students and all unemployed people should borrow money instead 😛 ). As a result, it is a good time to briefly go through the way I see the labour market and a few of the things I think are important for analysing it.

The labour market is a difficult thing to analyse given that it is the only input to production where we also value the outcome for the input!  The best way to look at labour in this case is to separate out the person selling the labour and the “labour input” – so when you go to work you are “selling an input” and the price you receive is your compensation for that – the wage.

Fundamentally, the labour market starts with the core bit – actual working labour. There are people who are employed in firms working for those that own capital.

Now, just by looking at employees and capital owners we can’t say anything about the labour market without rabid conjecture an flying euphemisms. In order to get an idea about how the “trade” between the owners of labour and the owners of capital occurs we need to get an idea about the people who do own labour but aren’t selling it.

Note: Very long post – skip to conclusion if you want, I doubt you will lose anything 😉

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