Joyce is said to have expertise in this area, not because he’s an accountant this time, but because he’s got a thing about Chinese investment, one supposes.

Whether or not Joyce remains in Finance, it appears unlikely that the Liberals are going to be able to demonstrate any great facility in identifying savings to offset promises. Despite the attempts to shoehorn the schools stimulus spending into the ‘waste!!!’ box, depriving schools of facilities and throwing construction workers out of work is surely the ingredient for a big scare campaign. And the National Broadband Network is, well, popular.

I can’t find it online, but Christopher Pearson let the cat out of the bag on the weekend in The Australian about the opposition’s fiscal figuring. One of the reasons for the decision to impose a tax on business to fund parental leave was the fact that the Henry Tax Review has not yet been released. He implied that the mooted resources rent tax would, in the eyes of the Coalition, provide the rivers of revenue that would enable Abbott to promise big picture stuff.

Support for a resources rent tax to do nation building would seem to be a natural fit for a social democratic view of things. It sits somewhat uneasily with the claim, articulated by Abbott in the Great Health Debate, that his party stands for “small government, lower taxes and greater freedom”. It would also further negate the opposition’s ability to run a tax scare campaign. But it would enable Abbott to satisfy both his statist instincts and his ego, and to implement just about the only electoral strategy he can seem to conceive – tossing money around with abandon, Howard style.

What, then, of the opposition’s economic cred?

Speaking of which, has anyone heard anything from them on the economy lately? And where’s Joe Hockey been? Keeping his head down so he can emerge as leader after the trainwreck?

Update: Barnaby’s gone from Finance.

The global market has stimulated first and foremost, on the part of rich countries, a search for areas in which to outsource production at low cost with a view to reducing the prices of many goods, increasing purchasing power and thus accelerating the rate of development in terms of greater availability of consumer goods for the domestic market. Consequently, the market has prompted new forms of competition between States as they seek to attract foreign businesses to set up production centres, by means of a variety of instruments, including favourable fiscal regimes and deregulation of the labour market. These processes have led to a downsizing of social security systems as the price to be paid for seeking greater competitive advantage in the global market, with consequent grave danger for the rights of workers, for fundamental human rights and for the solidarity associated with the traditional forms of the social State. Systems of social security can lose the capacity to carry out their task, both in emerging countries and in those that were among the earliest to develop, as well as in poor countries. Here budgetary policies, with cuts in social spending often made under pressure from international financial institutions, can leave citizens powerless in the face of old and new risks; such powerlessness is increased by the lack of effective protection on the part of workers’ associations.

Elsewhere: Analysis at Salon and The National Catholic Reporter (and Rich Heffern on the consonance between the document and the Green vision), full text of the encyclical here.

The two key elements of the plan are: 

• Legacy Loans Program: a program to combine an FDIC guarantee of debt financing with equity capital from the private sector and the Treasury to support the purchase of troubled loans from insured depository institutions.

 • Legacy Securities Program: a program to combine financing from the Federal Reserve and Treasury through the Term Asset-Backed Securities Loan Facility (“TALF”) with equity capital from the private sector and the Treasury to address the problem of troubled securities.

Okay, so what does all this mean exactly? The best description-by-analogy I’ve seen is Economist’s View’s toxic car analogy, which begins like this:

Imagine a car lot that has 100 cars on it. However, some of these cars have problems. Half of them will have engine troubles that total the cars – the engines blow up and the cars are then worthless – and this will happen just after purchase. The other half are perfectly fine. Unfortunately, there is no way to tell prior to purchase which type of car you will get no matter how hard you try. Thus, half of the assets on the car dealer’s “balance sheet” – the cars on its lot – are toxic, and lack of transparency makes it impossible to tell which ones are bad prior to purchase.    

The Geithner plan works in the following way: the government offers a subsidy to private sector buyers. Depending on what the sellers of these toxic assets are prepared to sell them for, the government will have to top up the amount that purchasers are willing to pay by an extra amount. As EV notes (WARNING: a supply-and-demand curve follows):

the government will not know if it is getting this right or not. Suppose it offers a $1,000 subsidy thinking that is generous enough. In this example, that won’t bridge the gap between the highest offer of $6,000, and the reservation price of $7,500. Thus, the subsidy would be too small to restart the market and the plan would fail. So the answer is to make the subsidy large enough to encourage buyers, but the problem is that if it is too large, the government will be giving money away unnecessarily.    

