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Love: the Biggest Investment You Will Ever Make

 

Valentine’s Day is almost upon us. This is a special day for some of us. It could mark the start of an exciting contractual arrangement to co-invest in each other’s labour productivity and future financial security. It could result in significant future stream of ongoing financial commitments such as mortgage repayments and educating and caring for children. Hopefully, you have thought of all of this as you checked out that hot guy/girl in real life or Tinder. As the passion wears off, you may want to consider conducting a rigorous due diligence process to assess if that person you have nicknamed ‘Snookie’ would be the ideal investment partner in your home, retirement and children. Also, you would want to assess if you would have economic complementarities that can allow both of you to smooth out economic uncertainty such as unemployment, starting new business ventures or looking after your parents. If you’re still not convinced on the value of due diligence, maybe just being happier will make you scrutinise your potential life partner a bit more closely. This article will explain some economic and financial concepts that will be useful in implementing your due diligence. Happy Valentine’s Day!

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Climate Change-Induced Financial Disaster

One of the extraordinary things to witness at the G20 meeting in Brisbane during the weekend of 15-16 November, was Australia’s rearguard action to keep climate change of the agenda. The G20 host’s justification was that climate change would distract from the economic policy focus. Besides, according to Australia’s Treasurer (i.e. Finance Minister), climate change is no impediment to economic growth. This is despite the wealth of economic research that has been produced that has modelled the economic impacts of climate change. A potential economic impact that has been gaining some traction is the ‘carbon bubble‘. The carbon bubble is where assets that derive most of their value from carbon reserves (i.e. coal, oil and gas) become ‘stranded assets’ as their value falls in response to international climate change action. For a country like Australia that is heavily dependent on fossil fuels for its prosperity, you would think a carbon bubble would have a serious economic impact. I went along to listen to a talk about what a carbon bubble meant for Australia. The panel was made up of Prof. Ross Garnaut, Jemma Green, Dr John Hewson and Tony Wood. Each of them an expert in economics, finance and energy in their own right. This is what I took from the discussion.

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Housing Bubbles as Economic Policy

 

I’m curious why governments around the world are fond of pursuing higher house prices as economic policy. Not that I have anything in principle against higher house prices. I understand why governments want to do it, housing is an important concern for many people and a significant contributor to an economy. But all of that is wasted if the policies stimulate a housing bubble that eventually bursts leaving people poorer because their main asset drastically falls in value. But I’m concerned that governments introduce significant economic risk to the whole economy by promoting housing bubbles. We saw this with the recent Great Recession that consumed the US and much of the world in 2008-09. Yet governments continue to inflate housing bubbles. In the end, we are worse off when a housing bubble pops. I’m no ‘economic girly man‘ when it comes to risk, but surely as stakeholders in the global economy (and voters, depending on where you are) shouldn’t we be cognisant of the risks that our governments introduce? That way if we know about it, we can demand our governments to manage or even prevent these risks. This post will attempt to identify the key ways that governments have introduced risks into our economies in order to stimulate housing bubble.

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Risk, Market Failure and Government: Case for a Social Impact Bank?

Last week, I attended the All-Energy Australia Conference because of my interest in renewable technologies and energy efficiency. A couple of speakers from the Clean Energy Finance Corporation (CEFC) were highlights for me. The CEFC is an Australian Government-owned financial corporation that was established to address financial impediments to private financing of renewable energy, energy efficiency and low emissions projects and emissions – i.e. it addresses a market failure in clean energy financing. It does this by developing innovative financial products and working with private financiers, principally aimed at reducing risk which in turns reduces the risk premium charged to clean energy projects and companies. Furthermore, it does so by actually generating a profit for the Australian Government; it provides loans and equity on a commercial basis and doesn’t provide grants. It seemed to me that basic model of the CEFC would be useful in catalysing private capital in other policy areas, such as reducing social disadvantage. This blog post will go through my thinking on how a ‘Social Impact Bank’ could work along CEFC lines.

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Government as Risk Manager: Should We be More Worried?

The Productivity Commission (PC) recently released a draft inquiry report into ‘Natural Disaster Funding Arrangements’ in Australia. For those that don’t know, the Productivity Commission is an Australian Government independent agency that provides advice on economic reform. To my knowledge, I’m not sure if other national governments have a similar agency. The only one that comes close is the OECD, but that is a multilateral agency. The PC has a strong reputation of furnishing ‘frank and fearless’ advice to successive Australian Governments. So it is with some interest that I read this report. I have worked on the role of government in managing risk, so I was interested to learn the PC’s perspective on natural disaster risk management. (more…)

Are You Ready to Manage Energy Price Risk?

Check out this post I wrote for Carbontel:

Now that the Federal government has ‘axed the tax’, energy prices should plummet now, right? Actually, reports from Federal Government agencies don’t see it that way. In fact, there are key economic drivers to expect energy prices to rise in the future. In this article, I will explain why energy prices will rise and what you could do to manage or ‘hedge’ energy price risk. (more)