In the article, translated on Metamute.org, leaders of the pirate groups say they’re willing to “transfer part of their loot captured from transnational boats and send it to Haiti.”
”The humanitarian aid to Haiti can not be controlled by the United States and European countries; they have no moral authority to do so. They are the ones pirating mankind for many years,” said the Somali spokesman.
Somali pirate leaders say they have links around the world to help them ensure the delivery of aid without being detected by the armed forces of “enemy governments.”
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- "Too Big to Fail" vs. "Too Small So We Failed"
- Obama Finally Talks About Trade
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- Strange Bedfellows
- Berlusconi Gets OWNED!
- Bernanke Update
- The Rise of Open Access
- Some Optimism at the IMF
- Just How Socialist Is Latin America?
- The Prisoner's Dilemma in Banking
- 230,000,000% inflation to 1%...HOW?!
- Wait, What Year Is It?
- How the Chinese One-Child Policy Caused the Financ...
- Extra! Extra! Obama Is a Politician!
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Sunday, January 31, 2010
A couple of weeks ago I argued that having "too big to fail" banks might actually be a good thing, or at least that the alternatives might be worse. Here's a few more reasons why this makes sense. First, because without large banks it's impossible to deal with many bank failures. How? Well, if you cap bank size, then who's going to buy the banks that fail?
In addition to being a jaw-droppingly superficial idea overall, here’s another reason why breaking up the banks and capping their size would be a titanic mistake. Everyone seems to agree that normal, non-TBTF banks can be resolved without causing a meltdown in financial markets. This is, in fact, the justification given for capping bank size — it would make all banks “small enough” to be resolved smoothly, which means that no single bank failure would pose systemic risks. Mission accomplished! Of course, this argument quickly breaks down when you think for more than 15 minutes about how the FDIC resolves failed banks.
The FDIC resolves the vast majority of failed banks through what’s known as “purchase and assumption” agreements, or P&As. P&As are transactions in which a healthy bank purchases some or all of the assets of a failed bank and assumes some or all of the liabilities, including all insured deposits. ...
But think about how potential acquiring banks would respond if the FDIC approached them and offered them a waiver on the $100bn cap in exchange for agreeing to a P&A. They would think:"Well, the government begged JPMorgan to buy Bear and begged BofA to buy Merrill, but then the government turned around and forced JPM and BofA to break themselves up a few years later! So thanks but no thanks, Sheila, we’re not interested in buying a bank that you’re just going to force us to divest in a couple years.”
So with a cap on bank size, P&As would likely be off-the-table for the largest bank failures. But if the FDIC can’t use P&As, then it can’t ensure that the largest banks will be resolved smoothly—and thus pose no systemic risks—even with a cap on bank size in place! And if the FDIC can’t ensure that the failure of the largest banks won’t pose systemic risks, then what was the point of the cap on bank size in the first place?
In other words, imagine what the world would look like right now if JP Morgan couldn't/wouldn't buy Bear Stearns, or if Bank of America couldn't/wouldn't buy Merrill Lynch. It's a world with several other Lehman-type collapses, many more small bank failures (there was 140 in 2009, with potentially hundreds more still to come), and a broader systemic collapse. Either that, or a much larger public intervention than we actually had.
In fact, that's exactly what happened during the Great Depression:
Indeed, one of the major contributors to bank failures during the Great Depression was the National Banking Act of 1864. That law, according to monetary historian Jeff Hummel, an economist at San Jose State University, banned any branching (interstate or intrastate) by nationally chartered banks, except for a few grandfathered banks. Because banks during the Great Depression were so small, they were undiversified. So when the agriculture sector went under, in part because of the Smoot-Hawley Act that attacked free trade, many rural banks failed. Call it "too small, so we failed."
It's possible that the relationship between bank size and systemic stability is parabolic: at first there are increasing returns, then those flatten and eventually recede. But if that's the case, I've not yet seen an argument as to where the "socially optimal" margin lies, if such a thing could even possibly exist. As a rule, arguments in favor of shrinking the banks do not discuss unintended downside consequences. That is reason enough to be suspicious.
Friday, January 29, 2010
Yes, there was the pie-in-the-sky "double exports in 5 years" talk during the SOTU address, but in a meeting with House Republicans today Obama got a bit more specific:
On the specific issue of trade, you're right, there are conflicts within and fissures within the Democratic Party. I suspect there are probably going to be some fissures within the Republican Party, as well. I mean, you know, if you went to some of your constituencies, they'd be pretty suspicious about it, new trade agreements, because the suspicion is somehow they're all one way.
So part of what we've been trying to do is to make sure that we're getting the enforcement side of this tight, make sure that if we've got a trade agreement with China or other countries, that they are abiding with it -- they're not stealing our intellectual property or making sure that their non-tariff barriers are lowered even as ours are opened up. And my hope is, is that we can move forward with some of these trade agreements having built some confidence -- not just among particular constituency groups, but among the American people -- that trade is going to be reciprocal; that it's not just going to be a one-way street.
You are absolutely right though, Peter, when you say, for example, South Korea is a great ally of ours. I mean, when I visited there, there is no country that is more committed to friendship on a whole range of fronts than South Korea. What is also true is that the European Union is about to sign a trade agreement with South Korea, which means right at the moment when they start opening up their markets, the Europeans might get in there before we do.
So we've got to make sure that we seize these opportunities. I will be talking more about trade this year. It's going to have to be trade that combines opening their markets with an enforcement mechanism, as well as just opening up our markets. I think that's something that all of us would agree on. Let's see if we can execute it over the next several years.
Read one way, this would seem to indicate that Obama would prefer a multilateral approach with built-in enforcement mechanisms to a series of bilateral agreements that leave more wiggle room. But if that's the case, then why hasn't he spent any time trying to jump-start Doha?
There's also some cognitive dissonance going on here. Take this part: "And my hope is that we can move forward with some of these trade agreements having built some confidence that trade is going to be reciprocal; that it's not just going to be a one-way street."
Well, it's pretty difficult for trade to not be reciprocal (it is trade, after all), but his point is that he doesn't want to enter into agreements where other states can manipulate the U.S. As someone in the blogosphere (can't remember who) recently wrote, Obama seems to only like exports. But imports are good too, especially when incomes are falling!
I don't find this encouraging or reassuring. Obama is signaling that he will put domestic interest groups at the forefront of his trade agenda. Which means, I think, that there is little hope for progress on the trade front during his administration. That's too bad.
I ventured into enemy territory today with other UNC doctoral students and faculty to attend the Interview Research in Political Science Conference at Duke University (co-hosted with UPenn). The conference was put together by Dr. Layna Mosley, Associate Professor of Polisci at UNC and features papers and presentations by Political Science scholars from across the country including Sarah Brooks, Cathie Jo Martin and Melani Cammett.
Senator Ben Nelson was the 60th vote in the Senate on healthcare reform. He held out for what is now called the “Nebraska purchase,” a side-payment from the federal government to Nebraska to extend Medicaid. He also got rid of the public option. He compromised a bit on abortion so he did not get all his cake.There were a whole bunch of people who didn’t like the Nelson language – they only went along with because I could be the 60th vote. Leverage increases, exponentially, like the difference between a number 2 earthquake, 3 earthquake, 4 earthquake – goes up exponentially like that – your leverage goes like that at the very end…..if you are going to match Stupak, you match him at the end when you have the most leverage.