And there’s another problem. If there’s a large gap between what people are willing to pay and what dealers are willing to accept(the gap between $6,000 and $7,500 in the example), this would be problematic politically since it would require subsidies that are unacceptably large.

And I should note that it doesn’t have to be a subsidy. That’s one way to do this – as a giveaway – but another way is through a no recourse loan (what is being called a partnership). Suppose that the government gives (up to) a $3,500 loan to a private sector buyer to purchase the car for $7,500. If it’s a good car and the value rises above $7,500, say to $15,000, then government will get paid back (with interest) since the asset can be sold profitably (another option is for the government to demand a share of this profit through warrants or other means). But if it’s a bad car, the price falls to zero and the loan is forgiven – it does not need to be repaid. So the private sector agents only have to put up a fraction of the price to control the asset, and their losses are limited to the amount they put up while the gains are potentially large.

This is, in essence, the Geithner Plan. If many of the loans are not repaid, or if the subsidy is too large, it could lose a lot of money, but it could also make money too.

Okay, back to the real world for those of you who find supply and demand curves just a little bit fake. As Paul Krugman notes, the real issue here is how toxic these assets are.  The substance of the Geithner plan is that hese assets are not really toxic, but merely mispriced. Which means that by re-financing the banks, they can eventually sell these assets and the crisis will pass. As Krugman points out, 

early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that’s an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong.     

Atrios via Kevin Drum makes the same point (as does Naked Capitalism):

Aside from setting up an overly complicated plan to try to disguise what they’re really doing, the utility of the Geithner plan rests (or pretends to rest, not sure) on one fundamental premise: that Big Shitpile is greatly undervalued by “the market” and that these mortgage securities really have expected revenues which justify higher prices. One could have reasonably believed this months ago, I have no idea why anyone would believe this now. The housing bubble burst, and now recession is here. There’s a lot of shit to be eaten, the question is who will eat it? Timmeh wants to make sure it’s not the banksters.      

Drum makes the point elsewhere that the crticism of the liberal bloggers is fairly simple:

banks aren’t willing to sell their mortgage-backed assets at market prices because they think the market is panicked and only willing to buy at fire sale prices. And fire sale prices will ruin them. But if the government buys at the price banks value this stuff at, they’re almost certainly paying too much. It might rescue the banks, but only by essentially giving away lots of free money.     

Not everyone is anti-Geithner, of course. Cautious supporters of the plan include conservatives like Gregory Mankiw and venerable liberal economist Brad DeLong, who argues that 

I think the private-sector players in financial markets right now are highly risk averse–hence assets are undervalued from the perspective of a society or a government that is less risk averse. Paul judges that assets have low values beceuse they are unlikely to pay out much cash.     

Okay – so – will it work? That depends, of course, on how toxic these assets really are.

If they are actually worth something in the long term – as surely some of them must be – then, with time and more government liquidity, the institutions can eventually sell them, round out their losses, refinance their balance sheets and begin to lend money again. The massive extra liquidity sloshing around the world will then move slowly (or perhaps rapidly) back out of defensive plays and into wealth-generating assets, US consumers will regain confidence and start spending again, and economic growth in the rich world may restart. Even so, we will have experienced a very nasty recession indeed.

But if enough of the assets are truly toxic, eg. worth nothing, then institutions like Citi, AIG, RBS et al are truly insolvent (which, given how much US government money they have all accepted, is not a long bow to draw).  In this case, Krugman is right: many of the pillars of global finance are in fact zombie banks. And zombie banks which do not die can limp on for years, soaking up liquidity and not lending it out to anyone. See: Japan in the 1990′s.  In which case the global credit squeeze will continue in the medium term, and economic growth in rich countries will continue to stagnate. And, in any case, consumers in much of the rich world will have to repair their balance sheets after decades of under-saving.

Which is why I think the current equities rally is just a bear market or “suckers” rally, and will soon be eclipsed by more market pessimism.

To a large degree, most of this debate is highly ritualised. I thought Bernard Keane had a very interesting point to make today in a long Crikey piece where he argued that decision makers who are gleefully imposing a story or narrativising both events and their preferred solutions may be as much in the dark as the rest of us. The increased unpredictability of events, and of prescriptions as well as diagnoses in a time of crisis really foregrounds the artefactuality of sense-making work as people try to reduce uncertainty and simultaneously ensure that their preferred perspective becomes “common sense”. Aside from the really dire possibilities facing us all from a system which has precisely been characterised by distributed decision making and thus – by design – up until now resistant to centralised control, it’s been a fascinating study in both the sociology and social psychology of policy making.

