IPE Journal

That Was The Year That Was: Economia

2010-01-03T16:00:00.000-05:00

"The best that can be said for 2009 is that it could have been worse" - Joseph Stiglitz, in China Daily

That pretty much sums it up right there. I have been looking through some of our posts from late '08 and early '09 and things looked pretty grim on a number of fronts. But the year did not turn out quite as badly as it could have. Let's have a look back at some notable items from the world of economics in 2009, shall we?

Some Statistics from 2009
# of US banks shuttered by the FDIC: 136; the current yield on a 1-year US Treasury bond: 0.00%; China's government stimulus package: 4 trillion yuan ($586 billion); inflation of the gold bubble this year: 27%; IIF's projected decline in foreign direct investment to emerging market economies in 2009: 82%; Actual decline as of October 2009: about 30%; IIF's prediction for 2010: probably worth ignoring entirely; The Economist's global public debt clock as of today: $32,052,820,000 (or thereabouts).

Protectionism
When we started our year, the threat of protectionism loomed large in many different countries. We've seen some bad examples throughout 2009 - government-sponsored stimulus packages being probably the worst offenders - but I suspect the above quote from Stiglitz applies here. We can find a number of protectionist anecdotes that make us shake our heads, but it doesn't appear to be systemic. Encouragingly, the G20 at least got the right language in their public statements, even if they haven't followed it to the letter.

The G20's extraordinary economic intervention
Surpassing my wildest expectations, the G20 has proven itself to be something other than a complete waste of time. The members of the G20 have shown themselves to be genuinely interested in making a crack at international cooperation on economic affairs - albeit with the usual cases of counter-productive grandstanding by leaders for their domestic political purposes. Granted, the "trillion dollars" of stimulus money pledged by the G20 in April may have been fudged a little, but the perception that governments were willing to step up and do something probably helped counter the deep-seated uncertainty felt by markets and citizens across the globe.

In all likelihood, the G20's accomplishments will be less about the big numbers and rhetorical posturing of the summits, and more about the incremental changes made by sub-bodies. Take the Financial Stability Board which, despite sharing an acronym with Russia's domestic security services, may prove to be quite useful. The FSB, like the IMF, has been tasked with some of the heavy lifting for the G20: strengthening regulatory standards, developing principles for compensation practices, and monitoring "exit strategies." They will also likely play a role, alongside the IMF, in the G20's efforts to conduct peer-review evaluations of each other's financial policies starting in 2010. Something to watch for.

Return of growth or govt life support?
Many of the economies of the world officially exited recessions my mid- to late-2009. These stats are always subject to later revision, but the overall point - that things did not get profoundly worse for economic growth - is the take home message. Of course, what's unclear is whether this growth will sustain itself when governments begin to ease off the stimulus measures. Moreover, the focus on overall GDP growth ignores the fact that unemployment rates have skyrocketed in many countries.

Macroimbalances
A running theme throughout the year was the dynamic between the US's efforts to re-balance their chronic deficits with China's efforts to continue export-led growth with an under-valued currency. Pressure on China has been growing throughout the year and will continue into the next.

Public Debt
Really piled up.

Some Losers
American auto-makers (esp. GMAC and Chrysler); traditional newspapers; global trade & Mother Nature (casualties of shifting priorities); Gordon Brown (policies as finance minister came home to roost); the US dollar (losing relative clout to China, maybe); frozen waffles & the Icelandic BigMac.

Some Winners
Gold, Goldman Sachs (God's work is apparently quite lucrative); Gordon Brown (crisis has temporarily breathed new life into premiership); IMF (relevant & better resourced); Ben Bernanke; and crackpot populist economic measures

That Was the Decade That Was: the long view

2010-01-03T13:33:00.004-05:00

In looking back at the past decade, most commentators have forfeited any meaningful narrative in favor of the proverbial 'better luck next time.' But if the following trends are taken in toto, the past decade in the markets looks downright revolutionary:

-The S&P500 fell 24%, its worst performance since the 1930s, FTSE down 7.3%, DJIA down 9.3%, Nikkei down a massive 44% over the past ten years. Contrast that with the major emerging markets: Russia's Micex index hit the moon with an astounding 802% rise, Brazil's Bovespa jumped 301%, India's Sensex rose 249% and the Shanghai Composite closed 140% higher.

-The benchmark Nymex crude oil contract ended the decade up 210%, but the story in between is among the most volatile in memory. Oil closed out 1999 at $25.60 a barrel, hit $147.27 in July 2008 and ended 2009 at $79.36.

