Matt Nolan

Was it the availability of credit that lead to the housing bubble?

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A popular explanation of the booming in house prices according to, well, everyone is that there was lots of “credit washing around” which convinced people that they should go and bid up house prices. An example of this logic is shown in this statement at the very good Big Picture blog:

The bubble in home prices, fueled by the ready availability of credit, resulted in an underestimate of the risks of residential real estate

Personally, I think this type of thinking has the causality all mixed up – if there was any error it was because people “underestimated the risks” associated with the price of residential real estate, and therefore given the “price” of credit the housing market appeared to be a better bet than it actually was. As a result, the entire blame for the bubble and associated crisis should lie with the fact that risk wasn’t being appropriately identified – not with some mystical belief that credit was springing up all over the place. If the risk problem was unsolvable, then we can blame central banks for leaving the price of credit (not its “availability) to low – however, this is a secondary issue to risk.

The whole concept of the “availability of credit” is somewhat of a misnomer.

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Matt Nolan

New Zealand: First developed nation to fall into a recession following the Sub-Prime crisis

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Congratulations New Zealand – once again, leading the world in terms of an economic downturn. The 0.2% fall in production GDP in June puts us in a technical recession!

Given how trade exposed we are I would assume that we would lag the rest of the world – but mother nature came in, provided us with a drought, and dragged us into recession.

More details on GDP to come, maybe 🙂

Matt Nolan

Is the Green party heavily risk averse? Do they think the rest of us are as well?

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According to a recent post on Frog Blog it would appear so.

As well as randomly comparing the current crisis to the methodologically flawed “shock doctrine”, frog states that NZ MUST:

invest in rebuilding our local communities so that they are economically independent and self sustainable

This would surely only be the best thing to do if you have an extremely pessimistic outlook for the world and world trade.

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Matt Nolan

Lessons from capital inflows

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Capital inflows are the reverse side of the current account deficits that we like to discuss on this blog (most recently here). For some reason a capital account surplus is often seen as a good thing by journalists while a current account deficit is seen as a bad thing (ht Bluematter). This does not make sense to us as economists, as we know they are the same thing.

However, I suspect the difference in attitude stems from some dose of reality – fundamentally there are good and bad elements in a current account deficit/capital account surplus, and when the two attitudes shown by journalists are put together we get a fairly good breakdown of what is really going on 🙂

On that note, Dani Rodrik discusses a paper on capital inflows. As Dr Rodrik states:

They find that capital inflow bonanzas have become more frequent as restrictions on international capital flows have been removed, that these episodes can last for quite some time (lulling policy makers into thinking that they are permanent), that they end with an abrupt reversal “more often than not,” that they are are associated with greater incidence of banking, currency, and inflation crises (except for in the high income countries), and that economic growth tends to be higher in the run-up to a bonanza and then systematically lower

Now New Zealand is a country that has had some capital inflows – so lets discuss what this view of capital inflows means for us:

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Matt Nolan

Is free trade solely of benefit to farmers/exporters?

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Over at No Right Turn I/S states that we can’t simply view “free trade” as beneficial, we have to be mindful of the costs. Now this is true, as with any policy we have to look at the costs associated with change as well as the benefits before we decide what to do.

However, I am not convinced that the issue is exactly the way I/S has framed it – fundamentally, I fear the I/S views farmers (or potentially exporters more generally) as the only people who benefit from a free trade deal – while stating that the rest of society bears some “cost”. It is the benefit side of the equation I wish to discuss here:

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Matt Nolan

Is outward migration a problem?

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Over at Kiwiblog, David Farrar comments on outward migration from New Zealand. He concludes by stating:

Inwards migration of new New Zealanders (which is a great thing) helps keep the overall population stable, but that does not mean there isn’t a serious problem with the numbers leaving.

A similar theme was mentioned a few weeks ago in an extremely interesting newspaper article by David Grimmond, which concluded:

Ultimately outward migration flows are a barometer of perceptions of government management. The steady growth in departures suggests a growing disillusion with the current government. It potentially also suggests a lack of confidence that the alternative will make much difference.

However, I don’t feel that this view of outward migration gives us the full picture of what is good and bad – lets discuss (Note: The Standard discusses the issue here):

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