It’s in no one’s interest, of course, to admit that they don’t quite know what is going on or that they’re frantically trying to impose a frame on the world economy for the intertwined purposes of politics and policy. It may be that we need different tools for understanding the social aspects of finance and market behaviour. It may also be that we need more research on exactly what drives “confidence” from a perspective which takes into account the fact that markets and investment decisions are far from random if driven by logics other than purely economic ones – what exactly is going on, for instance, when Geithner’s proposals send the Dow plummeting? It’s got to be both more complex and more interesting than the usual story (his presentation was poor, “investors”/”markets” were “spooked” by a “lack of detail” etc…)

One threshold such studies would need to overcome would be the notion that “the economy” itself is a reified sphere with perhaps only tenuous or tendential connections to the social and the cultural. Another would be the enforcing of the borders of explanation which are erected around events, and which often refer back to purportedly “natural” equilibria and explain far too much actual activity as in some way deviant. We need to re-embed the economic within the social, as both an analytical and a political project. As SocProf points out, Karl Polanyi can teach us how to do this. So I’d like to experiment a bit and characterise this post as a longish introduction to hers, which I’d now encourage you to read…

Rudd’s rather anodyne response to this threat is that “we will continue to work in partnership with the private sector to do what we can to support Australia’s credit markets.” This means more work for the Government-banking oligopoly combination. Bankers and officials have been busy discussing options while the rest of us were having a break.

This approach — and this is not to suggest there’s a viable alternative — is not merely entrenching the position of the major banks, which have been allowed to consume competitors, but also entrenching the Federal Government at the heart of our financial system.

It’s not nationalisation; it’s more like the worst of both worlds. Politicians and bureaucrats are now key decisionmakers in our financial system, but they have limited control via the major banks, which continue to operate — as they’re required to — in the best interests of their shareholders. Responsibility and accountability are diffused between ministers, Treasury, agencies and the banks themselves. And there are multiple ways in which it could go wrong. Taxpayers could be left, via government guarantees, with failed businesses and debt. Business might struggle to obtain necessary capital. The only guaranteed winners are the big banks…

The AFR’s editorial today on this mess noted “extraordinary times call for extraordinary measures, but their long-term effects are likely to be profound, and they need to be managed with as much care as possible…”

Those long-term effects have been more or less ignored until now, in the urgent need for action. What’s the Government’s exit strategy to eventually remove itself from its now dominant role in the financial system? Does it intend to exit at all? And how much of a trade-off are taxpayers getting from the privileged financial and policy-making role now accorded the banking oligopoly?

The working theory, both here and overseas where the simpler option of nationalisation has had to be pursued, is that governments shouldn’t be in finance, and will get out just as soon as they can while maintaining the stability of the financial system.

This may prove to be wishful thinking, and not only because the duration of the financial crisis and the wider recession is unknown. Wartime policies have a habit of persisting long after victory has been declared. Our better economic thinkers should be turning their attention to the new financial system we’ve suddenly acquired over the last six months — and how much of it we want to keep when — if — things get back to normal.

I think Keane is right that there’s some danger in both ignoring the longer term implications of some of the crisis management decisions being taken, and of ending up with the worst of both worlds with public involvement in financial decison-making. I think Keane’s bias is probably towards the free market end of the ideological spectrum, and I suspect that a lot of those making such decisions and defending their necessity are unwilling (unlike Keane) to contemplate their long term effects precisely because the nature of the decisions runs so spectactularly counter to their liberal predilections.

Having said that, John Quiggin is one exception to both rules, and has made an interesting case – in debate with Paul Krugman – for doing bank nationalisation properly if you’re going to do it at all:

Financial restructuring is going to be a huge challenge, involving both a radical redesign of national regulations and the construction of an almost completely new global financial architecture. To attempt this task while leaving the banks under the control of discredited managers nominally responsible to shareholders whose equity has, in the absence of massive transfers from taxpayers, been wiped out by bad debts, seems like doing live electrical work while wearing a blindfold and standing in a pool of water.