Much more at the link, including the fact that Nelson's strategy contradicts game theory.
America is now at a watershed. In the last year, at least two dozen men in the United States have been charged with terrorism-related offenses. They include Najibullah Zazi, the Afghan immigrant driver in Denver who authorities say was conspiring to carry out a domestic attack; David Coleman Headley, a Pakistani-American from Chicago who is suspected of helping plan the 2008 attacks in Mumbai; and the five young men from Virginia who, authorities say, sought training in Pakistan to fight American soldiers in Afghanistan.
These cases have sent intelligence analysts scurrying for answers. The American suspects come from different backgrounds and socioeconomic strata, but they share much in common with Europe’s militants: they tend to be highly motivated, even gifted people who were reared in the West with one foot in the Muslim world. Others may see them as rigid or zealous, but they envision themselves as deeply principled, possessing what Robert Pape, a professor at the University of Chicago, calls “an altruism gone wildly wrong.” While their religious piety varies, they are most often bonded by a politically driven anger that has deepened as America’s war against terrorism endures its ninth year.
That is just a short bit from a very engaging, in-depth article. I'm pleased to see that Elliott refuses to regurgitate the normal "Muslims iz crazy!!!" rhetoric of much press coverage. These actors act politically and strategically; they aren't crazy or nihilistic. Some of them are barely religious, if at all.
None of which is meant as any sort of justification or equivocation of course; they're still vicious murders whether they're motivated by politics or piety. But it's important to understand who your enemy is and what motivates him. If we treat these actors as irrational psychopaths then that will lead us towards one type of action; if we treat them as rational strategic actors, it will lead us toward a very different course of action.
Framing matters, and changing the conversation from hysteria to pragmatism can only help us. Hopefully political scientists can be in the vanguard of that ideological fight.
Thursday, January 28, 2010
Is this a market in everything?
In Doha last month, CommGAP learned about the work of 5th Pillar, which has a unique initiative to mobilize citizens to fight corruption. In India, petty corruption is pervasive – people often face situations where they are asked to pay bribes for public services that should be provided free. 5th Pillar distributes zero rupee notes in the hopes that ordinary Indians can use these notes as a means to protest demands for bribes by public officials. I recently spoke with Vijay Anand, 5th Pillar’s president, to learn more about this fascinating initiative.
According to Anand, the idea was first conceived by an Indian physics professor at the University of Maryland, who, in his travels around India, realized how widespread bribery was and wanted to do something about it. He came up with the idea of printing zero-denomination notes and handing them out to officials whenever he was asked for kickbacks as a way to show his resistance. Anand took this idea further: to print them en masse, widely publicize them, and give them out to the Indian people. He thought these notes would be a way to get people to show their disapproval of public service delivery dependent on bribes. The notes did just that. The first batch of 25,000 notes were met with such demand that 5th Pillar has ended up distributing one million zero-rupee notes to date since it began this initiative. Along the way, the organization has collected many stories from people using them to successfully resist engaging in bribery.
One such story was our earlier case about the old lady and her troubles with the Revenue Department official over a land title. Fed up with requests for bribes and equipped with a zero rupee note, the old lady handed the note to the official. He was stunned. Remarkably, the official stood up from his seat, offered her a chair, offered her tea and gave her the title she had been seeking for the last year and a half to obtain without success. Had the zero rupee note reached the old lady sooner, her granddaughter could have started college on schedule and avoided the consequence of delaying her education for two years. In another experience, a corrupt official in a district in Tamil Nadu was so frightened on seeing the zero rupee note that he returned all the bribe money he had collected for establishing a new electricity connection back to the no longer compliant citizen.
This is yet another piece of evidence in favor of the argument that in order to succeed markets (and governments) must be embedded in a set of social institutions, many informal, that reinforce norms of reciprocity, fairness, and accountability. Without those ideals firmly in place, society can fail to progress, or break down rather rapidly. Deidre McCloskey calls them the "Bourgeois Virtues", although these examples from India would perhaps point to a more universalist explanation.
Of course this is not a new story.
McMegan passes along this tasty tidbit:
Jay Cost of Real Clear Politics tweets that the Senate just voted for cloture on Ben Bernanke's confirmation, 77-23. Immediately thereafter came the tweet from Jim DeMint: "By confirming Bernanke, the Senate rubber-stamped a failed economic policy."
That's right, Senator DeMint (R-SC); the Senate just rubber-stamped George W. Bush's failed economic policy. Would you be happier if Barack "Sgt. Socialist" Obama replaced Bernanke -- a conservative Republican (like you) who was nominated by a conservative Republican (like you) and confirmed by a Republican Senate (including you) -- with a Keynesian? Would you rather have Paul Krugman as Fed chairman, as Simon Johnson proposed? Doesn't it give you pause that you and Bernie Sanders voted the same way on this confirmation? At least Sanders was voting out of conviction rather than misdirected partisanship.
Bernanke is one of the foremost scholars on financial crises and how to get out of them, and he's performed as well as could be expected under the circumstances since Sept., 2008. Regardless of what led to the situation we're now in, he's the right guy for the job right now, and I'm very happy he was reconfirmed.
In case you haven't been following some of the Italian dailies lately, Silvio Berlusconi, a constant source of entertainment on this blog (along with our friends Hugo, Evo and Kim - not good company) and one of Italy's richest men who also happens to be Prime Minister, recently had a hair transplant. This comes a month or so after being smacked in the face with a mini-statue, having his tooth chipped and his face all bruised up.
Absolutely fantastic! Italy's foreign aid numbers are pretty damn bad, but when Silvio wants some new plugs, Silvio gets some new plugs."In a clear reference to the notoriously image-conscious Berlusconi, Gates told Süddeutsche Zeitung: "Rich people spend a lot more money on their own problems, like baldness, than they do to fight malaria."Italy's foreign aid budget was approximately 0.11% of its GDP in 2009, one of the lowest figures among developed countries, and half of what it was even in the prior year. Gates didn't mince words on his views:"Dear Silvio, I am sorry to make things difficult for you, but you are ignoring the poor people of the world," he told the Frankfurter Rundschau.
Fed Chairman Ben Bernanke just cleared a major hurdle a few minutes ago when the Senate voted 77-23 to end debate (cloture vote) on his reappointment. This means that there should be a final up or down vote coming sometime this afternoon/evening. I'll throw up the final vote tally when it becomes available.
Wednesday, January 27, 2010
Jeff Ely passes along a success story:
The Econometric Society which publishes Econometrica, one of the top 4 acadmic journals in Economics has taken under its wing the fledgling journal Theoretical Economics and the first issue under the ES umbrella has just been published. TE has rapidly become among the top specialized journals for economic theory and it stands out in one very important respect. All of its content is and always will be freely available and publicly licensed.
Bootstrapping a reputation for a new journal in a crowded field is by itself almost impossible. TE has managed to do this without charging for access, on a minimal budget supported essentially by donations plus modest submission fees, and with the help of a top-notch board of editors who embraced our mission. There is no doubt that the community rallied around our goal of changing the world of academic publishing and it worked.
This is just a start. Already the ES is launching a new open-access field journal with an empirical orientation, Quantitative Economics. Open Access is here to stay.
The trend is certainly going towards more and more open access, but it should be done sooner rather than later. Perhaps supply will create its own demand.
