Conflict of interest?

I blogged a couple of months ago on research documenting the over-exposure of financial market economists in the media. And now, from today’s SMH:

A further interest rate rise is unlikely by the end of this year, Westpac’s new boss Gail Kelly says.

Now, perhaps Ms Kelly has especially good information about interest rates. But what’s striking about the report is that nowhere does the journalist mention the key commercial conflict: people who expect a rate rise will be less likely to buy a Westpac variable rate mortgage. Asking a bank CEO about future rate rises is like asking the boss of a car company whether she thinks her cars are good value.

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11 Responses to Conflict of interest?

  1. There was a related debate at Club Troppo a few weeks ago. In that case (Alan Kohler’s multiple media interests) I suggested that to alert readers to the potential conflict would actually be to exacerbate it, as it would inform them of Kohler’s newsletter which would encourage them to buy it. In this case it seems too obvious to point out that Westpac is a lender; that’s why its CEO is being asked in the first place, because a bank CEO presumably knows a lot about interest rates. Since Westpac and numerous others offer both fixed and variable loans I can’t see that the advice in itself advantages Westpac, though Kelly getting her name in the paper may microscopically increase the bank’s profile.

  2. As somebody working in the (busness) media, I can tell you, that the overexposere of financial economists is mostly due to the inavailability of knowledgable non-financial economists at reasonable notice and on day-to-day-matters. Most academics do not follow these matters closely and, what is more, most of the serious researchers do not care much less for the publicity of being in the media.
    I agree that financial economists can be biased. However, I agree with Andrew Norton that this bias it not generally in favouring a forecast of low rates. Financial economists like to predict rising stock prices and dislike precicting a crisis or recession. Where will always be the dissenting voice, though, usually coming from major investment bank with a large base of sophisticated clinets.

  3. harry clarke says:

    Maybe, she is saying the variable rate loan won’t become more expensive which increases the demand for such loans in general . But I agree with Andrew – not much effect in particular on Westpac.

    Given the recent financial turbulance and the decision of the bank to increase rates prior to that she is probably just being sensible. Glenn Stevens is talking about the possibility of future increases to conceal the fact that the RBA, on this occasion, inadvertently got it wrong.

  4. Andrew Leigh says:

    Sorry guys – are you arguing that higher interest rates have no impact on people’s propensity to borrow money?

  5. “Sorry guys – are you arguing that higher interest rates have no impact on people’s propensity to borrow money?”

    No, no impact on their propensity to borrow from Westpac. And if you are taking out a 25 year loan, your interest rate horizons ought to extend rather further than whether rates will go up in 2007. If she was saying interest rates will never be higher than now then we might have a conflict of interest issue.

    Either way, that she is CEO of a bank (two banks?) should be disclosure enough.

  6. Andrew Leigh says:

    No, no impact on their propensity to borrow from Westpac

    If the data were public, I’m pretty sure we could empirically disprove that one. I’d be very surprised if there wasn’t a negative correlation between the RBA rate and the number of new mortgages issued by Westpac.

    And you’re right – Kelly has certainly disclosed what’s necessary. My quibble was with the journalist treating her as an unbiased source.

  7. Mr Denmore says:

    As someone who used to report on financial market economists’ prognostications on interest rates, I have to say that anyone who believes anything that Westpac says on the subject needs their head read. Westpac probably has the most dire record of any of the financial institutions in correctly calling rate changes. A monkey and a dartboard would have a greater accuracy rate.

  8. She happens to be at odds with her chief economist, who is actually calling for a rate rise in December. Taking Andrew L.’s argument to its logical conclusion, they are paying Bill Evans to hurt their own business! That would seem unlikely to me.

    Yes, the change in the 90 day bill yield has a negative effect on the number of housing finance commitments for owner occupied housing, but I think Andrew N. is right.

  9. The media want crystal ball predictions. I get asked when will the election be? Is Howard going to retire etc. etc.? Perhaps academic economists don’t provide what journalists want? Expertguide actually has more economists than political scientists.

  10. Rajat Sood says:

    I have to confess I watched that interview on the Today show (my wife limits my viewing of CNBC – perhaps an even more tragic admission!) and I think you have to consider what Kelly said in that perspective. The opening question of the interview was whether having a woman heading a major bank would lead to lower bank fees. In other words, it was a chatty lowbrow interview of the type we particularly have Mel and Kochie to thank for popularising on breakfast TV. Kelly probably didn’t want her first exposure to mums and dads as Westpac CEO-elect to be tarnished by a prediction of an interest rate increase. The comment was also made in the wake of last week’s financial markets volatility, which may not have been the right time to tell the punters how it is. Of course, there is the possibility that she may genuinely believe what she said.

  11. invig says:

    I think there is also an issue with people releasing reports that are likely to give an effect to the stockmarket. I mean, the fact is that stock prices are as much about groupthink and perceptions than economic reality, and so a ‘weighty’ report released by a credible institution at a sensitive time can easily shift behaviour.

    Given the potential for rich people to make large amounts of cash from such situations, it leads me to wonder whether the current tug of war between the market ‘optimists’ and ‘pessimists’ over low doc loans isn’t one great big fat conspiracy to scare the illinformed into selling their shares at a time that the world economy has never looked better.

    Andrew, any way your number crunching might pick this up?

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