-Spot gold closed the decade up 281%, while copper ended 290% higher.

-Two major stories in the currency markets: the dollar's long decline and the euro's rise to viability. The dollar ended the decade down 23.5% on a trade weighted basis, while the euro gained 43% on the dollar.

So what can we extrapolate from the data above? The 'rise of the rest' is the defining trend of the past decade; loose monetary policy contributed to a great capital flight from developed market equities; the dollar's long relative decline has eroded the US' influence internationally and will shape the coming decade as much as any other trend (politically, financially and economically); emerging market industrialization made commodities a really, really good bet; and precious metals retained their mystical aura in uncertain times.

If you ask people in China, India and Brazil for their impressions of the past decade, I suspect you'll get a more positive consensus than 'good riddance.'

Progress

2010-01-01T15:33:00.006-05:00

As usual, The Economist's year-end issue is sweeping and engaging. Its lead article, 'Onwards and Upwards: Why is the modern view of progress so impoverished?' is the paper at its absolute best.

Happy new year.

That Was the Year That Was: Politique

2009-12-31T12:54:00.005-05:00

This was the year that everything was supposed to change. We were told that the greatest financial and economic crisis since the Great Depression would usher in a new paradigm on global markets and authority (look up)...did it? Judging by the top political stories of 2009, not quite:

And then it was two...the G2
For years we have been waiting for the inevitable moment when China would elevate to great-power status and challenge the US for global authority and influence. While the conventional wisdom says that this happened in 2009, the reality is more nuanced. China's role as America's banker and its economic performance are the envy of the world and empowered it with great and growing influence over affairs both local (see: African investment) and global (see: climate change). But it is still years, maybe decades, away from truly rivaling the US on military, economic and political power. It's precarious social order and frothy economic recovery may yet fundamentally undermine the communist party and China's methodical rise on the international stage.

That said, the US-China balance was clearly tilting eastward following the crisis and 2009 was the year that the so-called 'G2' paradigm finally crystallized. The US and China are now the two primary players and their cooperation is essential to progress on almost every major global issue, from trade to climate change.

Exit the old, enter the new economic order...sort of
The crisis would change the relationship between government and markets, reorganize the major economies, elevate the emerging giants and re-regulate financial markets. The G20 talked a big game and editorial boards called for sweeping regulatory reform. Everything would be different the next time around.

Remember those heady days? Crises often bring about transformative change, but the window of opportunity to affect this change is often small. Unfortunately, this window closed quickly in 2009 with little substantive reform enacted either transnationally or within the major economies. In the US, massive government bailouts translated into surprisingly little leverage in the re-regulation of the financial sector. Executives at AIG are using the threat of resignation to extort further pay exemptions from Obama's pay czar. Perverse incentives and too big to fail firms still pervade the system. Record profits have afflicted the financial sector with collective amnesia.

The problem is one of political will and policymakers in the US in particular lacked the courage and purpose to enact real regulatory reform. We need more Paul Volkers and less Timothy Geithners.

Obama- The Tragedy of Great Expectations
What started with such promise and purpose ends the year struggling under the weight of expectations. To be fair, the Obama administration's first year has been marked by notable successes domestically, from the stimulus package to health care to executive orders reversing Bush-era policies on everything from stem cells to government secrecy. His international rhetoric and posture have remarkably transformed the image of the US following eight years of tarnish. His Cairo and Nobel speeches were transcendent.

But many of us are still waiting for 'change we can believe in.' Perhaps the expectations were always too high, setting Obama up for an inevitable fall. Perhaps the challenges facing the US are too great for one government to correct. But I can't help but feel that on issues where he could affect great change, from Afghanistan to financial reform, he has come up short. Domestically, he has been naively committed to the fantasy of bipartisanship in Washington. His trip through Asia was a bust on any measure. The challenges are no less daunting in 2010.

Kicking the Can
Climate change, trade, Iran, financial reform. Big issues, little progress.

Lisbon Treaty
Europe finally got its act together and ratified the Lisbon Treaty, only to appoint two of the most underwhelming candidates on the international scene. The primacy of the nation-state persists in spite of Lisbon.

The Trouble with Elections
Elections in Israel, Iran and Afghanistan all complicated progress on major international issues in 2009. In Iran, the regime faces its most committed and prolonged challenge since the revolution.

Berlusconi
Just kidding!

