21/07/2011 - 00:00

Governments should stay out of markets

21/07/2011 - 00:00


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Government intervention in markets rarely has a positive long-term effect on the economy.

FALLING prices on property and share markets are making everyone feel poorer. But if you believe government intervention will help, such as through the creation of Australia’s $10 billion ‘green energy bank’, then you will be disappointed.

The outlook for much of the world is not positive, with repeated examples emerging of government intervention in markets doing more harm than good.

The latest – Australia’s carbon tax and its associated income redistribution and social engineering experiment – will follow other examples of government intervention in markets that had little effect other than to distort values and generate waste.

Problems caused by spending taxpayer funds on politically inspired schemes will be magnified over the next few years by an even more powerful force gripping the world – massive debt reduction by consumers and companies.

In effect, we are entering a dangerous time that might one day be called the period when ‘debt de-leveraging met experimental economics’.

The near-collapse of Australia’s retail sector is symptomatic of the problem.

Consumers are conserving their cash just as the government gets ready to spend on green energy programs – with ordinary households telling government that they know green energy will drive costs up, especially for power and transport.

Before considering Australia’s green energy bank, or Clean Energy Finance Corporation (CEFC) to use its proper name, look at a few other examples of government intervention in business, and the consequences.

• More of the corn grown in the US now goes into ethanol production than food thanks to government financial support for biofuels, a scheme that is likely to end soon with a potentially disastrous effect for investors in biofuels.

• Tax-driven investment schemes in Australia pumped up a number of agri-businesses, including tree and vine plantations, leading to massive losses for investors when government changed the rules.

• Government spending on ceiling insulation, rooftop solar power, and school buildings did some good for a brief period of time, before becoming bottomless pits for taxpayer funds.

• The biggest example of government intervention ever, the US government’s multi-trillion dollar monetary stimulus program, which has done little for that country, but has helped Australia in a round-about sort of way, with near zero interest rates on cash deposits encouraging investors to buy commodities.

There is a theme running through all of those examples, a belief that when business errs (which it does when greed runs rampant) then government can fix things by tossing money at the problem, perhaps because politicians on both sides believe they know how to run business better than business.

Picking winners

THE CEFC, or green energy bank, will unquestionably be another wonderful example of a government wasting taxpayers’ funds as it seeks to pick winners in the alternative energy sector.

The most obvious problem is that those running this new government investment arm will be people on a political quest, fired with all the enthusiasm of an environmental movement that believes it is on a mission to save the planet.

The first obstacle for the green bankers will be the challenge of trying to pick winners in a very narrow field, with the $10 billion earmarked for investment being roughly 10 times the size of the stock exchange opportunities.

Investors are already sensing the problems likely to be caused by force-feeding green energy ideas with government money, just as American corn farmers and Australian tree planters, ceiling insulation installers and solar-panel companies discovered to their cost.

After a two-day boost last week to their share prices, most green energy stocks, including geothermal explorers, solar cell developers and wave power inventors, returned to their pre-carbon tax levels.

Geodynamics, a green favourite, actually ended last week lower than its pre-tax announcement price. The trend looked like this: 33.5 cents on the Friday before the July 10 tax announcement, up to a peak of 45 cents on Monday, down to 32 cents by Thursday.

The latest price is better than the 12-cent level to which Geodynamics fell in late June, but last week’s price trend is a pointer to what the market (if not green energy believers) think of the chances of geothermal power delivering affordable electricity in the lifetime of most consumers.

As for that point about the green bank’s budget of $10 billion being 10 times more than the value of listed green energy stocks, why not test it yourself because most green energy stocks are currently valued at less than $50 million, and some less than $10 million.

In the ‘hot rocks’ space, Geodynamics, which is already the recipient of generous government funding, is valued at $107 million; Petratherm is worth $22 million; Panax Geothermal $10 million; and Hot Rocks $7 million.

Other alternative energy developers have higher values. Carnegie Wave Energy is valued at $87 million, Ceramic Fuel Cells at $162 million, and Infigen Energy $280 million.

The challenge for the green bank will be picking winners from that lot, or finding its own favourites either on the stock market or in private, and pumping them full of taxpayers’ funds until they work – or else.

It’s the ‘or else’ that consumers fear because they sense the need for perpetual cash top-ups, or the introduction of more green electricity into their homes at ever-increasing prices.

In a spin

INTERVENTION in markets is not the sole province of governments, with the decline of traditional media leading to a number of new communications concepts.

The Pick, a magazine produced by a public relations firm on behalf of its resources clients, is one of the better examples of corporate frustration creating a new business niftily embedded in an old business.

Because companies such as Cape Lambert, Arafura and Bannerman Resources have struggled to win headlines in the shrinking newspaper world, they are buying their own space in The Pick, which is distributed in a national business daily.

There is absolutely nothing wrong with companies buying space and time to tell their stories, so long as investors realise they are reading marketing material when making buy-or-sell decisions.

As for newspapers that accept corporate publicity with a pure investment bias, there is the question of why public relations practitioners are now doing the job of reporters?


“Debt is the slavery of the free.”

Publilius Syrus, 1st century BC.



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