The Conversation – Page 4 – Digital Finance Analytics (DFA) Blog

Why Sweden’s Central Bank Dumped Australian Bonds

Suddenly, at the level of central banks, Australia is regarded as an investment risk. Via The Conversation.

On Wednesday Martin Flodén, the deputy governor of Sweden’s central bank, announced that because Australia and Canada were “not known for good climate work”.

As a result the bank had sold its holdings of bonds issued by the Canadian province of Alberta and by the Australian states of Queensland and Western Australia.

Martin Flodén, deputy governor Sveriges Riksbank Central Bank of Sweden

Central banks normally make the news when they change their “cash rate” and households pay less (or more) on their mortgages.

But central banks such as Australia’s Reserve Bank and the European Central Bank, the People’s Bank of China and the US Federal Reserve have broader responsibilities.

They can see climate change affecting their ability to manage their economies and deliver financial stability.

There’s more to central banks than rates

As an example, the new managing director of the International Monetary Fund Kristalina Georgieva warned last month that the necessary transition away from fossil fuels would lead to significant amounts of “stranded assets”.

Those assets will be coal mines and oil fields that become worthless, endangering the banks that have lent to develop them. More frequent floods, storms and fires will pose risks for insurance companies. Climate change will make these and other shocks more frequent and more severe.

In a speech in March the deputy governor of Australia’s Reserve Bank Guy Debelle said we needed to stop thinking of extreme events as cyclical.

We need to think in terms of trend rather than cycles in the weather. Droughts have generally been regarded (at least economically) as cyclical events that recur every so often. In contrast, climate change is a trend change. The impact of a trend is ongoing, whereas a cycle is temporary.

And he said the changes that will be imposed on us and the changes we will need might be abrupt.

The transition path to a less carbon-intensive world is clearly quite different depending on whether it is managed as a gradual process or is abrupt. The trend changes aren’t likely to be smooth. There is likely to be volatility around the trend, with the potential for damaging outcomes from spikes above the trend.

Australia’s central bank and others are going further then just responding to the impacts of climate change. They are doing their part to moderate it.

No more watching from the sidelines

Over thirty central banks (including Australia’s), and a number of financial supervisory agencies, have created a Network for Greening the Financial System.

Its purpose is to enhance the role of the financial system in mobilising finance to support the transitions that will be needed. The US Federal Reserve has not joined yet but is considering how to participate.

One of its credos is that central banks should lead by example in their own investments.

They hold and manage over A$17 trillion. That makes them enormously large investors and a huge influence on global markets.

As part of their traditional focus on the liquidity, safety and returns from assets, they are taking into account climate change in deciding how to invest.

The are increasingly putting their money into “green bonds”, which are securities whose proceeds are used to finance projects that combat climate change or the depletion of biodiversity and natural resources.

Over A$300 billion worth of green bonds were issued in 2018, with the total stock now over A$1 trillion.

Central banks are investing, and setting standards

While large, that is still less than 1% of the stock of conventional securities. It means green bonds are less liquid and have higher buying and selling costs.

It also means smaller central banks lack the skills to deal with them.

These problems have been addressed by the Bank for International Settlements, a bank owned by 60 of the central banks.

In September it launched a green bond fund that will pool investments from 140 (mostly central bank) clients.

Its products will initially be denominated in US dollars but will later also be available in euros. It will be supported by an advisory committee of the world’s top central bankers.

It is alert to the risk of “greenwashing” and will only buy bonds that comply with the International Capital Market Association’s Green Bond Principles or the Climate Bond Initiative’s Climate Bond Standard.

Launching the fund in Basel, Switzerland, the bank’s head of banking Peter Zöllner said he was

confident that, by aggregating the investment power of central banks, we can influence the behaviour of market participants and have some impact on how green investment standards develop

It’s an important role. Traditionally focused on keeping the financial system safe, our central banks are increasingly turning to using their stewardship of the financial system to keep us, and our environment, safe.

Author: John Hawkins, Assistant professor, University of Canberra

Does Monetary Policy Work Any More?

In its quarterly statement on monetary policy, released today, the Reserve Bank of Australia declared its preparedness to “ease monetary policy further if needed”. Via The Conversation.

This suggests the bank still thinks monetary policy – in this case lowering interest rates to stimulate the economy – could help “support sustainable growth in the economy, full employment and the achievement of the medium-term inflation target”.

But in the wake of the bank last month lowering the official interest rate to a record low and the current somewhat sad state of the Australian economy, many commentators have speculated that monetary policy doesn’t work any more.

Is that right?

Reserve Bank cash rate

There are a number of variants of the “monetary policy doesn’t work” argument. The most basic is that the Reserve Bank has this year cut rates from 1.50% to 0.75% without any improvement to the Australian economy.

This is a textbook example of one of the classic logic fallacies known as “post hoc ergo propter hoc” (from the Latin, meaning “after this, therefore because of this”).

Put simply, it assumes the rate cuts have had no effect and doesn’t account for the possibility things might have been worse had there been no cuts.

