Rational skepticism

I decided to start writing again.

I have recently become a member of the stock owning class.

With the birth of my daughter I decided to save for her future university education. While there is always the chance I will become Prime Minister and she will be offered a secret $60,000 scholarship, I think its better to hedge her bets by starting a university fund.

Now the pot has grown large enough, I've invested it in stocks.

The amount is tiny, the risk minuscule and my level of research in the relevant companies infinitesimal  – naturally I watch them like a hawk, becoming enraged when my holdings in Wesfarmers fall by 76 cents and euphoric when Woolworths investment grows by $1.20.

I've deepened my involvement in this penny ante game by reading blogs, website and columnists who all claim searing insights into the futures of listed companies they have never worked for run by managers and directors they have never spoken to.

Turns out their predictive ability is no better than mine despite the no doubt countless hours spent pouring over information.

So my issue is this: what is the rational level of skepticism in “expert opinion”?

Obviously throwing out all expert views and trusting to blind faith is foolish. I still hold sacred the right to treat with derision and contempt vaccine skeptics, holocaust revisionists and climate change deniers.

So where is the line?

Perhaps we can start with the proposition that skepticism of established data puts you on shaky ground. So we can be skeptical whether a new “pandemic” will kill all human life on the planet (though hopefully it will still get Gwyneth Paltrow), but only an idiot would argue that vaccines cause autism.

Next rule, its dangerous to trust the opinion of a person whose salary depends on them holding that opinion. So when my local bishop told me in school that the Catholic church would never cover for a Marist brother involved in child abuse, I should really have been a little less trusting.

Third rule, predicting based on an ideological stand point should be done with care.  It exposes you to the risk of confirmation bias. 

Last rule, real world systems are complex. Lots of things both visible and hidden can skew predictions. Hard simple rules don't usually have great predictive ability beyond the obvious.

With this in mind, I vow to be less firm in my future predictions on this blog and more open to opposing arguments in my every day life.

I also intend to keep my stock buys to safe blue chips.

I'm also going to try to write at least once a fortnight, whether anyone reads it or not.

As always, your comments are appreciated...even the trolling.

Too big to fail? Ireland v Iceland

Yes I’ve neglected my blog for a while.

No I don’t have a decent excuse.

However, on the up side, the passage of time has allowed the greatest social experiment of the GFC to develop. Iceland and Ireland have generously lent their entire economies to answering the question: Can a bank be too big to fail?

You will recall when we left the story back in March the two countries had shattered banking systems, crushed economies and severe downturns in their property markets. Both had massive private sector banks either on the verge of falling over or already collapsed. The issue was whether the governments of those nations would step in to guarantee the banks' liabilities?

The Irish chose to nationalise their banks and all the toxic assets that they contained, while the Icers rejected paying for the excesses of Icesave and others despite threats from creditors.

When the British and Dutch investors demanded the Iceland government guarantee the banks’ debts, the Iceland government put the question to the people. Asked whether the government should pay €3.8 billion to cover British and Dutch investor losses following the collapse of their Icesave accounts, 93% of Iceland said “just as soon as Satan rides to work in a snow plow” and the debt remained stubbornly private (at least in Iceland, in the UK and the Netherlands their own governments covered the losses).

The world is finally getting to see a side by side comparison of the two strategies. Would the pain of saving the banks be worth the price to the citizens of Ireland, or would it have been better to let them fail and pick up the pieces Iceland style?

The cost of the Irish bailout was staggering. In 2009 the Irish government injected €54 billion into its largest banks to protect them from collapse. The only way to pay for this was to smashed its local population.

Public sector wages were slashed by 1 billion euros and welfare reduced by €760 million (about 20% and 4% respectively in real terms).

The removal of that much public spending increased the contraction pressue in the economy and helped send unemployment to its current 13.7%.

This month, the other shoe dropped: Anglo Irish Bank just hit the wall with massive unserviceable debts.

The Irish government has agreed to save the bank at a cost of up to an additional €35 billion (if you’re doing the maths, that’s about 20 times the savings from wage restraint and welfare cuts).

Even after this, the bank's bonds are rated as junk.

Once again, the Irish taxpayers have been advised that they will be paying the bill to protect investor confidence and save the Irish economy.

The net effect? Ireland’s current account deficit is projected to increase from 14% to 32% of GDP as a direct result of swallowing all that toxic debt. That will put government debt up from the current 77% to 115% of GDP in the next years.

The only way to pay for this will be further cuts to services and wages from a people already on their knees. If you’re of a keynesian school, you know this will lead to further contractions in the economy, more unemployment and still further reductions in public services.

On the other side of the experiment, the Iceland government is still talking with the Brits and the Dutch about someday looking at the real possibility of considering kicking the can for some of the bad loans. So far they haven’t paid a single euro towards those debts.

While they are at it, the Icers declared a moratorium on house repossession to give households a bit of breathing space without forgiving debt.