Nassim Taleb: Messin with my Head

2009-12-30T11:00:00.004-05:00

I hope you have all enjoyed a bit of a holiday in the past week or so - I've been using my break as an opportunity to catch up on some reading. One of the books I have on the go, however, is causing my brain to explode a little bit.

That book is The Black Swan, by Nassim Taleb. I realize that I'm late to this particular party: Taleb's book was published in 2007 and has been widely read and discussed (the book's publisher even took out full-sized ads in the London Underground, a spot usually reserved for bad television ads and the latest Victoria Beckham ghostwritten word vomit). But for anyone else who is behind the curve, I highly recommend this book. Not because you will enjoy it, but because it will make you uncomfortable.

The book's tagline reads "The Impact of the Highly Improbable," but it is much more than a collection of vignettes about unlikely events that have shaped human history. In fact, it is an exploration on the limits of human knowledge and our systematic failures to both interpret past events and predict events of the future. Actually, it's not so much of an exploration but an all-out assault on what it is that we think we know. He's particularly hard on those who claim to be experts in areas of fundamental unpredictability: political scientists, economists, historians, business executives, bureaucrats, risk analysts and just about everyone working in the financial industry (which includes Taleb). Like I said, this book will make you uncomfortable.

I don't agree with all the arguments that Taleb makes in this book. For instance, he distinguishes between the damage caused by forecasting errors made by governments and those of large corporations. Unlike governments, "corporations can go bust as often as they like, thus subsidizing us consumers by transferring their wealth into our pockets.... As individuals, we should love free markets because operators in them can be as incompetent as they wish." Well that's obviously not the case: the recent string of bankruptcies in the financial industry has not transferred wealth into, but out of, our pockets.

Rather than undermining his argument, however, I think the above example serves to reinforce the fundamental point of his book: Taleb has attempted to create a neat distinction, but the reality of the system is much more complex than he realizes at the time of writing. His misreading of history has led him to make an incorrect prediction about the future value of bankruptcies. In other words, he has unintentionally reinforced his own arguments about why we suck at predicting things. (For yet more evidence, see the FAIL list below).

I cannot possibly do justice to this book in a short blog post, so I will merely repeat my earlier recommendation to "read this book." Despite the heavy philosophical content, this is an accessible and easy-to-read (even funny) way to totally mess with your head.

That Was the Year That Was: FAIL list

2009-12-24T00:01:00.011-05:00

As we kick off our look back at 2009, here's a list by Joshua Keating, associate editor at Foreign Policy, of the 10 Worst Predictions for 2009. The predictions are paraphrased below, the comments are my own:

1. Obama to sign energy bill by end of the year- Rahm Emanuel on 19 April (White House chief of staff)
Not even close. Health care, health care, health care.

2. Bernnake to step down after first term, Summers replaces him at Fed- Business Week on 2 January (magazine)
Tough confirmation hearings, but Bernanke enjoys the confidence of the president and is soon to be entering his second term. Far from basking in the glory of a depression averted, Bernanke has been charged with unwinding his extraordinary response to the crisis.

3. Swine Flu to kill hundreds of thousands in the US- Report to the President on US Preparations for the 2009-H1N1 Influenza on 7 August (President's Council of Advisors on Science and Technology)
Um, no. But this was enough to scare me into getting vaccinated.

4. No end in sight to US economic freefall- George Soros on 20 February (billionaire investor and activist)
To be fair, Soros hedged his comments, but the pace of recovery in both the financial markets and real economy has undoubtedly been surprising. The US stimulus package may not have done enough, but it seems to have done just enough to avert catastrophe. That tricky unemployment rate remains...

5. No Afghan surge for Obama, Gen. McChrystal to resign- Charles Krauthammer on 27 September (right-wing columnist/commentator)
Obama succumbed to the COIN camp against, I suspect, his instincts. McChrystal saw the back of Obama's hand following his public intervention into the Afghan surge debate, but in the end got 3/4 of the troops he was looking for.

6. Gordon Brown will 'certainly' step down within three days- Martin Kettle on 5 June (associate editor at The Guardian)
The train wreck that was the Brown premiership reached its inglorious nader over this week in June when the Labour backbench revolt burst into the open with public calls to resign. Somewhat remarkably, Brown fights on (thanks in no small part to Lord Mandy) and has even narrowed the Tory lead in the run-up to likely elections in March.

7. Breakthrough agreement, Zelaya returning to office, democracy lives in Honduras!- Hillary Clinton on 30 October (US secretary of state)
Zelaya has spent quite a bit of time the Brazilian embassy, presiding over nothing but his cowboy hat, and Honduran democracy is shaky at best.