Things might have been even worse. We’ll never know.

It also ignores what might have happened if the RBA had cut sooner. Again, we can’t know for sure. It is possible, though, to make an educated guess.

When to cut rates

Had Reserve Bank governor Philip Lowe acted, say, 18 months earlier to cut rates, he would have signalled that Gross Domestic Product growth was indeed lower than desired, that the sustainable rate of unemployment was more like 4.5% than 5%, and, most importantly, that he understood the need to act decisively.

That would have sent a powerful signal.

It would also have ameliorated the huge decline in housing credit that pushed down housing prices in Sydney and Melbourne by double digits.

That, in turn, would have prevented some of the weakening in the balance sheets of the big four banks that has occurred (witness this annual general meeting season).

All of this would have pumped more liquidity into the economy and put households in a much stronger position, likely leading to stronger consumer spending than we have seen.

Bank pass through

One gripe both the Reserve Bank governor Philip Lowe and federal treasurer Josh Frydenberg have had with the banks is their failure to fully pass through the RBA cuts.

It is true there is a problem with banks not being able to cut deposit rates below zero, and as a result having less scope to cut mortgage rates, which are majority funded from deposits.

But there are, of course, other ways monetary policy can work. The leading example is quantitative easing (QE).

This is where the central bank pushes down long-term interest rates by buying government and corporate bonds. At the same time this expands the money supply, thereby adding some upward inflationary pressure.

There is little reason to think such measures wouldn’t work.

The power of free money

Perhaps paradoxically, the closer interest rates get to zero the more powerful those rates may end up being.

To put it bluntly, if someone shoves a pile of money into your hand and asks almost nothing in return, you’re likely to use it. In fact, you would be pretty silly not to.

Suppose your mortgage rate really goes to zero – as has happened in Europe.

You might decide to redraw that and spend the money on a home renovation or some other productive purpose. Or you might decide to buy a more expensive house.

Such spending provides an economic boost.

The effect is all the more pronounced if people expect interest rates to be low for a long period of time. Aggressive cutting coupled with quantitative easing – which lowers long-term rates – signal just that.

But not only monetary policy

Just because monetary policy still has some effect at near-zero rates doesn’t mean we should pin all of our economic hopes to it.

A near consensus of economists have argued repeatedly for the use of more aggressive fiscal policy – including more infrastructure spending and more tax cuts.

Indeed, Philip Lowe has raised eyebrows by speaking so forthrightly on this issue. That doesn’t make him wrong, though.

There is little doubt the Reserve Bank should have acted much earlier to cut official interest rates. There is also a very good chance it will need to begin to use other measures such as quantitative easing in the relatively near future.

All of that says the Australian economy, like most advanced economies around the world, is in bad shape.

But it doesn’t mean monetary policy has completely run out of puff.

Author: Richard Holden, Professor of Economics, UNSW

Mounting Evidence Against Cashless Debit Cards

It would be nice if the “facts” being thrown around in the debate over the Cashless Debit Card were peer-reviewed, or even just evidence-based. Via The Conversation.

Instead, there are anecdotes. And it’s these that are being used to justify the government’s decision to spend A$128.8 million over four years continuing the existing trial of the cashless debit card in five sites in Western Australia, Queensland and South Australia and extending it to Cape York and all of the Northern Territory.

The extension will lift the number of people on the card from 11,000 to 33,000. Most will be Indigenous people – its disproportionate targeting has already attracted the attention of the National Congress of Australia’s First Peoples and the Human Rights Commission.

The cashless card was recommended to Prime Minister Tony Abbott in a report from mining billionaire Andrew Forrest in 2014. He initially called it the “Healthy Welfare Card”.

It wasn’t a new idea. Some A$1 billion dollars had already been spent on income management programs in the past, many of which had failed to meet their stated objectives.

It’s been tried before

The biggest was the Basics Card introduced as part of the 2007 Northern Territory Emergency Response (the “Intervention”) which was only made possible through the suspension of the Racial Discrimination Act.

Research published by the Australian Research Council funded Life Course Centre of Excellence found its introduction was correlated with negative impacts on children, including reductions in birth weight and school attendance.

It points to several possible explanations, including increased stress on mothers, disrupted financial arrangements within households, and confusion about how to access funds.

The government has not addressed these serious issues. Instead, it now seeks to place those who have been left on the basics card for over ten years now, on to the cashless debit card.

What was ‘Basics’ has become ‘Indue’

The 2016 Indue Cashless Debit Card. indue.com.au

The “Indue” Cashless Debit Card trials underway since 2016 direct 80% of each payment to the card (Forrest asked for 100%) where it can only be spent on things such as food, clothes, health items and hygiene products. Purchases of alcohol and withdrawals of cash are not permitted.

The trials are compulsorily for everyone living in the trial sites receiving a disability, parenting, carer, unemployment or youth allowance payment.

My own research in the East Kimberley found it makes those people’s lives harder.

Those targeted are a broad group needing support for a broad range of reasons, yet all are treated as if they have issues with alcohol or drugs or gambling.