The pictures that emerge are of ambivalent participants, and clunky principles that demand attention. The winning photograph is a local solar installer in a residential project in South Africa. The photographer has tried to use an on camera fill flash, but doesn’t seem to have applied any exposure compensation, so the subject – an installer awkwardly crouching – is rather underexposed. The third placed photo, ‘Indian Sugar Power’, also feels like an uneasy moment has been captured. A boy is holding a loose sugar cane on a (presumably moving – we can’t tell because the shutterspeed is set too high) truck and glaring, unemotionally into the camera. The four placed photo, ‘Mount Bagasse’, actually shows some aesthetic effort, though it’s hardly in line with the intent of the competition – to showcase the way the CDM is ‘changing lives’. Instead, the subjects are thoroughly dominated by technology and the flattened by the landscape as if in an ironic homage to the romantic modernists.

Though the aesthetics of industrial waste gas destruction are conspicuously absent from the photo contest (they make up a disproportionate number of Certified Emissions Reductions), the GAO provides a nuanced view from experts on the issue. Some believed it a good move because it probably wouldn’t have happened anyway, and these cheap ($1, sold on for $25) offsets are finite and rapidly diminishing.

However the sense that the CDM, in a Frankenstein-esque move has overtaken its original role as provider of, well, finance for some clean development projects and devoured other development pathways (such as direct legislation) is perhaps the most notable punchline of the GAO report, which notes that

… using the CDM to involve developing nations in efforts to address climate change may not always have positive effects. For example, some experts said the mechanism encourages host countries to rely on external funding from industrialized nations. Others went further, saying the CDM can dampen or delay efforts by host countries to reduce emissions on their own. The CDM does not credit emission reductions that result from newly imposed policies or standards, in part because it would be difficult to demonstrate that emission reductions were a direct result of the law. This may pose a dilemma for host countries that want to implement low-carbon policies but also want to attract investment through the CDM. Given these considerations, many experts and researchers have said the CDM would best be used as a temporary tool to help transition countries toward broader commitments (p.38).

Which isn’t to say that policy insiders are aware of this problem. Flows through the CDM will almost certainly be explicitly pulled if developing countries don’t signal an intent to get on board an international mitigation effort down the track. Perhaps the most telling data from the work of the auditors was this graph which shows the inherent ambiguities in the notion of ‘additionality’:

The CDM isn’t just asphyxiating alternative technological development, but propping up industries that were well on their way too:

According to a review of available research, between one-third and one-half of CDM projects involve some type of technology transfer. Such transfer is much more common in certain types of projects, such as industrial gas projects that utilize “end-of-pipe” technologies developed in Europe and Japan. Apart from industrial gas destruction, the project types most likely to involve technology transfer appear to be wind power, landfill gas capture, and agriculture (biogas). However, one expert pointed out that most of the wind power capacity represented in the CDM project pipeline is sited in India and China, countries that have supported domestic wind industries prior to the CDM (p.44).

In Australia, of course, has devised its own solution to the question concerning technology. Cars in, wind out. One might be forgiven for thinking that our debate is completely arse backwards if we can’t even figure out how to transition away from fossil fuel dependent stationery energy, let alone what some abstract carbon target should be. Howard was a denialist through and through, but at least he put his priorities on the table – like looking after Australia’s natural advantages. Like having babies. and digging things up.

On a more positive – if entirely unrelated – note, get your daily does of hope and the sublime in one hit from Sarah Wilson’s extraordinary documentary slideshow of Texas School for the Blind prom.

Update: Point Carbon is reporting that a ruling on whether to include new HFC-23 production in the CDM has been delayed until June. Looks like it’s part of a broader trend of delays to hit the process.

Elsewhere: Kevin Smith in New Matilda: Money Can Save the World:

The winners are energy intensive companies, whose profit margins have benefited enormously in the short term through the lucrative trade in the credits themselves. Because of fundamental flaws in the design of the CDM, industry has been able to buy cheap carbon credits to meet their emissions commitments and avoid the cost of shifting to low carbon technologies. Add these savings to potential windfalls from new trading options in derivatives and other exotic financial services and it’s no surprise there is such a gold rush for this lucrative market.

Conversely, Southern countries have lost out enormously. Many projects, such as the waste incinerator in India, have been imposed on communities without their prior, informed consent…

Political will must instead be directed at ensuring that Northern countries meet their commitment to providing finance to the South that isn’t tied to undemocratic institutions like the World Bank and that doesn’t lock those countries further into the spiral of debt.