They also defiantly refused to strip what has become the hallmark of Nordic countries, a strong social safety net.

People predicted it was the end of Iceland, it would be frozen out of the world economy, their children would starve, the country would come to resemble an arctic version of Mad Max II.

So how are the Icers doing beyond Thunderdome? Well, not good, to be sure, but not Irish bad.

Contrary to threats made, the IMF has continued to provide a “Stand by Arrangement” to provide $2.1 billion in loans. The third tranche was paid on 29 September.

While their public debt is currently 115% of GDP, Iceland's 2010 budget will actually produce a surplus. The IMF itself believes Iceland will get back to a national debt of 80% GDP by 2015. This is more or less the exact reverse of the Irish trajectory.

Unemployment is at 7.3% which sucks if you’re in that group, but better than the 13.7% in Ireland.

Real wages, which were put to the sword in 2008, remain depressed but have been growing in the last three months.

It’s a tough long road for the Icers, but they seem to be climbing back.

On the flipside, the Irish are crushed and look like getting more crushed as their deficit continues to spiral, their economy shrinks and those that can leave, get on a plane out of there.

Its still too early to decide if the Irish were fools to listen to the "too big to fail" mantra; this experiment still has quite a way to run. Iceland has not resolved its dispute over the Icesave accounts, nor does a projection of reigning in nation debt by 2015 automatically mean that it will happen.

However at this stage it looks like Iceland has its nose in front.

The Mining Tax and the PM's Downfall

I’ve been neglecting my blog, focusing on the fortunes of Australia, Germany and Brazil at the World Cup.

However, events in Canberra this week inspired me to post.

I woke up on Thursday morning intending to watch the last roar of the defiant Soccerroos as they fought for a desperate and ultimately pointless victory against Serbia.

There is something sublime about fighting for a lost cause, but I’ll leave that for another day to dissect.

Instead I woke to a leadership spill in the Australian Federal Government that was executed with brutal speed and efficiency and which left a former loyal deputy standing over the political corpse of her former leader. Indeed the numbers so lopsided, the move so irresistible Rudd didn’t even contest the ballot.

Looking back, Rudd might reflect on the fact that his downfall was caused in part by the backlash against his proposed Resources Super Profits Tax.

He was so confident about this being popular, he was prepared to take it to an election.

He must have viewed this as a way that the government could collect more revenue without increasing tax on the ordinary people of Australia, thinking “Surely voters will see that a tax on very rich miners will benefit them”?

Instead of being viewed positively, the proposal sent his popularity plummeting to the point where his own team dumped him.

In my view, this reaction is a predictable outcome if you think in terms of Public Choice Theory.

Public Choice Theory is one of my personal favourite tools for explaining democratic politics. It posits that political decisions are marketable commodities that can be bought and sold with money, influence and lobbying.

In such an environment small well funded groups competing for concentrated gains will triumph over large disparate groups where the gains to any member are relatively small.

RSPT pitted a very small, very powerful group of mining magnates defending a huge amount of personal wealth against the entire nation fighting for at best a very small amount of personal gain should the tax go ahead. Whether in practice the tax would have benefitted the majority of Australians or not, I’ll leave for others to debate, however, the one thing it was certain do was reduce the profits of the big miners like BHP Billiton, Rio Tinto and Fortescue Metals Group

Their reaction was predictable: They fought it with all the power and strength their considerable resources and influence could bring.

If Rudd predicted this, he might have comforted himself with the notion that voters vote with their hip pockets and would reward his policy because, it would not involve a tax on the ordinary person. However, his timing was lousy. You don’t pick a fight with powerful interest groups in the run up to an election. It means you have to defend a policy rather than a detailed plan.

A policy lacks detail, which allows your enemies to create hypothetical detail and then attack it. In the US they saw this with their recent health care debates, with Republicans predicting that the legislation would create death panels and that people would be allocated doctors rather than seeing their own GPs.

What US President Obama understood (and Rudd didn't) was that if you are going to face entrenched opposition from powerful groups, you need to have time to get out a structured plan. Even then, his health reform bill went right down to the wire.

RSPT suffered from the same problem. Without a clearly detailed explanation of the tax, those opposed were free to predict disastrous consequences to whip up pubic fear.

So we saw little old men on television saying “you know, I’m just an ordinary street sweeper, but this mining tax will kill my superannuation and wreck my life”. A little fear goes a long way in the public’s mind.

The miners' relentless ad campaign successfully reframed the debate from a discussion as to where the tax burden should fall in Australia, to whether the RSPT would destroy the prosperity of Australia.

With the public offside, the polls falling and the Prime Minister unsupported, it was a quick and easy hatchet job for the power brokers in the party.

I don’t think in their wildest dreams that Twiggy Forrest and Marius Kloppers thought they would bring down the Prime Minister in their campaign or even wanted to, however, the response from the miners to the RSPT was a key factor in pushing the ALP down in the polls to the point where an internal coup was possible.