Most of the people on it do indeed have a common problem: that is trying to survive on meagre payments in remote environments with a chronically low supply of jobs.

Of all the claims made for the card, the least believable is that it gets its users into jobs.

What it does do is limit access to cash needed for day to day-to-day living. It makes it hard to buy second-hand goods, transport and (at some outlets) food, and can make living more expensive.

For anyone actually struggling with addiction, it can’t substitute for treatment, a concern raised by medical specialists.

While the government says the trials have been community-led, in reality consultation has been limited to a small group of people not subject to the card.

When leaders in the East Kimberley who had agreed to the card withdrew their support, the government continued with the trial.

Its success has not been established

In addition to relaying on anecdotes, the government continues to cite a widely condemned report by Orima Research. Among others, the Australian National Audit Office found this report was inadequate to draw any conclusions from.

Profiting from the Cashless Debit Card has been Indue, a private company whose deputy chairman up until 2013 is now the present President of the National Party, Larry Anthony.

Indue’s involvement is helping to create a two tiered banking system in which most people have a choice of financial providers, but those subject to the card are restricted to one, which provides a very different product to the others.

Indue is also not a member of the Australian Banking Association, and so is not bound by the consumer protection provisions of its Banking Code of Practice.

The inquiry is due to report next week. Given the expensive and harmful consequences of the trial, it ought to find the extension is not justified. There are better ways to spend $128.8 million that would actually help vulnerable Australians.

Author: Elise Klein (OAM), Senior Lecturer in Development Studies, University of Melbourne

A Way to Include Homes in the Age Pension Assets Test

Here’s the boldest idea the government’s inquiry into retirement incomes should consider but might not: no longer exempting all of the value of each retiree’s home from the pension assets test. Via The Conversation.

The test would merely exempt part of the value of retirees’ homes. The change would free-up funds to support other retirees who are struggling because they have to pay rent.

It’s an idea with an impressive lineage.

The Henry Tax Review suggested exempting only the first A$1.2 million. The bit above $1.2 million would be regarded as an asset and subject to the test.

The review said it would hit only 10,000 retirees. The $1.2 million figure was in 2009 dollars, meaning that if the change came in today the review would want it to cut in at a higher dollar figure.

The Grattan Institute suggests a lower cut in: $500,000. The first $500,000 of each mortgaged home would remain exempt from the pension assets test, the part above $500,000 would be regarded as an asset. Grattan says it would save the budget $1 to $2 billion a year.

The Australian Chamber of Commerce and Industry agrees, as does the Actuaries Institute.

The idea scares homeowners

Who could object?

The Combined Pensioners and Superannuants Association says asset testing the family home would be “massively unfair”, targeting the vulnerable.

But people with high-value mortgage-free homes aren’t normally thought of as vulnerable.

Labor’s treasury spokesman Jim Chalmers says it would push more retirees “off the pension, out of their homes, or both”.

He is right about the former, but wrong to think the retirees who suffered a cut in their pension or lost their pension would be badly off.

The worst off retirees, as recognised by a Senate Committee, are those without homes making do with grossly inadequate rental assistance.

Right now it is possible for a single person owning a $1.3 million mortgage-free home and $260,000 of other assets to get the full age pension.

Assuming that person draws down on those other assets at the rate of 5% per year, he or she can spend $37,000 per year and pay no rent.

Yet homeowners do well

A non home owner with $785,000, or half the assets, would be denied the pension.

Like the much-richer homeowner, that person would be able to draw an income of about $37,000 per year, but half it will have to go on rent.

It’s hardly fair.

It encourages retirees with homes to stash more and more of their assets into them in order to get the pension (and pass something valuable on to their children). Retirees with lesser assets miss out and have to rent.

But fairness is in the eye of the beholder.

The problem is that a ceiling on exemption from the assets test that seems fair in one part of Australia might not seem fair in another where home prices and perhaps the cost of living is higher.

Our suggestion could be sold as fair

In order to make more equal treatment seem fair to all retirees with homes I and fellow actuary Colin Grenfell have worked up an option that would use the median (typical) price for each postcode as the cut off point for exemption from the assets test.

It would happen postcode by postcode, updated every year using Council valuations and as the median prices changed.

Only the owners of homes who values were atypical for the area would be affected, and only that part of the value of their home that was atypical would be included in the assets test.

Its key selling point is that it wouldn’t threaten homeowners with values at and below the average for their area.

The funds freed could increase the overall pension, but would probably be better applied to lifting rent assistance.

It’s important to treat retirees in the same financial circumstances the same, regardless of whether they own a mortgage-free home, and fewer and fewer retirees are owning mortgage-free homes.

It would have the added benefit of reducing the pressure on our parents and grandparents to own houses with bedrooms on the first floor that are never opened, not until they die and their houses are sold.

Anthony Asher, Associate Professor, UNSW

Inside Boris Johnson’s Brexit Deal

Via The Conversation.