8. Israel will likely strike Iran between US election and Obama's inauguration...Israel will likely strike Iran before end of 2009- John Bolton on 22 June 2008 and 28 July 2009 (former US ambassador to UN and epic moron)
John Bolton calls on Israel to bomb Iran as often as the sun rises. It still hasn't happened. You get the impression that Bolton believes if you wish for something hard enough it will just happen. I really loathe this guy on so many levels.

9. G7 finance ministers have unleashed inflationary hell, world markets to collapse under chaos- Jim Rogers on 10 October 2008 (billionaire investor)
I would argue that entering 2010 deflation remains a bigger risk than inflation in the major economies.

10. China will take over Panama and choke the US via the canal- Rep. Dana Rohrabacher on 7 December 1999 (US representative)
Ten years later and the cargo flows.

Wednesday Readables

2009-12-23T18:00:00.001-05:00

- Prospect gives its list of the 25 most influential intellectuals during the financial crisis

- From the above list, Simon Johnson's The Quiet Coup. Not sure how I missed this one back in May, but it's a good read for those looking for a Big Picture view of the financial crisis and its implications.

- Free Exchange discusses the same WaPo review of the Fed that I tackled below; suggests that Fed is better equipped to deal with inflation than regulation: "It's time to learn a lesson here. An institution that missed a brewing crisis of this magnitude is an institution not set up to detect and prevent a brewing crisis of any magnitude. Something else is needed."

- Underwater robots help reveal history

- LOLFed takes stock of TIME magazine's love affair with Ben Bernanke

- Failure by global leaders to tackle global warming leads to new investment opportunities

Christmas Consumer Price Index 2009

2009-12-23T09:00:00.000-05:00

PNC Wealth Management has calculated this year's Christmas CPI to be $21,465.56. That's up from $21,080.10 last year.

The index, which tracks the total cost of the 78 gifts from the carol "The Twelve Days of Christmas," has been around since 1984. PNC's website lets you play around with some of the historical data to see how much the price of swans-a-swimming, for example, has changed over the years.

This is the kind of valuable information you can impress your friends and family with over the holidays - but maybe only after one-too-many eggnogs.

Afghanistan is HARD (and confusing)

2009-12-23T00:01:00.003-05:00

This is a couple of weeks old, but are you looking for a graphical representation of the cluster**** that is the US counterinsurgency (COIN) strategy in Afghanistan? Good, I have one. Good luck.

Stephen Colbert tackles the COIN challenge below by playing 'Afghandyland.'

The Colbert Report

Mon - Thurs 11:30pm / 10:30c

Obama's Nobel Prize Speech & Afghandyland

www.colbertnation.com

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Economy

Copenhagen III: Blame China

2009-12-22T21:06:00.004-05:00

Last week, I got a little ranty about China's role in torpedoing the climate change talks in Copenhagen. I've thought quite a bit about that post since, wondering if I was perhaps a bit too one-sided in my criticism.

But a first-hand, 'fly-on-the-wall' account by Mark Lynas in The Guardian affirms my suspicions that China was the primary obstacle to an international agreement to fight climate change. In fact, according to Lynas the behavior of the Chinese delegation, particularly the undiplomatic and inexcusable absence of senior officials from the critical talks, was down right Machiavellian. The Chinese strategy was two-fold: kill the deal and embarrass the US president.

It succeeded on the first measure, and time will tell whether Copenhagen will hurt Obama's presidency and global position. But it is clear that on issues from trade to climate change, the delicate US-Sino dance that prevailed during the Bush years has started to unravel amid the global crisis and first year of the Obama presidency. If the new world order is driven by a G-2, this is an ominous sign. China's 'peaceful rise' has quickly morphed into shrewd realpolitik, presaging greater tensions on the international stage between the world's two superpowers.

The political economy of North-South trade (get it?)

2009-12-22T18:06:00.005-05:00

Our friend Patrick Thomas, the UK Embassy in Washington's policy advisor for trade and agriculture, and his colleague Tom Barry, first secretary, economics at the Embassy, have contributed a great guest post to the Wall Street Journal's Real Time Economics blog entitled 'Santa Claus's Trade Infractions.'

According to little Johnny (aged four and three quarters), Santa has a lot of explaining to do before the WTO.

Check it out!

Financial Crisis: Learning the Right Lessons?