They've revised upwards their projections for global GDP growth for 2010:
The IMF has revised upwards its forecast for growth in the global economy saying it is recovering faster than previously expected. It sees world growth bouncing back from negative territory in 2009 to a forecast 3.9 percent this year and 4.3 percent in 2011.
But there's a catch, isn't there? Yep, I knew it.
But the recovery is proceeding at different speeds around the world, with emerging markets, led by Asia relatively vigorous, but advanced economies remaining sluggish and still dependent on government stimulus measures, the IMF said in an update to its World Economic Outlook, published on January 26.
If you want more, the full report is here, and below there are some videos of IMF Managing Director Dominique Strauss-Kahn and Director of the IMF’s Monetary and Capital Markets Department Jose Viñals.
Secrets of the Tokyo underground, from the always-excellent Pink Tentacle.
Is there a "centrist-socialist" category? Greg Weeks reports:
Yet even in countries that are supposedly Hugo Chávez satellites, such as Ecuador, 35 percent approve of U.S. leadership, and 33 percent of Venezuelan leadership. On the flip side, despite all the talk of a rightward tilt, 22 percent of Chileans approve of Venezuelan leadership. And 35 percent of Venezuelans even approve of U.S. leadership!
So we end up with the unsurprising conclusion that in the aggregate, Latin Americans very often want the state involved in the economy and, like most people in the United States, do not simply want free market capitalism. But the Venezuelan model does not necessarily appeal to them.
Has anybody contrasted political attitudes in Latin America to those in other regions like Europe? How much is this effect is a product of diffusion? It seems like there are quite a lot of interesting research questions raised by these two questions. I'm sure some of them already have answers, but my knowledge of the Latin American literature is sparse in the best of times. If anybody knows of related material, please post it in the comments.
Felix Salmon passes this along:
“A California Banker” writes to Mish, giving yet another reason why banks aren’t lending:If you’re a bank with a relatively healthy balance sheet with adequate capital, (like us)you want to maintain surplus capital in order to stay on the FDIC’s list of banks they can transfer the loans and deposits from a failed institution into.
This is a home run for the acquiring bank and far more of an instant benefit than any new lending.
The problem here is that healthy banks end up competing with each other to have the largest capital surplus and therefore the greatest chance of being anointed in this manner by the FDIC. If everybody was lending, the FDIC would still have to place failed banks’ assets and deposits with someone. But instead we get the opposite corner solution, where nobody is lending — except, presumably, for banks which are close to failure and need all the interest income they can get. I wonder whether the FDIC has anybody thinking about how to counteract this syndrome.
Salmon calls this the "FDIC lottery" but I think a better name would be "Vulture-Banking": the healthy banks are waiting for the sick ones to die so they can acquire their assets at fire-sale prices.
It would be easy to counteract this syndrome: start taxing bank reserves instead of paying interest on them. But the authorities seem to be more interested in the short run in capitalizing the banking sector rather than really getting cash moving again. Why? Perhaps another post from Salmon could provide an answer:
My feeling is that the US poses at least as much of a risk to the global economy as southern Europe does. There’s a good chance that 2010 could be the year of walking away from underwater mortgages; there’s no sign of the private sector releveraging; and the government has clearly reached its limit in terms of the degree it can step in and borrow on behalf of the rest of us. If the attempt to prop up the still-overvalued housing market fails and there’s another downwards lurch, there will be a whole new wave of bank insolvencies and much less fiscal space to bail them out than there was pre-crisis.
Right. So if the regulatory authorities are thinking the same thing, they want to make sure there is enough capital in the banking system to keep banks solvent if there is another wave of writedowns in real estate. And if/when more banks do collapse, they want to make sure that other banks are healthy enough to absorb their balance sheet. The government either can't or won't pass another TARP-type bill, so the strength of the banking sector is essential; there can't be another bailout.
The downside to this strategy occurs when a cessation of lending slows down the economy enough to cause another downturn, which causes more foreclosures and walk-aways, which pushes more banks into insolvency. The regulatory authorities, however, apparently think that is a risk worth taking.
UPDATE: McMegan says this is evidence of moral hazard. I don't think so. I think regulators would like to see banks lending more, but they also want to boost capital reserves as protection. But they've incentivized the latter, not the former, and banks have responded accordingly.
Tuesday, January 26, 2010
After a complete economic collapse, inflation last year about this time had reached 230 million percent; GDP "growth" was negative in all senses of the word. It was in this nasty environment that the new finance minister, Tendai Biti, came along and began what few would argue is the hardest job in the world.That's a pretty damn impressive turnaround.
Now less than a year later, he was in Washington to tally the progress (and damn, Milton Friedman would be proud...)
- Inflation is completely gone, thanks to the abolition of the Zimbabwean currency in favor of a basket of other notes (including the dollar and the South African Rand). The highest rate seen in 2009 was a slim 1 percent.
- The money supply has been cut by 1,000 percent -- effectively decapitating a nasty forex trade that the money-printers were previously using to enrich themselves
- Capacity utilization in the economy is up from 4 percent to nearly 50 percent, with some industries, including food and beverages, as high as 95 percent.
- GDP growth this year was probably around 4 percent; Biti expects 6 percent in 2010.
Of course, it's not all rosy. But just think about that for a second: the world's most free-fall economy -- the only one in history to see negative economic growth for a decade in which it was not at war -- today is almost normal. In fact, it has the largest stock exchange on the continent, capitalized at $4 billion.
Biti has an interesting theory about this. The collapse of the economy, he said today at a Freedom House event, was in fact the reason why President Robert Mugabe's government finally had to accept the power-sharing agreement in the first place. "Everything else they could deal with -- the opposition, they could beat us up," he said, "but you cannot implement violence against the economy."
Is it 1930 or 1933? Maybe 1937? 1994?
It's none of the above. We're not defending the gold standard and we're not Japan. Historical analogies are fun, and this is not to say that there are no lessons to learn from those periods. It's just that those lessons have either already been internalized or are so controversial that further debate is unlikely to be productive.
So no, Obama isn't Hoover. Nor is he FDR. He's... Obama.
What caused the financial crisis? A new (to me) argument says it wasn't regulation. It wasn't greedy bankers. It wasn't predatory lenders. It was the Chinese one-child policy. Tyler Cowen points us to Eric Barker, who passes this along:
“The increased pressure on the marriage market in China might induce men and parents with sons to do things to make themselves more competitive,” Wei says. “Increasing savings is one logical way to do that, to the extent that wealth helps to increase a man’s competitive edge. Parents increase household savings mostly by cutting down their own consumption.”
Wei worked with Xiaobo Zhang of the International Food Policy Research Institute in Washington, D.C., to see if his hypothesis held up, comparing savings data across regions and in households with sons versus those with daughters. “We find not only that households with sons save more than households with daughters in all regions,” Wei says, “but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed sex ratio.”
The effect is significant. The household savings rate in China rose from about 16 percent of disposable income in 1990 to over 30 percent today, which is much higher than most countries. About half of the increase in the savings rate of the last 25 years can be attributed to the rise in the sex ratio imbalance.
Here's the sequence: the Chinese one-child policy led to a greater male-to-female ratio (since cultural norms valued male children over female children, and if you only get one...), which increased competition among men for the affection of women; this incentivized good-husbandry signals like lots of savings; lots of savings among many Chinese men led to excessively high savings rates, which led to a "global savings glut"; all that savings had to go somewhere, so it came to the U.S. and found its way into risky mortgages; these risky mortgages were then packaged and sold under wrong risk calculations, leading to the spread of systemic risk throughout the domestic and international financial systems; this led to the failure of some financial institutions, which caused a credit crunch, which led to the financial meltdown, which led to the current Decession.
