Thursday, 17 October 2013

Pimp my professor

Professor Willem Buiter was a fantastic source of insight and analysis into the credit crunch, so much so Citigroup bought him in 2010. Since then he has undoubtedly earned lots of money and got to associate with powerful bankers who, I'm sure, regard him as a terribly nice ornament that does a really good turn at board meetings and away days.

But, compared to pre-2010, his more recent public output has been unfortunately limited and involved pish like “Global Growth Generators” wherein “Citi economists Willem Buiter and Ebrahim Rahbari investigate the likely future sources of global economic growth between 2010 and 2050. They come up with 11 global growth generators, i.e. 11 3Gs”.

Or not given, dumb buzzwords aside, a 40 year forecast (anyone feel capable of accurately predicting the rate and scope of technological change decades in advance? Thought not), can be safely ignored as one of those as stupid as its glossy “thought leadership” pieces companies hand out to executives who typically don’t know any better.

What’s also notable is that here and elsewhere Professor Buiter relegates himself to co-authorship status with a nobody business economist, a nice gesture that lets the latter ride on the coat-tails of the former’s reputation *.

With that in mind lets move on to a piece in praise of “Help-to-Buy” by Professor Charles A.E. Goodhart and Melanie Baker. Now Goodhart is such a big dog British economist he’s got a law named after him. Now? He’s a senior adviser to Morgan Stanley where Melanie (who?) works full-time as a UK economist. Hmmm, see the pattern emerging? Anyhoo, they make 4 big claims in support of Help to Buy, which are:
1)       It will help address to a gap in the market for affordable housing.
2)       Supply-side dynamics should respond from historically low levels to this stimulus if house builders have confidence in its duration.
3)       The private sector could take over some or all of this role after year 3 – by privatisation of the nascent mortgage indemnity insurer, by introducing private competition, or via re-insurance.
4)       It could be used as a powerful macro-prudential tool. Regardless of whether it remains a government vehicle, we think the FPC should retain control over the key parameters – and the Canadian experience shows a possible role for tweaking terms.
These are all for the most part pants. In response to 1), so would an increase in social housing, but without the risks inherent in help-to-buy's reintroduction of the 95% mortgage. Plus, I reckon building social housing assets that would generate income for government/put downward pressure on rents (a reduction in housing benefits costs anyone?) would provide all sorts of additional benefits.

Re: 2), note their use of the word “should”, also think about the timescales here because it takes time to build houses, let alone buy landbank, get planning permission, confirm designs, organise and schedule the various trades, then sell the final product. Then compare this with the actual duration of the scheme (a few years) i.e. government is boosting demand now, whereas actual supply “should” only start responding gradually over the next 18-24 months or so, which means house prices will rise sooner rather later (rendering housing less affordable in the process. Doh!).

Re: 3), “could” is nice, but why should/could the private sector take over this role given the government response is predicated on notions of “market failure”. Oh and the period up to 2007 practically illustrated the risks attached to high LTV mortgages and their consequent limited appeal.

Re: 4), this is simply wishful thinking/disingenuous. Yes it could be a macro-prudential tool I guess, but then so could flexing bank risk weighted asset ratios on mortgage lending, which has far more appeal because it would reduce risk rather than, as with Help to Buy, increase it and transfer it to the public sector. However, the real point here is that in practice all this scheme is being used for is to actively increase risk i.e. it’s a policy lever that only moves in one direction.

Pulling all this together, you’ve got Big Dog Goodhart actively pimping out himself and his reputation to a big bank for mucho cash to give us a pro-government puff piece as vacuous as its dumb. This is a bad thing because, as the Reinhart and Rogoff debacle made abundantly clear, we're in an environment where politicians make aggressively selective use of people like Big Dog to justify their policies, however nasty, dangerous or just plain wrong.

Now back to Buiter; when he took the Citgroup job he stopped writing his Maverecon blog stating  “As a consequence of this career move, Maverecon will be mothballed. That is the logical implication of brand integrity and credibility.  In Maverecon I wrote under the cover of ‘academic immunity’ . Academics have no duty other than to state the truth as they see it – to ‘speak truth to power’.  This gives them the ability to be undiplomatic, blunt, tactless and outspoken in ways that are unacceptable in the wider world – the world of grown-ups…..  Inevitably, during my years with the MPC and the EBRD, both the form and substance of my public statements were more constrained than during my academic episodes before and after.  The same will be true during the years to come with Citi.” .
I’m not as yet aware of any similar statement by the all grown up Big Dog Goodhart**.

* Alternatively, the nobodies actually write and research such dreck leaving the Big Dogs to read over the final version, then attach their name to it to lend it credibility/get it published/raise its profile.
** Americans call such people "shills". Britain doesn’t have such a straightforward equivalent to shill suggesting a cultural difference, but only so far as the relative willingness to acknowledge the practice exists.

Tuesday, 1 October 2013


Simon-Wren Lewis recently asked on his blog whether the Conservative party will become like the US Republican party, well in two wee respects British politics certainly feels creepingly American.

One concerns the news, in particular how mainstream media reporting in the US is so bad, satirical shows – above all the Daily Show and the Colbert Report – are regarded as more credible sources that the actual news; cue April’s Daily Mash article about how “the government’s welfare cuts are targeted at the fictional character Frank Gallagher” and compare it with the reporting here of the new Work for the Dole scheme.

Another is the flat out disregard for the truth. Over there, this reached its apogee with Bill Clinton’s subsequent destruction of Paul Ryan’s speech during the presidential elections (recent events aren’t so much about truth as they are utter mental-ness). Here, we’ve just had George Osborne’s Conservative party conference speech.

Take him saying this: “You ask someone with a mortgage what happens to their living standards when mortgage rates go up. Just a 1 percent rise means an extra £1000 on the average mortgage bill.” Fair point, it probably does except he’s incorrectly using this to falsely claim his policies have maintained bond market confidence in current economic policy. Except, current interest rates are actually a sign of how fecked the economy is i.e. if the economy really was undergoing a strong and sustainable well interest rates would start rising back to more normal levels.

That was flat out disingenuou whereas the following is a dirty great fib: He said “(u)ntil we’ve fixed the addiction to debt that got this country into this mess in the first place. It’s not over.” Uh huh? The Help to Buy scheme he announced has just been brought forward is about increasing personal borrowing i.e. debt. And it does so by increasing the risk involved because it single handedly reintroduces the 95% mortgages banks are no longer willing to sell.

So Osborne is trying to fix our addiction to debt by ......  aggressively encouraging an increase in higher risk borrowing by individuals. Immersion therapy economics perhaps given his stated aim? No, just rank hypocrisy.