2009-12-22T00:01:00.001-05:00

I'm not one to regularly quote from the Washington Post, but it's good to break free from the usual sources every now and again, yes? So here it goes, a WaPo retrospective on the US Fed's shortcomings in the run-up to the recent financial crisis:

The Fed's failure to foresee the crisis or to require adequate safeguards happened in part because it did not understand the risks that banks were taking, according to documents and interviews with more than three dozen current and former government officials, bank executives and regulatory experts.

Well blow me down. I don't think one needs three dozen interviews to figure that one out: it's pretty obvious that the various US financial regulatory bodies didn't see this coming, nor did those in the other major financial centres. However, as Arnold Kling points out, neither did most of the suits at the very banks within which the risks were being taken. I think it's fair to say that it has been a learning experience all around.

But exactly what kind of lessons are we learning from this crisis? It's very important that we learn the right ones. Even if we acknowledge that there was a collective cognitive failure on the part of our regulators, there are a couple of different ways to run with this.

If we're of the mindset that we should see bankers hanging from Blackfriars bridge, or have their heads on pikes or whatever, I don't think the discussion will go very far. Despite the obvious excesses of financial sector, I am still waiting for evidence that performance bonuses to Goldman Sachs employees has been the cause of our financial crisis.

But let's agree that the Fed F'd up. What should we do about this? One option is to use this argument to argue against the re-appointment of Ben Bernanke as Chairman because of his obvious failures to mitigate the crisis. While there is merit in digging up all the mistaken decisions by the Fed in the past decade, scapegoating will not address the problems of tomorrow. John Maynard Keynes is reported to have said: "When the facts change, I change my mind. What do you do, sir?" When the facts changed for Bernanke in late 2008, he also changed his mind. Although late to the party, the Fed's willingness to adapt to the crisis over the last 16 months has been a crucial part of slowing the economy's decline and stimulating what is, to date, modest signs of recovery. (I think Rory agrees) (wait, so does TIME)

But even if we accept that the Fed has learned from some of its past mistakes, this has not addressed the fundamental problem with financial regulation: the regulators don't have the capacity to know everything that's going on. They never will. The people who work at investment banks, hedge funds and the like are too smart and too motivated. There will always be loopholes, and those loopholes will be found. That said, it should still be possible to avoid the kind of crisis that we just experienced, with huge sums of money (your money, my money) being used to prop up the balance sheets of our financial giants. I see at least three possible avenues for the future:

First, concentrate the US regulatory system into fewer bodies. I couldn't find the organizational chart I wanted, but you can get a sense of it from this summary. Compared to many other industrialized countries, this is madness. Having one financial entity regulated by so many different government bodies will leave gaps in coverage. It's hard enough for one government entity to share information with itself - multiplying entities will multiply the problem.

But with a more concentrated financial regulator, the information-gathering problem will not disappear. This is why I find Paul Volcker's vision for the US banking sector to be persuasive. Since we cannot prevent financial innovations and we cannot expect our regulators to understand all the risks associated with them, we should at least prevent our "systemically important" financial institutions from playing with them. The risks and rewards should be realized by firms which are able to fail.

Third, let's beef up the regulatory standards for our core financial industries - the ones we can't afford to see fail. The Basel Committee on Banking Supervision recently released its list of five suggestions for doing just that. This is an excellent place to start the discussion, and efforts to coordination internationally will help address concerns about competitiveness.

------------

I think that it's crucially important to learn the right lessons from this financial crisis and avoid being side-tracked by the promise of a quick fix (think: banking bonus supertaxes or the Tobin tax). From where I'm sitting, one of those key lessons will focus on cognitive limitations - the limited ability of our government officials, regulators, banking execs and individual investors to understand complex realities of the markets they interact with. Once we accept this, we can begin to build buffers against the problems that will inevitably arise.

Now if you'll excuse me, in recognition of my own cognitive limitations, I have a stack of holiday reading to attend to.

A decade in the markets

2009-12-21T21:24:00.002-05:00

The FT has, as usual, fantastic graphs charting the course of different major markets over the past decade.

From the tech bubble to the great credit crunch, this has been a bumpy ride indeed.

Copenhagen II: Blame China

2009-12-18T19:35:00.006-05:00

One final comment on Copenhagen (it's about to get ranty!). As the details trickle out from participants, it is becoming apparent that China was the primary obstacle to a real deal. It snubbed the US on more than one occasion, in rather undiplomatic fashion, over the past 24 hours, sending low-level diplomats to meet Clinton and Obama even though Obama extended his stay in the hopes of reaching a deal with the Chinese. In return, Wen wouldn't even show up for a meeting. This is bad diplomacy and bad news for the US-China relationship. Brazil appears to have also played a particularly unhelpful role.