Against seemingly all the odds, we have a new Brexit deal. As an apparent vindication of UK prime minister Boris Johnson’s strategy to ramp up the threat of a no-deal departure from the EU and to force concessions from Brussels, one would imagine that Number 10 is rather happy right now. But that happiness will be tempered with caution, because some major issues lie ahead.

Negotiations in Brussels have produced legal texts on arrangements for Northern Ireland and on the political declaration, which outlines the broad outline of what the two sides want from their future relationship. These are the product of months of planning by the British government, so it’s reasonable to ask what has actually changed since former prime minister Theresa May struck her original deal.

Reading the text, the first impression is that there’s much more that hasn’t changed than has.

Northern Ireland

The protocol on Northern Ireland and Ireland has long been in the firing line. It proposes a backstop arrangement that would keep Northern Ireland in close alignment with the EU unless and until both UK and EU agreed to change that.

On that front, the introduction of a section on “democratic consent” is an important shift on the EU side. This provides a mechanism for the Northern Ireland Assembly to vote on whether to maintain the provisions of the protocol, with a requirement to have cross-community support. That means the UK is now no longer subject to the EU’s approval if it wants to end the backstop arrangement.

That said, a voting requirement to have majorities from both unionist and nationalist groupings makes it very hard to achieve – especially since the Northern Ireland Executive broke down several years ago and is still not in operation. While the Democratic Unionist Party (DUP) might control unionist voting, it can only do the same with nationalists if it creates a much more benign and cooperative environment. And even if that does happen and arrangements are voted down by Stormont, there is still a long phasing-out period, so things cannot move too quickly.

From the EU’s perspective, this arrangement provides a degree of security, mainly because any decision to overturn the system is not solely in the hands of the UK – which has not been the most reliable partner of late.

Customs arrangements

The other big change is on customs arrangements. Instead of creating a temporary customs area for the whole of the UK, the revised Protocol makes Northern Ireland a part of the UK’s customs territory. Because that would imply border controls, a rather convoluted system of custom duty collection is set out.

In essence, the system collects duties from businesses, dependent upon where goods are coming from and going to, with the possibility of various exemptions that will be agreed down the line.

It’s a much more complex system than before, but it does allow Johnson to argue that the entire UK is leaving the EU’s customs union, allowing it to benefit from any new trade deals that might be concluded.

Meanwhile, the political declaration, the main change is that the UK now suggests it is looking for a much looser future relationship, based on a free trade agreement, rather than anything that might include participation in the EU’s single market or customs union.

Less is more?

While these are all noteworthy, they do represent only a very small part of the totality of the withdrawal agreement, as agreed by May last November. The Protocol still kicks into effect at the end of a transition period and the effect is still that Northern Ireland is kept very close to EU’s regulatory standards for many years. The future relationship remains as aspirational as May’s plans – until such a document is negotiated and ratified, by some future British government, no one can be sure what it will look like.

Nor did this negotiation touch on citizens’ rights, financial liabilities, the power of the EU’s courts to issue definitive rulings on matters of dispute (an important matter for hard Brexit supporters in the Conservative Party) or the institutional arrangements for managing all of this. Even as Number 10 goes into its selling mode, those continuities from last year’s text will be present in many people’s minds.

The plan still seems to be for the government to present this deal to the UK parliament in a special Saturday sitting on October 19. We already know that the DUP has issues with the revised text because it places Northern Ireland in a different legal position to the rest of the UK, so winning that vote looks even harder than it already did. The government will hope that it can present the deal to MPs as the last, best hope for a Brexit settlement – but, with wobbles from the DUP, Johnson will struggle to get close to a majority.

Even if he does, the potential to keep that majority together for the subsequent passage of the Withdrawal Agreement Bill looks even less likely. And remember that, as things stand today, this text isn’t even signed off by the 27 EU member states – there’s now not really enough time for them to digest and approve something that moves them off their previous position.

In short, this might still fall apart for Johnson, just as it did for May.

Author: Simon Usherwood, Professor in Politics, University of Surrey

Cashless Welfare Card – Not So Flash

“This is a bit controversial, we know that,” deputy prime minister Michael McCormick told the National Party’s federal council, which on the weekend voted for a national roll-out of cashless debit cards for anyone younger than 35 on the dole or receiving parenting payments. From The Conversation.

The Nationals have joined the chorus within the federal government proclaiming the cards a huge success.

The Minister for Families and Social Services, Anne Ruston, has even gone so far as to claim welfare recipients are “singing its praises”.

Really?

Both McCormick and Ruston have proclaimed success based on the most recent trial of cashless welfare in Queensland. This trial began barely six months ago, and the independent evaluation by the Future of Employment and Skills Research Centre at the University of Adelaide is ongoing.

A more complex story emerges out of my research into lived experiences of the first cashless debit card trial, which began in Ceduna, South Australia, in March 2016

I spent about three months in the town of Ceduna between mid 2017 and the end of 2018 talking to people about life on the card.

Ceduna is located on the north-west coast of Eyre Peninsula, South Australia. www.shutterstock.com

All communities are diverse and people’s experiences diverge. Some liked the card, or had come to accept it, others were caught up dealing with far more significant problems.