Got it? As Cowen notes, this means that macroeconomic imbalances cannot be addressed through exchange rate mechanisms alone:
You'll note, by the way, that low wages and a high savings rate are the fundamental reasons for global imbalances, not Chinese currency policy. If this is true, one implication is that the Chinese attempt to cut population leads indirectly to those global imbalances. If you "fear China" (whatever that means), the current imbalances might be better than the relevant alternatives, namely a China with high and growing population and all the environmental problems which that involves.
Of course it's worth asking whether Chinese currency policy incentivizes those low wages and high savings rates. If the yuan is under-valued, then imports and even domestic products are relatively more expensive than they "should" be. Factor in the low wages, which is also somewhat intentional, and that lack of a social safety net and it's no wonder why having a lot of savings is attractive to a potential mate. This pushes incomes into savings rather than consumption.
But it doesn't have to be that way. After all, in some other societies males signal their worth to female by conspicuous consumption, not conspicuous savings. If China wanted to incentivize consumption they could begin constructing welfare programs, let the yuan appreciate (and thus let the real purchasing power of Chinese citizens increase), and we'd (presumably) start to see behaviors change.
So there is certainly a currency/exchange rate component to this. Chinese men are acting according to the incentives the government has given them to save rather than the incentives the government *could* be giving them to spend.
I have no idea how rigorous this theory is, but it's certainly intriguing. I'm kind of surprised Malcolm Gladwell hasn't gotten ahold of it yet, to be honest.
Wow. I voted for Obama for president, and I assume that Ryan Avent did too, but we must have had very different views of what we were buying because he is shocked (SHOCKED!) to learn that Obama responds to political incentives:
Through bad times and good times for the president, there was one word I never associated with him and his approach to the challenges facing the country: gimmick. But this is a bright shining gimmick that advertises a lack of seriousness to both near-term economic weakness and long-run budget problems. This is decidedly not what is needed right now. If this is the best the president can do, Democrats, and the country, are in for a very long few years.
Look. Obama never campaigned on a platform of "Elect me and I'll slash entitlement spending and the defense budget because we've gotta get serious about our long-term budget constraints." He campaigned on "We'll expand health care and save money, we'll 'get serious' about climate change without raising energy prices, we'll support American workers without actually restricting trade, we'll restore America's standing in the world without actually spending resources to curry favor, etc.". His entire campaign was a gimmick: we'll fix everything by hoping and coming together and changing the culture of D.C., and all the programs we want won't cost anything at all! We'll create jobs in green technology, and we'll save money on health care administrative costs, and we won't have to sacrifice anything at all! We'll take control of Wall Street and give everything it has to Main Street and there will be no downside! We'll 'get tough' with China and then they'll do everything we want! We'll play nice with Europe and then they'll also do everything we want! New Deal 2.0, except this time without the war!
And then the CBO scored it. Turns out it's hard to have your cake and eat it too.
I voted for Obama because he's smart, he surrounds himself with smart people, and I hoped that that would lead to better outcomes than under a McCain/Palin administration that took pride in how willfully, proudly stupid and ideological it was. I also hoped he would be willing to look into the medium- and long-run future of the country and enact entitlement reform and cut the defense budget in order to shore up America's finances, but I never actually expected it to happen because he never said he was going to do it. (Or, more specifically, he never said what he would do to do it.)
So I'm not surprised that he's resorting to gimmicks in an attempt to curry favor. He did it during the campaign, too. I have no idea why progressives expected so much; it was never going to happen they way they imagined it.
Monday, January 25, 2010
Elizabeth Warren, would-be head of the Consumer Financial Protection Agency:
I was really knocked out -- I have to tell you -- by the hearings last week when Jamie Diamond [head of Citibank?] said, [airy tone], "You know, you just have to expect this. We'll have crashes like this every five to seven years--"
Doesn't that just knock you over?
Let me guess, Ms. Warren: if you get the authority you want, this time will be different, right?
Sunday, January 24, 2010
For reading while watching the Saints and Colts win:
1. Reconfirm Bernanke. And also here.
2. Global inequality has decreased enormously. Why don't people talk about this more?
3. Clive Crook on the U.S. and European models.
4. Whole Foods founder John Mackey has a LOT of faith in capitalism.
5. European Commission: "Euro imbalances weaken trust in the euro and endanger the cohesion of the monetary union."
6. Mike Rorty on Glass-Seagall, and here, and here.
[T]he French pact civil de solidarité – a kind of civil union introduced in 1999/2000, [was enacted] largely as an alternative to gay marriage. But the pacs has had very interesting consequences for straight couples (95% of couples with pacs are straight), as this chart shows.
The growth of the pacs’ popularity over its first decade is striking. There are now two pacs for every three marriages. Interestingly, this is because of both a significant decline in marriage, and a significant increase in the overall number of people willing to engage in some kind of state-sanctioned relationship.
Score one for slippery-slope arguments, or chalk it up to selection bias? More from Henry Farrell at the link. (And see the first comment, by John Quiggin.)
Saturday, January 23, 2010
I don't get this:
A nice tidbit from the Washington Post/KFF/Harvard poll of MA special election voters (pdf):As you may know, Massachusetts has a law that is aimed at assuring that virtually all Massachusetts residents have health insurance. Given what you know about it, in general, do you support or oppose the Massachusetts Universal Health Insurance Law?
Among Brown voters, 51% support this law and 44% oppose it.
What's the point? Brown's opponent had an identical view on the issue, and he wasn't running for MA Senate; he was running for US Senate. A state program on which they agreed wasn't what separated them in a race for a national seat.
What separated them was that Brown pledged to oppose national universal health care plans while Coakley pledged to support them. It's a pretty safe assumption that all of the 44% opposed to the MA plan would also be opposed to a similar national plan, and that some of the 51% who support a MA might also be opposed to a similar national plan (if, e.g., they are concerned about rising national deficits, or an increased tax burden on a relatively affluent state, or any number of other concerns). All he needed was 3 of those 51% to swing the election to his side. It's not at all surprising to me that he was able to find them.
Given that, it's no surprise that big chunk of Brown's voters would disagree with his views on a local issue over which he has no discretion, but support him on a national issue in which immediately becomes a pivotal vote.
DeLong linked to this as if it meant something. So... does it mean something? I can't see how. What am I missing?
UPDATE: Brown's voters were overwhelmingly against a national health care reform plan.
Venezuelan leader Hugo Chavez Wednesday accused the United States of causing the destruction in Haiti by testing a 'tectonic weapon' to induce the catastrophic earthquake that hit the country last week.
President Chavez said the US was "playing God" by testing devices capable of creating eco-type catastrophes, the Spanish newspaper ABC quoted him as saying.
Evo Morales was only slightly more sane, calling US relief efforts a "gringo military occupation":
President Evo Morales said Wednesday that Bolivia would seek U.N. condemnation of what he called the U.S. military occupation of earthquake-stricken Haiti. "The United States cannot use a natural disaster to militarily occupy Haiti," he told reporters at the presidential palace.
"Haiti doesn't need more blood," Morales added, implying that the militarized U.S. humanitarian mission could lead to bloodshed. His criticism echoed that of fellow leftist, Venezuelan President Hugo Chavez, who said Sunday that "it appears the gringos are militarily occupying Haiti."
Robert Farley adds comment:
Now, I'm going to go out on a limb here and argue that Chavez' comment is substantially stupider than Pat Robertson's, if only because I suspect that God actually could cause an earthquake in Haiti if He so desired. I suppose we could debate the point, but I also find God's motivation (get back at the Haitians for their Satanic proclivities) considerably more plausible than that which Chavez and Morales attribute to the United States; the single last thing that anyone in the Pentagon wants to do right now is devote more troops and treasure to Haiti...
I'm with him, even though I'm an unbeliever. Robertson's quip is eminently more sensible than Chavez's (although I can understand Morales' skepticism of the U.S.'s intentions given our history in Haiti).
Chavez, Morales, and Robertson are interpreting current events through their ideological prisms. Their presuppositions are absurd, so this predictably leads to bias, and these biases lead to borderline-insane statements. Farley is right to poke fun at their expense.
Unfortunately, Farley's co-blogger Charli Carpenter recently made a similar -- though much less egregious -- mistake when she referred to the Haiti earthquake as a "climate disaster". I took umbrage in comments to that post, and she responded by posting this link as evidence that the Haiti disaster could have been related to climate change. But what does the author of that post conclude about the likelihood that the Haiti earthquake was caused by climate change?
I don't mean to pick on Carpenter, who is one of my favorite bloggers and who provides a unique and vital voice to the blogosphere generally and the IR blogging community specifically. I know that I regularly make the same mistakes in bigger ways. And her broader point -- that the U.S. and international community don't have a coherent disaster-response program, much less standards for infrastructure development -- is certainly well-taken.
But framing matters, and framing crises like the one in Haiti as a climate disaster can be counter-productive. Even people who acknowledge the reality of global warming can be skeptical that every natural disaster is a result of these processes, so claiming any particular crisis is a result of climate change can come across as opportunistic. That turns people off, as it did when similarly dubious claims were made about Hurricane Katrina. The fact is that no one can know, nor could they prove, that the Haitian earthquake or Hurricane Katrina was caused by climate change, and such needless spinning-of-wheels distracts from what's really important: improving and institutionalizing emergency responses to disasters, and improving global infrastructure so that the effects of disasters are not as extreme.
If it's counter-productive when Chavez or Morales or Robertson do it, it's no more productive when we do it. So let's not.
UPDATE: I can't believe it, but Chavez has just jumped his own shark:
In a recent speech against capitalism (South Americans must never get tired of them) Venezuelan President Hugo Chavez lambasted Playstation videogames because they encouraged violence, which is, uncoincidentally, just what capitalism wants. According to the babelfish translation of the spanish language article, Chavez warned that:In those electronic warlike games “cities are bombed, pumps are thrown”, and are promoted by “Capitalism” to seed the culture of the “violence” that, is saying, guarantees that soon it can “sell arms”.
I’m going to assume that “pumps are thrown” is not a mistranslation, but rather some strange Venezuelan violence phenomenon. The best part of the article though is the picture juxtaposing it
Click the link for the pic; it's well worth it. When Hugo Chavez and Tipper Gore agree on something, you know it's wrong.
Friday, January 22, 2010
Remember when some American liberals like Alec Baldwin were threatening to move to Canada if George W. Bush was elected president? Well maybe tea party conservatives should start thinking about it:
According to the Heritage Foundation’s 2010 Index of Economic Freedom, Canada now enjoys a greater degree of economic freedom than the United States. ...
Where you getting all this economic freedom all the sudden Canada? Just happen to find it laying around in the snow somewhere? Well it turns out we’ve recently misplaced a good deal of it around here. A little suspicious if you ask me.
Whatever. I hear it's cold up there this time of year.
KPC reads Andrei Shleifer's recent paper on efficient regulation and gets off a nice one:
Actually, it's easy to explain. Regulation makes it possible for felons like Andrei Shleifer to steal millions. There, that puzzle is solved!
Thoughtfully compiled by Charlie Carpenter. To my shame, I haven't read any of them.
I'm busy, so I can't comment much, but a few thoughts from others worth highlighting. First, McMegan:
But even if it's not the best idea in the world, there are definitely many worse rules that we could think up. And after a stunning defeat on health care, the administration needs to score big points against the bankers quickly. If "Don't just stand there, do something!" is the order of the day, there are clearly worse somethings we can do.
If we do choose this "something", Americans should probably be clear that this is going to deal a major setback to New York as a world financial capital. Many of the rules that were undone in the last two decades were got rid of because they were making it too hard for American banks to cope with foreign competition. If we do this, America's financial sector will shrink, and our banks will lose a lot of business to foreign firms. That means, among other things, that we are going to lose big chunks of tax revenue, because bankers are very disproportionate contributors to federal coffers. It also means that New York's renaissance will probably slack off--and the people who complain about the bankers will discover how many city services those banker salaries paid for.
Felix Salmon started off thrilled, but cooled down later the day:
Now the proposed Volcker rule will try to cut back on some of that borrowing and gambling, but it probably wouldn’t have had any effect on their idiotic actions in mortgage-backed securities and collateralized debt obligations. Banks will always find a way to lose money: not all banks fail, but there are always bank failures. The important thing is that when banks fail, there aren’t massively destabilizing systemic consequences. And the only way to ensure that is to make the biggest banks smaller. It’s sad that the Obama administration seems to have flubbed this final chance to get that done.
My take? It's too soon to know for sure what the final bill will look like, but as currently constructed the loopholes are big enough to drive a Hummer-limo through. And I don't think it stands much of a chance if it would actually put American banks at a significant competitive disadvantage vis-a-vis the rest of the world.
The above picture is worth a thousand words, but here's some more:
Despite alot of incendiary rhetoric from the Chavez regime over the years, The United States secures alot of its just-in-time supply from Venezuela. (I’m not convinced that the power outages in the country’s grid will actually get the price of oil to 100 just yet). However, it’s instructive that along with geological declines in Mexico, hemispheric supply to the United States remains on a well-established downward path. It appears that Chavez is about to achieve dysfunctional petrostate status for Venezuela.
Via Felix Salmon.
Thursday, January 21, 2010
Thirty years ago, Gordon Tullock posed a provocative puzzle: considering the value of public policies at stake and the reputed influence of campaign contributions in policy-making, why is there so little money in U.S. politics? In this paper, we argue that campaign contributions are not a form of policy-buying, but are rather a form of political participation and consumption. We summarize the data on campaign spending, and show through our descriptive statistics and our econometric analysis that individuals, not special interests, are the main source of campaign contributions. Moreover, we demonstrate that campaign giving is a normal good, dependent upon income, and campaign contributions as a percent of GDP have not risen appreciably in over 100 years - if anything, they have probably fallen. We then show that only one in four studies from the previous literature support the popular notion that contributions buy legislators' votes. Finally, we illustrate that when one controls for unobserved constituent and legislator effects, there is little relationship between money and legislator votes. Thus, the question is not why there is so little money politics, but rather why organized interests give at all. We conclude by offering potential answers to this question.(bold added)
If you're concerned about "quality of democracy" (whatever that means) or "corporations buying votes" or "the new kleptocracy" or anything similar, it might be worth asking yourself whether or not that fear is warranted. It might also be worth asking if the principle of extending political speech to all actors in society is worth upholding.