But I talked to people who found the card “an insult”. They told me it made them feel “targeted” and “punished”. They talked of degradation and defiance. They also told me the card didn’t work.

As for the the claim by both Ruston (and her ministerial predecessor Paul Fletcher) that the card empowers people to “demonstrate responsibility”, the opposite was true. In the words of June*, an Indigenous grandmother, foster carer and talented artist: “It has taken responsibility away from me. It’s treating me like a little kid again.”

Indigenous testing grounds

Ceduna, in the far west of South Australia, was the first of four sites chosen to trial cashless debit cards. The second was in the East Kimberley

The location of these two trial sites meant early trial participants have been predominately Indigenous. I am of the view that Indigenous communities are being used as testing grounds for new technologies and controversial measures.

In the first two trial sites, income support recipients younger than 65 have just 20% of their payment deposited into their bank account. The remaining 80% goes on to their debit card, which cannot be used at any alcohol or gambling outlet across the nation. Nor can they be used to withdraw cash.

The lead-grey cashless debit card is similar but different to the lime-green BasicsCard, introduced as part of the 2007 Northern Territory National Emergency Response (the “Intervention”). The use of the BasicsCard as an “income management” tool was extended to non-Indigenous people in the Northern Territory in 2010, and to other states in 2012.

The BasicsCard generally quarantines 50% of a social security recipient’s income so that it cannot be spent on alcohol, gambling, tobacco or pornography. BasicsCard holders need to shop at approved stores. In contrast, the cashless debit card, administered by financial services company Indue, can theoretically be used wherever there are Eftpos facilities.

Shame and humiliation

My research wasn’t based on collecting statistics but “hanging out” and getting to know people. I came to see the stigma associated with the “grey card” sometimes resonated with past experiences.

Robert*, for example, told me about growing up on a mission and then suddenly finding himself as “one little blackfella” in a large high school. He was acutely sensitive to the “smirks” and judgements of others whenever he used the grey card to pay for things.

Pete* left high school after a couple of weeks to join an itinerant rural workforce that has since vanished. After decades of manual work, finding himself unemployed due to ill health was devastating enough. Being issued the grey card compounded his humiliation.

Others voiced their belief the grey card was designed to induce shame. But they refused that shame, expressing instead a defiant belief in the legitimacy of their need for support.

The welfare system often defines people by the one thing they are not currently doing – waged employment. But many people I spent time with in fact laboured constantly: it just wasn’t recognised as work. People like June*, for example, looked after sick kin, the elderly and children. Yet the grey card treated them as dependents.

I heard about ways of getting around the card’s restrictions. As one acquaintance put it: “Drunks gonna drink!” One strategy involved exchanging temporary use of the card for cash. With terms that nearly always disadvantage the card holder, it has the potential to make life tougher for people living in hardship.

These observations concur with the sober assessments of experts such as the South Australian Aboriginal Drug and Alcohol Council.

The evaluation of the Ceduna trial for the Department of Social Services was more positive, noting that alcohol drinkers and gamblers reported doing so less frequently. But it also noted no reduction in crime statistics related to alcohol consumption, illegal drug use or gambling. And the Australian National Audit office was so critical of the government’s evaluation it concluded that it was difficult to ascertain “whether there had been a reduction in social harm” as a result of the card’s introduction.

Which makes simplistic claims about the card’s success look a bit rich.

Author: Eve Vincent, Senior Lecturer, Macquarie University

Bupa’s nursing home scandal is more evidence of a deep crisis in regulation

British health-care conglomerate Bupa runs more nursing homes in Australia than anyone else. We now know its record in meeting basic standards of care is also worse than any other provider. Via The Conversation.

This is more than a now familiar story of a corporation putting shareholders before customers. It is also about another abysmal design failure in regulation.

Health care is meant to be one of our most regulated sectors. In this case, Bupa’s facilities were inspected and certified by the Aged Care Quality and Safety Commission.

The regulator’s inspectors found 45 of Bupa’s 72 nursing homes failed health and safety standards. In 22 homes the health and safety of residents was deemed at “serious risk”. Thirteen homes were “sanctioned” – with government funding being withheld and the homes banned from taking new residents.

Yet none of this appears to have spurred Bupa’s management into action, according to media reports. Flurries of inspection reports and written warnings over months and years only underlined that the regulatory tiger, even if it had teeth, had a very soft bite.

Responsive regulation

We have seen examples of equally insipid regulation in other areas. In the building sector, for example, a range of regulatory flaws including outsourced building certification have led to shoddily built and dangerous apartment construction.

In the financial sector, the banking royal commission castigated the industry regulators – the Australian Securities and Investments Commission and the Australian Prudential Regulatory Authority – for their unwillingness to enforce rules.

“The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct,” noted royal commissioner Ken Hayne. “The prudential regulator, APRA, never went to court.”

This failure is due to more than individual agency shortcomings. It’s an unintended consequence of the design of “responsive regulation” – the system that has superseded command-and-control regulation over the past three decades.