A good lesson for social scientists: know what the measures you are using are actually measuring.
To make a long story short, the World Bank decided to boot richer India out of the group of poorest countries used to determine the poverty line, which made the poverty line higher, which made Indian (and global) poverty higher – all because India was richer. This misguided revision of the poverty line, which accounted for virtually all of the upward revision, was not clear to virtually anyone until this new paper by Deaton. ...
Then there is the “index number problem,” which only is of great fascination to 2 people, but unfortunately can change the ratio of US/Tajikstan incomes by a factor of 10. The trouble is that rich people and poor people consume very different things. For example, poor people may consume a lot of something that is cheap in the poor country, which is not consumed much and is expensive in the rich country. Similarly, rich people consume a lot of something else that is cheap in the rich country and expensive in the poor country. If you use rich country prices, you exaggerate poor people’s consumption basket value (they are given a lot of credit for consuming a lot of something very expensive, but it isn’t that expensive in the poor country and if it were, they would consume a lot less of it). Conversely, if you use poor country prices, you exaggerate rich people’s consumption basket value. There are possible intermediate solutions but no complete solutions to this intractable problem.
I don't like PPP measures for this reason: I don't think they are always measuring what they claim to measure. Which is not to say that non-PPP-adjusted measures don't have their own problems; they do. But I think that traditional GDP measures (say) lend themselves to more straightforward cross-national comparisons. Even if they aren't exactly comparing apples to apples, at least they're not comparing apples to aardvarks.
Another good point from EoC:
It's amzing to me that people are still referring to commercial banks and thrifts as "safe and boring operations," even though 140 commercial banks/thrifts failed in 2009, and the number of banks on the FDIC's "problem list" has risen to a whopping 552. Commercial banking is inherently risky — in all loans, there's a risk that the borrower won't pay you back. Just ask all the commercial banks and thrifts that lent most of their deposits out in the form of commercial real estate loans.
Another reason why having TBTF banks may actually be a good thing. For more thinking along these lines, see this discussion. There are some interesting ideas in there, although operationalizing this stuff might be difficult.
Some new research using network analysis supports the theory of the liberal peace. Here's the abstract:
Classical-liberal arguments about the pacifying effects of international trade are revisited, and it is argued that they consistently refer to the ability of trade to provide ‘connections’ between people and to create a perceived ‘global community’. Dependency and openness are commonly used to test for any pacifying effects of trade in the current literature, but these measures fail to capture some of the classical liberals’ key insights. Several network measures are introduced in order to give natural expression to and to develop the classical-liberal view that trade linkages reduce interstate conflict. These measures applied to trade flows are incorporated in the Russett & Oneal triangulating-peace model. The main results are that trade networks are indeed pacifying in that both direct and indirect trade linkages matter, and as the global trade network has become more dense over time, the importance of indirect links by way of specific third countries has declined, and the general embeddedness of state dyads in the trade network has become more relevant. These findings suggest that the period since World War II has seen progressive realization of the classical-liberal ideal of a security community of trading states.
Bold added. Here is an ungated version [pdf].
Wednesday, January 20, 2010
Svet passed along this interesting article:
If the euro were being launched this year, which European states would be allowed to adopt it? The answer is that only Finland, Bulgaria and Luxembourg currently meet the euro convergence, or Maastricht, criteria.
Bulgaria? This new EU member state is supposed to be a basket case, bucolic economy riddled with corruption. Perhaps, but it also has low inflation of 0.3%, low public debt of only 13.5% of GDP, and low interest rates of 0.8% - all way under the Maastricht limits of 3.2%, 60% and 6.5% respectively.
The international financial crisis has turned Europe on its head and made a mockery of the old division of east (read: "backward") and west (read: "developed") that existed only two years ago. Indeed, any lists that rank the economic health of all the countries on the Continent is now a mash-up of eastern and western names. Many of the so-called "industrialised" countries of the west now have structural problems more typical of Europe's "emerging markets", whereas many emerging markets in Europe sport much better fundamentals than their western cousins.
The result is the current crisis will accelerate the catch-up of east with west.
Much more at the link.
EoC restates the obvious:
It's true that the idea that "what's good for Wall Street is good for America" has been disproved, but that does NOT prove the opposite—that is, it doesn't prove that "what's bad for Wall Street is good for America." It's frightening how many commentators fail to grasp this distinction. ...
Cutting into Wall Street's profit margins shouldn't be an explicit goal of financial reform. In other words, we shouldn't look for where the Street has the highest profit margins, and then say, "OK, now how can we cut into those profits?" In most instances, enacting sensible regulation based on an objective weighing of the evidence will lower Wall Street's profit margins anyway. But the fact that the Street is going to profit from a particular regulatory change doesn't necessarily make the regulatory change ineffective, or insufficiently "tough on Wall Street." One argument I hear a lot on OTC derivatives is that we need to push them onto exchanges rather than clearinghouses because Wall Street would still make fat profits if they just went through clearinghouses. That's not a coherent argument for why public policy should require exchange-trading for standardized OTC derivatives.
I'd only quibble with the very beginning: what's good for Wall Street is good for America, if by "good for Wall Street" you mean finding a system of regulation that protects against systemic risk while still allowing financial firms to provide valued services to their clients. That would be good for Wall Street, America, and the rest of the world to boot. That should be the goal of policy. And if firms make a lot of money under such a system, and if they use those profits to pay out large bonuses, then we should be happy that they're providing so much value to the economy.
By the way, this sentiment can be generalized to all corporations.
Tuesday, January 19, 2010
1. "Private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.”
2. "If a small-enough-to-fail bank takes too many risks and fails, the systemic consequences are manageable. If a TBTF bank takes too many risks and fails, it can drag down the entire economy."
Both come from here. The first is Alan Greenspan in 2005, but he has since recanted. The second is Felix Salmon, arguing that we should chop down too-big-to-fail banks until they are small enough to fail.
#1 is interesting to me, because Salmon seems to think that it is an obviously false statement; even its originator disagrees with it now. But I'm not necessarily convinced. First of all, what does Salmon mean by "government regulation"? Well, according to this post he means the Federal Reserve. Is it true that the Federal Reserve has proved better than market discipline at constraining excessive risk-taking by banks? I believe that's an open question. That doesn't mean that markets are perfect; but surely regulators aren't either. Is it obviously the case that regulators are less flawed than markets? Neither performed well in this crisis.
When you have systemic collapses, it's because you have systemic failures in risk-pricing. That means both markets and regulators get it wrong. But look statement #1 again: I think there is a strong case to be made that in general markets do a better job of disciplining banks than governments do, even if I accept that markets did worse in this particular case.
Now, about #2. Is it really the case that small banks can't cause systemic collapses? Well I guess you can do what Salmon does and make the answer tautological. If a bank collapses and sets off a broader collapse, then it was ipso facto TBTF. But Salmon is talking about chopping up TBTF banks until they are a manageable size. But how big is too big? Bank Herstatt wasn't very large, but it caused quite a bit of damage. The Great Depression was not caused/exacerbated by the collapse of one or two TBTF institutions, but rather by the spread of panic throughout the entire system. Smaller community banks failed first, touching off a panic that led to bank runs that caused other banks to fail. It's simply not true that we're protected from a systemic banking crisis if we limit the size of financial institutions.