Responsive regulation was popularised by Australian sociologist John Braithwaite and American law professor Ian Ayres in the early 1990s. It was intended to overcome the pitfalls of the command-and-control model, which involved regulators employing large numbers of inspectors to look for non-compliance.

From about the 1970s it had become increasingly evident this model wasn’t working. It was also very expensive. Consider, for example, the cost of having fire and health and safety inspectors visit every single building site, particularly when most builders were doing the right thing. The cost and intrusiveness of the system fuelled calls to do away with regulation .

Too big to fail

Ayers and Braithwaite saw their model as a way forward. “Responsive regulation is not a clearly defined program or a set of prescriptions concerning the best way to regulate,” they explained. “On the contrary, the best strategy is shown to depend on context, regulatory culture and history.”

Responsive regulation assumes that in most cases the enterprises being regulated are interested in compliance and will respond to light-touch directives. It assumes that often compliance failures are due to ignorance or inadequate procedures. Its approach is to give parties a chance to amend their ways.

But there’s a potentially huge flaw in the responsive regulation model. What happens when an organisation is so large it is deemed too big to fail, or deems itself so?

How Ian Ayres and John Braithwaite conceived the enforcement pyramid in responsive regulation. The problem now seems to be that regulators want to stop halfway. Responsive Regulation: Transcending the Deregulation Debate

This seems to have been the case with a number of financial companies whose misdeeds were exposed by the banking royal commission. It seems it might have been the case with Bupa.

In such cases, because of the timidity of the regulator or the confidence of the enterprise, the warnings might just go on and on. The company continues to book its profits – which may well eclipse any penalty it might have to pay if crunch time does ever come.

Markets have their limits

This design flaw highlights a more fundamental problem with governments positioning themselves as rule makers and leaving the rest to the “market”.

Markets are designed to facilitate exchange on the basis of profits. The profit motive means market participants look for the lowest-cost option. In aged care this means paying the lowest possible wages, possibly to unqualified staff, and cutting corners to cut costs.

Markets are very useful for increasing individual choices and efficiently allocating resources, but they are not suited to every task. They fail when factors other than profit ought to be considered.

We therefore need to think about the design of regulatory systems more holistically, as part of a broader social process.

The pioneers of responsive regulation certainly understood this. They emphasised flexibility, taking into account context, culture and history.

What those three things now tell us, given widespread regulatory failure across industries, is that government should not resist stepping in to provide important public services where the private sector cannot or will not do so at an acceptable level. Nor should it be afraid to act through empowered regulators, with ressources and powers to fulfil their mandates.

Author: Author: Benedict Sheehy, Associate professor, University of Canberra

The ABS And Productivity Commission Both Downplayed Growing Inequality

From The Conversation.

We now know the Bureau of Statistics did quite a bit of soul-searching before producing the bland and ultimately misleading press release headed “Inequality Stable Since 2013-14” last month.

Late last week we pointed to the odd way in which the release included no data to back up the claim, and how journalists from the ABC and Sydney Morning Herald and Age quickly discovered the statistics it purported to summarise actually showed wealth inequality climbing.

On Wednesday in The Guardian, Paul Karp revealed the contents of documents released under freedom of information laws that shed light on the creation of the press release.

An earlier draft had pointed to a “significant increase” in wealth inequality compared with 2011–12 and 2003–04.

Australian Bureau of Statistics disclosure log

The phrase “significant increase” didn’t survive the editing process.

A reference to a measure of wealth inequality being “at its peak” since it was first comprehensively measured in 2003-04 was also removed after a direction to “focus on income over wealth”.

Another email noted there has been “a significant (downward) change” in the wealth share of the bottom fifth of households, but added: “I’m not sure that we want to draw attention to this though??”

The Bureau responded to the Guardian article on Wednesday, saying it had not attempted to misrepresent the data, and that it prepared the press releases “internally with no external influence”.

It’s not just the ABS

It’s not only the Bureau of Statistics that has found it difficult to draw attention to increasing wealth inequality.

In August last year the Productivity Commission released what it called a stocktake of the evidence on inequality, titled “Rising Inequality?”.

It wasn’t so much a “stocktake of the evidence” as a showcase of new specially assembled evidence that conflicted with a wider body of evidence that shows wealth inequality increasing.

The Commission’s contribution presented the wealth shares for the top 10% of Australian households only.

These came not from publicly available data, but from “confidential unit record files” made available to approved users by the Australian Bureau of Statistics.

We have presented the microdata in its raw form below, alongside four other well-established and widely published series.

For notes, see full paper: Inequality stocktake … or snowjob? Evatt Journal, November 2018

The striking feature is that every line except the Productivity Commission’s shows inequality increasing since 2011.

The data from both Credit Suisse (on which Oxfam bases its research) and the Evatt Foundation suggest that the top 10% now own more than half the nation’s household wealth, and the Organisation for Economic Co-operation and Development’s 47.2% is just a little less.

The Productivity Commission is an outlier in finding the top 10% own closer to 40%. Its finding that the share has been falling between 2013-14 and 2015-16 makes it even more of an outlier.

Beyond the bland headline, the latest statistics from the Bureau confirm our analysis of growing wealth inequality.

The Commission’s results are implausible

Our suspicions were aroused when the Productivity Commission’s results appeared to be incompatible with the Bureau’s published findings, of which they were a subset.

The Bureau’s data showed the share of wealth held by the top 20% climbing, while the Commission’s series showed the share held by the top 10% falling – implying that the share of the next top 10% must have been climbing quite a lot.

The divergence strained credulity. There are no advantages in accumulating wealth that apply to households in the second top decile that do not apply with at least equal force to those in the top decile.

Without an outside explanation (such as an extra tax applying only to the top 10%) the result is so improbable as to seem impossible.

Other data available from the Bureau at the time showed that the ratio of the wealth of households 10% from the top to the wealth of those 10% from the bottom had climbed, while at the same time the Commission found the wealth share of the top 10% overall had fallen.

Unfortunately, the Commission gave pride of place to its own findings over and above more conventional findings, and used a question mark in the title of its paper “Rising Inequality?” to imply that it might not be.

As we wrote here last week, wealth inequality and its effects matter. Australians need the truth about how much it is growing.

Authors: Christopher Sheil, Visiting Senior Fellow in History, UNSW; Frank Stilwell, Emeritus Professor, Department of Political Economy, University of Sydney

Would you buy a new apartment?

“What we need to do is rebuild confidence in Australia’s building and construction sector,” said federal minister Karen Andrews after the July 2019 meeting of the Building Ministers’ Forum). Via The Conversation.

This has been a recurring theme since the federal, state and territory ministers commissioned Peter Shergold and Bronwyn Weir in mid-2017 to assess the effectiveness of building and construction industry regulation across Australia. They presented their Building Confidence report to the ministers in February 2018.

In the 18 months since then, the combined might of nine governments has made scant progress towards implementing the report’s 24 simple recommendations. Confidence in building regulation and quality has clearly continued to deteriorate among the public and construction industry.

In last week’s Four Corners program, Cracking Up, Weir was asked whether she would buy an apartment. She responded: “I wouldn’t buy a newly built apartment, no […] I’d buy an older one.” She went on to say:

We have hundreds of thousands of apartments that have been built across the country over the last two, three decades. Probably the prevalence of noncompliance has been particularly bad, I would say in the last say 15 to 20 years […] And that means there’s a lot of existing building stock that has defects in it […] There’ll be legacy issues for some time and I suspect there’ll be legacy issues that we’re not even fully aware of yet.

These comments may not have delighted those developers trying to sell new apartments, or owners selling existing apartments, but they are fair and correct. Confidence will not be restored until all the governments act together to improve regulatory oversight and deal with existing defective buildings.

Residents of the Lacrosse, Neo200, Opal and Mascot towers and other buildings with serious defects are already living with the impact of “legacy” problems. Over the weekend, another apartment building was evacuated – this time in Mordialloc in southeast Melbourne. The building was deemed unsafe because it was clad with combustible material and had defects in its fire detection and warning system.

A costly but essential fix

Fixing such defects is a costly business. A Victorian Civil and Administrative Tribunal decision established that replacing the combustible cladding on the Lacrosse building in Melbourne would cost an average of A$36,000 per unit. At Mascot Towers, consultant engineers estimated the cost of structural repairs at up to A$150,000 per unit on average.

According to UNSW and Deakin research, between 70% and 97% of units in strata apartments have significant defects. Let’s assume 85% have such defects and the average cost of fixing these is only $25,000 per unit. That would mean total repair costs for the 500,000 or so tall apartments (four-storey and above) across Australia could exceed A$10 billion.

The Victorian government has taken the lead on combustible cladding, setting up and funding a A$600 million scheme to replace it. It’s also replacing combustible cladding on low-rise school buildings even though these may comply with the letter of the National Construction Code.

No other state has yet followed this lead. This is concerning given the risk to life. No one viewing images of the Neo200 fire in the Melbourne CBD could doubt how dangerous combustible cladding can be.

The other states and territories should immediately copy the Victorian scheme. While not perfect, and probably underfunded, it is a positive step to improve public safety. The Andrews government should be congratulated for doing something practical while its counterparts in New South Wales and Queensland, which have many buildings with combustible cladding, fiddle about.

All governments share responsibility

The federal government’s response has been inadequate. When asked about contributing to the Victorian scheme, Karen Andrews said:

The Commonwealth is not an ATM for the states […] this problem is of the states’ making and they need to step up and fix the problem and dig into their own pockets.

This flies in the face of reality. All nine governments are responsible for building regulation and enforcement. All signed the intergovernmental agreement on building regulation.

The federal government, which chairs the Building Ministers’ Forum, leads building regulation in Australia. The Australian Building Codes Board, which produces the National Construction Code, is effectively a federal government agency. The precursor to the national code, the Building Code of Australia, was a federal initiative.