Suppose we all do as as Salmon and others are asking, and move our money from large TBTF banks to smaller community banks. What happens the next time a panic enters financial markets? If we can isolate a handful of very large institutions, we can stabilize the system by stabilizing those few institutions. But if market power is much more diffuse, then containing the contagion is much more difficult: counterparty obligations can still have cascading effects, but it's more difficult to see how, when, where, and why. You may end up having to bailout or nationalize the entire banking system rather than just a handful of institutions.
In other words, perhaps TBTF is actually the best scenario. It allows us to focus recovery efforts where they can do the most good.
UPDATE: I should say that I'm not actually persuaded that any of this is actually right. Just thinking out loud.
Danny Mwanga was the first overall pick in the recent MLS soccer draft. He is also the son of Belmand Mwanga, an adviser to Joseph-Desire Mobutu, the former dictator of
Zaire the Democratic Republic of Congo. When Mobutu was overthrown, Mwanga senior went missing and is presumably dead. The effect on Danny was surely profound:
"I miss him. I wish he were here today," Mwanga said in French. Although his English is excellent, Mwanga still jumps at any chance to speak his mother tongue. Those who doubt that Mwanga is 18 -- and some do -- have but to look at his boyish looks and his pronounced cheekbones, which punctuate a face he hasn't quite grown into yet. He's coy and soft-spoken. If you want to be able to hear what Mwanga has to say, you need to sidle up to him. Whenever his father is mentioned, he lowers his gaze to the ground and turns the volume down even further. "I don't like to talk about it," he said.
After his father's disappearance in 1998, Mwanga's mother fled to America. They hadn't seen each other in five years when Danny, whose given name is Jean-Marie Daniel, was awarded refugee status and followed.
Why is this interesting (other than on a human level)? Because if this study [pdf] is to be believed, Mwanga will soon be one of the most violent soccer players in MLS. It will be interesting to see if that's what happens, or if the effect of "cultures of violence" is not present in MLS.
(edited for clarity in language)
Sunday, January 17, 2010
1. The high points of Christopher Hitchens' political philosophy, in two parts.
2. Just came across this tool for time-series cross-sectional analysis. Looks interesting, although I've yet to play with it. The list of Gary King's public goods is ever-growing.
3. How preference utilitarianism -- like that in Rawls' A Theory of Justice -- denies human rights and provides justifications for slavery and genocide. [pdf]
4. How the Fed earned its profit:
I have suggested that the right way to think about these operations is that the Fed acquired the funds for these operations by borrowing them from banks in the form of the huge expansion of interest-bearing reserves. In essence, the Fed is borrowing short through banks' excess reserves and lending long through the MBS purchases, and profiting from the interest rate spread.
The ultimate rationale for such actions might be that private banks should be conducting this arbitrage on their own, but are prevented from doing so by ongoing financial difficulties.
5. Sebastian Pinera is the new president of Chile. He is also a Harvard-trained economist. Here are some of his academic papers.
6. NAFTA increased real wages in all participating countries, and Mexico benefitted the most.
7. Steven Landsburg wants feedback on this draft of a new paper [pdf] on quantum game theory.
8. Dan Drezner and Henry Farrell compare Europe and America:
Thomas Friedman, c. 1999: Hallelujah! The Golden Straightjacket will save us all!
Thomas Friedman, c. 2005: Globalization 3.0 is cool! Who needs states or MNCs?
Thomas Friedman, c. 2010: ZOMG! EVERYTHING IS HORRIBLE! BACK TO MERCANTILISM AND ISOLATIONISM, PRONTO!
One takedown here.
Saturday, January 16, 2010
I completely agree with all of this. This tragedy is terrible, but the world has already mobilized in support. There is a saturation point of efficacy, which has almost certainly been reached by now. It's much better to give unrestricted aid to reputable organizations (like Doctors without Borders, although there are others) that are operating around the globe, all the time, and not getting the sort of attention that a sudden catastrophe gets. If Haiti truly needs more aid, then these organizations will funnel cash there. If other places are more neglected, then the money will go where it's most needed.
This is not an encouragement to not give; it's merely an encouragement to give where it can be most beneficial. At this point, that is probably not Haiti. So give unrestricted donations to reputable aid organizations.
Friday, January 15, 2010
Here's the thing: if inflation cranks up, the Fed is going to have to unload a buttload of debt, really fast. The only way to sell that much debt, and take excess cash out of the economy, is to sell at fire sale prices.
So, if there is inflation, the Fed is going to take truly ginormous capital losses on the debt it will have to sell. But this is exactly Bernanke's plan, the one he is so sure will work to prevent inflation. Big Ben's talk at the AEA meetings made much of this policy. But who in the world is going to buy CDOs in this market?
The lagniappe: Lots of the CDOs are based on fixed interest rate mortgages. If there is inflation, the capital value of those gets hammered. All the rest are based on ARMs of some kind. And for those the PAYMENTS skyrocket with nominal interest rates, and defaults go up, and AGAIN the CDOs' capital value takes it right up the ol' gazoch, with a red hot poker.
This is not really a good policy.
All of this is true... if inflation cranks up in the short-run. What do the markets think about inflation? Here is the most recent TIPS spread (the difference between nominal T-bills and inflation-protected T-bills, which represents the market's expectations about inflation):
This indicates that the market does not anticipate inflation to "crank up" any time soon. In fact, it means that we are at a much greater risk of deflation than inflation. Which means that the Fed policy is actually a very good policy, given the circumstances.
Of course, Munger is free to disagree with the markets if he pleases, but a libertarian should do so at his own risk.
As Krugman says, the danger that we'll end up in a Japan-style situation is much greater than the danger that we have rampant inflation in the short-run. In the medium-run, sure. But by then the Fed will have had plenty of time to off-load its risky assets at acceptable prices.
Here are some quick-fire thoughts about Obama's bank tax:
1. This is a essentially a tax on risk, because it targets leverage ratios. In terms of economic theory or even social justice this makes some sense. Think of it as a Pigouvian tax: moral hazard exists for firms with an
implicit explicit government guarantee, so this tax could help bring private and social costs in line. In other words, it could help banks internalize the social costs of their actions. Especially, as Daniel Indiviglio says, if the proceeds from the tax were put into a "rainy day fund" to be used only if/when banking rescues need to happen again. That isn't going to happen, but I guess that doesn't make too big of a difference.
In practice, of course, it isn't going to work like that since banks will be able to pass some or all of the tax onto consumers. This view is supported by the fact that banks seem to have no problem at all with this tax. In fact that could be the best outcome. If banks are somehow forced to pay the tax themselves, it could actually create perverse incentives for banks to lever up even more to offset the loss of revenue from the tax. There is an argument [pdf] that this was the effect of capital adequacy requirements when combined with risk-weighting and the Recourse Rule, and that that created or exacerbated the financial crisis we're still digging out of.
2. The Obama administration could just target leverage ratios directly by mandating prudential standards. But that couldn't happen for several reasons. First, because it would put American banks at a competitive disadvantage in globalized markets (unless it happened under the auspices of the Basel Committee, which it might). Second, because it wouldn't raise any revenue for the Treasury, which could use it right now. Third, because it's a good political move to tax the banks even if it doesn't have the desired effects. The public is seeking its pound of flesh right now, and a "Bank Tax" could help stem some populist rage, even if the public are the ones who ended up paying it.