It is clear Australian governments have worked effectively together in the past to combat threats to life and safety, or to provide consumer protection nationwide. Examples include initiatives as diverse as the national gun buyback, the creation of the Australian Securities and Investment Commission (ASIC) and the program to replace defective Takata airbags in cars.

The crop of building defects we see today are a direct result of negligent regulation by all nine governments over the past two decades. Clearly, they all have a legal and moral duty to coordinate and contribute to a program to manage the risks and economic damage this has created.

All the evidence points to a long-term failure to heed repeated warnings about the dangers. Governments and regulators were captive to the interests of the development lobby, building industry and building materials supply industry.

The governments must stop playing a blame game. Effective programs are urgently needed to fix defects, including combustible cladding, incorrectly installed fire protection measures, structural noncompliance, structural failure and leaks.

The Australian Building Codes Board, which is directly responsible for the mess, should be reformed to ensure it becomes an effective regulator. The National Construction Code should be changed to make consumer protection an objective in the delivery of housing for sale.

All parties involved will have to take some pain: regulators, developers, builders, subcontractors, consultants, certifiers, insurers, aluminium panel manufacturers, suppliers and owners. Only governments can broker a solution as it will require legislation and an allocation of responsibility for fault.

The alternative will probably be a huge number of individual legal cases and a rash of owner bankruptcies, which may well leave the guilty parties untouched.

Author: Geoff Hanmer, Adjunct Lecturer in Architecture, UNSW

Fed rate cut bails out Trump for policies that are slowing the economy

The Federal Reserve appears to be bailing out the president. From The US Conversation. The central bank is essentially signaling it’s now the administration’s insurer of last resort.

Responding to concerns of a slowing economy – in part caused by President Donald Trump’s trade wars – the Fed cut short-term interest rates for the first time since 2008, lowering its benchmark rate 25 basis points to 2.25%.

The cut sends a message to financial markets and households that the Fed stands ready to give the economy a boost should it slow further. Given that it’s forced to do so by Trump’s own policies, the central bank is essentially signaling it’s now the administration’s insurer of last resort.

As an expert on monetary policy and a former Fed economist, I believe the bank’s embrace of this role is bad for the economy. It could embolden Trump and other politicians to pursue policies that are even more reckless – the kind intended more to benefit narrow constituencies and help win their re-election than support the broader national interest.

The message matters

Judging the merits of a rate cut usually can only be done in hindsight. But the case for one seems to be more about what it signals than directly boosting growth.

By itself, a single quarter-point reduction in the overnight borrowing rate – the rate most directly affected by the Fed – will likely do little to alter directly the economic decisions made by consumers and companies. Virtually no households, and very few businesses, borrow money for such a short term.

Most mortgages, for example, are of the 30-year, fixed-rate type. And while the Fed’s short-term “target” does eventually affect other interest rates in the economy, long-term borrowing costs typically react less to modest changes in monetary policy, especially if these changes are “one-off.”

Rather, it’s the message that matters. Stoking expectations that the Fed stands ready to provide additional monetary easing if necessary is a powerful tool. And although rates are historically low, the central bank still has another 2 percentage points it can cut to stimulate the economy, as well as similar tools like so-called quantitative easing.

The Fed’s ‘insurance’ policy

Furthermore, although the economy has slowed slightly, it’s still growing. Some argue that the “insurance” of a rate cut – and the signal it provides that the Fed stands ready to do more – will help maintain that positive growth.

But the very reason the Fed feels the need to do this is because of the government’s own policies. Most economists agree that the current round of tariffs and the resulting disruptions to supply chains have been harmful.

Normally, economic conditions play a big role in presidential elections. And as the political and economic costs of a bad policy mount, a president would be forced to switch course to avoid doing more harm – not to mention damaging his re-election chances.

Therein lies the problem of the Fed’s rate cut. Its commitment to reducing rates to stimulate the economy regardless of the source of the slowdown insulates the administration from the consequences of its actions, potentially leading to even more misadventures.

Not only that, cutting rates drives up the prices of risky assets – which could metastasize into something harmful, as we saw ahead of the 2008 financial collapse – and masks other structural problems in the economy. Furthermore, rate cuts tend to primarily benefit the upper middle class and the wealthy – the group that owns most of the financial assets in the economy.

Americans experienced something similar in the 1970s. AP Photo

Cuts have costs

History shows that this kind of central bank insurance is not free.

In the 1970s, President Richard Nixon pressured Fed Chair Arthur Burns to keep interest rates low in order to help him win re-election in 1972. Ultimately, Burns acquiesced, Nixon won re-election, the Vietnam War continued for three more years, and the U.S. economy suffered high and disruptive inflation throughout most of the decade.

Something similar could happen if the Trump administration provides even more fiscal stimulus to bolster its 2020 election chances. Fed rate cuts in conjunction with additional fiscal stimulus could result in higher inflation – which could spook markets and lead to a nasty unwinding.

Author: Rodney Ramcharan, Associate Professor of Finance and Business Economics, University of Southern California