3. The government is making money off of the bank "bailout". I'll repeat that: the government is making money off of the bank "bailout". Quite a bit, as it turns out. It's losing money on the "Main Street" auto bailouts and AIG, but not the banks. Now, this doesn't count the loss in tax revenue (from decreased economic output) that the financial crisis caused, but it does stand for something.
UPDATE: Mankiw makes some similar points.
Thursday, January 14, 2010
From Andrew Ross Sorkin's Dealbook column in the NY Times:
To be sure, Mr. Blankfein was correct in saying that his firm had sold the bundles of mortgages, or synthetic collateralized debt obligations, only to sophisticated professional investors who managed large amounts of money and had an appetite for the securities.If there is one thing that this financial crisis has made clear is the fact that the actions of professional and wealthy investors can clearly have systemic repercussions. The losses from their investments tanking don't impact just their personal wealth and portfolios but have the potential to impact the lives of millions of people around the world and the stability of the financial system itself. I also especially like the last paragraph of the quote above: the technical, forecasting and predictive capacity of institutional investors is not any better than your typical amateur investor. People believe that equity markets and most of these other investments can be gamed and strategically coerced to do what you want them to do. Truth is, a lot of it is just a random walk.
He was trying to distinguish them from individual retail investors. And those investors probably should have known better. But, of course, those investors also relied on rating agencies to evaluate these securities — and as it turns out, the ratings were often way off.
For years, most financial regulation has been focused on protecting the individual investor (though its effectiveness is obviously questionable), leaving professionals and wealthy investors to take whatever risks they choose.
But if we learned anything in this crisis, it is that most of the sophisticated financial professionals in the world were no better at predicting the market than some amateur investors. Even Mr. Blankfein highlighted that he did not see the crisis coming.
Wednesday, January 13, 2010
Yesterday it was reported that the Fed earned about $46bn last year, mostly because it diversified its portfolio into riskier assets as a way of injecting capital into the banks. Fed payments to the Treasury also increased, and were north of $20bn.
This is unequivocally good news. Combined with the profits from TARP (at least the banking interventions), and it now appears that the government may make as much as $100bn from the interventions into the banking sector. That's right: not only did it not cost us trillions, as some claimed, or even the hundreds of billions of TARP outlay, but there will be a substantial profit.
Last fall, a lot of more liberal commentators like DeLong and Krugman were advocating a Swedish-style nationalization of the banks. As DeLong put it, if the government was sharing downside risk with banks it should share in the upside as well by acquiring equity stakes. Now we see that the government was sharing in the upside by buying depressed assets at low prices, waiting for the markets to stabilize, and then selling them back. All without having to bother full nationalization and the pitfalls that may have entailed.
This is very good news indeed.
Tuesday, January 12, 2010
In comments to this post, Emmanuel stressed that we in the IPE community should spend more time trying to raise the profile of the discipline and less time practicing fratricide. I agree.
But now I see Ezra Klein thinks that political scientists just aren't accessible to the public:
All that said, political scientists make it extremely hard for the rest of us to benefit from all that study. The papers are locked away in obscure journals accessible only by expensive subscriptions. There are relatively few blogs dedicated to applying the insights of political science to the events of the day (but more than there used to be!). I don't know of any organizations in the District dedicated to guiding journalists through the thickets of the discipline. Nor do many think tanks in Washington employ political scientists (one reason that economists are so dominant in this town is that they're everywhere, and they spend most of their time talking to journalists on the phone).
First of all, it's crazy to suggest that there are no (or few) political scientists in the District. Are they employed by think tanks? Maybe not (though some are), but why should Klein's only base of knowledge be advocacy organizations when he has a number of high-quality political science departments in high-quality universities all around him? Moreover, economics journals are behind the exact same paywalls as political science journals. And while it's true that there are fewer political science blogs than economics blogs today, there are more political science blogs today than there were economics blogs 10 years ago. It's not as if political journalists alluvasudden started ignoring political scientists, so I think the causes run deeper. And why is it that D.C. economists spend their days talking to journalists on the phone? Presumably, it's because journalists call them up and ask for their opinion, which they could just as easily do with political scientists.
First, Klein argues that the barriers to access of political science research and expertise are much higher in political science than in economics, but I don't see how that could be true. Then he switches to arguing that journalists shouldn't have to do any research or actual reporting, and should instead just reach for the most readily-apparent source. Notice:
I really like the papers I've come across from Yale's David Mayhew. Brilliant, careful stuff that's vastly enriched my understanding of Congress. But I've only read them because another political scientist thought to send them to me. And there's no obvious way for me to get more of them without badgering people for things that I don't yet know that I want. Similarly, Frances Lee's publisher recently sent me her book 'Beyond Ideology.' Great stuff, and it led to this post. But I never would've found out about it if it hadn't shown up on my doorstep.
Here's what I think: journalists rely on economists because they know that they don't understand economics. They were probably forced to take an intro econ class in undergrad, hated it, and so they immediately outsource their opinions to the first economist in their rolodex. But political journalists think they do understand politics, even when they clearly don't. They think that electoral outcomes actually depend on whether Obama drinks beer or wine or whether Hillary Clinton was crying real or fake tears. The opportunity cost of reading real research is quite high compared to just filing another horse-race story. Plus, the tawdriness sells copy.
In a previous post Klein indicated that he understood this, and he (and folks like Yglesias) have been much more open to incorporating political science into their work than, say, Thomas Friedman. So I don't want to pick on him too much. But if he is really interested in hearing what political scientists think he could pick up the phone. And if he's really interested in the research we do, he can probably convince the Washington Post to subscribe to JSTOR. He shouldn't expect it all to just show up on his doorstep.
(An aside: I can somewhat forgive journalists for this. They aren't trained to think like social scientists, and often just don't know where to look, as is clearly evident from Klein's post. It's only a half-excuse, but maybe that's better than none. What really gets me is when economists spew all sorts of lazy political commentary while complaining about how badly journalists report on economics. They should really know better, and they have easy access to political scientists. All they have to do is walk down the hall.)
UPDATE: I completely agree with this...
Every political scientist should have a webpage where ungated copies of their papers and articles are available. Period. When I want to blog about a particular political science article, I am probably going to find an ungated copy about 50% of the time. I sometimes email people to ask them to put the article on-line, but that seems an unnecessary hurdle.
I would also urge the APSA and political science journal publishers to consider making their content available for free to journalists who request it. I am told that Nature and Science will do so.
Ezra Klein loves him the political science. But the Washington Post doesn’t have a subscription to JSTOR. To be sure, free access to the wide world of political science won’t make journalists salivate over the latest issue of the APSR. But let’s at least make this problem one of demand, and not supply.
... but let's not make too much of it: Klein isn't complaining that only 50% of political science articles are ungated, he's complaining that only one or two show up on his doorstep or are specifically recommended to him by other people. And he's one of the only journalists who give even half a damn about political science. And I've never once heard of an academic refusing to disseminate their work if someone e-mails to request an ungated copy. It's also ridiculous (and possibly not true) that the Washington Post doesn't have access to JSTOR; an annual subscription costs $9,000 for corporations, which is lunch money for the Kaplan Group (which is dedicated to education services, after all).
So this is very clearly a demand issue. This is not to say that we shouldn't make all of our work more freely available. We should. But it's not as if Ezra Klein is searching and searching for political science research and just can't find any because of the blasted paywalls; he's complaining about not having enough stuff spoon-fed to him.