I must admit that my expectations were low going into Copenhagen, but the outcome is still disappointing. I retained some optimism because for the first time in a decade, a US administration walked into discussions ready to act. Easier said than done, of course. Domestic political constraints limit Obama's hand, and this prevents the US from signing up to legally-binding and substantial emissions cuts. This is a real obstacle to an international agreement.

Yet, everyone knows this, and it wasn't going to be the biggest obstacle to an agreement in Copenhagen. In fact, this is part of the reason that Copenhagen was supposed to be a 'political', and not legal framework. In my opinion the US is no longer the primary obstacle to an international agreement; that dubious distinction now belongs to China, Brazil and India. Particularly China in the wake of their performance in Copenhagen.

Any restrictions on economic growth, which even reasonable climate change activists must admit are a likely short-term byproduct of a best-case agreement, are unacceptable to the Chinese. Nothing can jeopardize their fragile bargain with the Chinese people: political tyranny for economic prosperity. When does this domestic calculation cease to consume the Chinese leadership in international affairs? Further, 'sovereignty' might be the buzz-word of the summit as it seems China's total unwillingness to sign up to any substantive monitoring mechanism is what ultimately doomed their negotiations with the US. China is deeply sensitive to any challenges (real or perceived) to its sovereignty, with perhaps the notable exception of the WTO. But their hardened opposition to even passive, independent monitoring is not just unreasonable but unacceptable for a country that wishes to be treated as a global power and leader. Its diplomatic behavior following Obama's speech was childish.

So here we are.

Friday finale: Failure in Copenhagen

2009-12-18T17:23:00.004-05:00

Despite reaching a 'meaningful' agreement late this evening, world leaders have failed to fulfill their ambitions to reach a comprehensive political framework for reducing greenhouse gas emissions, according to the FT.

Listening to Barack Obama's press conference, it is clear that he is leaving Copenhagen with little optimism. A legally-binding international agreement, with substantial cuts in emissions pledged, and mechanisms in place to formally verify compliance, is a long way off.

Have a nice weekend.

Yegor Gaidar

2009-12-17T14:18:00.006-05:00

Anyone who worries about the direction Russia has taken under Putin will find this post from Leon Aron, director of Russia studies at the American Enterprise Institute, on Yegor Gaidar's death heartbreaking.

The positive aspects of any man's life tend to be accentuated in death, and many of the tributes to Gaidar, like this one, have taken a decidedly rosy perspective on the shock therapy he administered to the Russian economy. The reality is far more complicated and much less positive.

But however flawed that project would ultimately be, imagine the alternative. The historical revisionism of the Putin years, under which the names Gorbachev, Gaidar and Yakovlev became synonymous with humiliation and suffering, must have slowly killed a man like Gaidar, a man whose work was to literally save the Russian people from famine and collapse.

Quick hits and pink picks: transparency can be a tricky concept when the lens is focused on you

2009-12-17T13:18:00.007-05:00

-An enterprising reader of The Guardian has answered the newspaper's call to untangle the complicated web of Tony Blair's finances. Usually I would say that the business of an ex-leader is none of my business, but with Blair the scrutiny would seem appropriate, given his still notionally official role as a Middle East envoy and near-presidency of the EU.

-The FT looks at the retreat of the siloviki under the Medvedev presidency.

-Yegor Gaidar, first finance minister of post-Soviet Russia and one of the architects of the country's transition to a market-based economy, died this week at 53. Gaidar's reforms, legacy and reputation are a complex mix of historic achievement, failure and resentment. The intellectual merits and legacy of the 'shock-therapy' administered by people like Gaidar in Russia or Jeffrey Sachs (for our younger readers, yes, that one) in Poland will be debated in academic and policy circles for generations.

-One of the cultural truisms of the crisis is that wealth is out, modesty is in. The ostentatious displays of the nouveau riche (think: oligarchs and investment bankers) are not only remnants of an era passed, but universally held in bad taste. However, an aspirational lifestyle has been fundamental to the consumer-driven, middle-class wealth-creation of the western world over the past century, and with swelling middle-classes in countries like the US and England due to decades of declining real wages and wealth destruction in the crisis (think houses and mutual funds), symbols of old-money status and wealth should enjoy a renaissance as the masses yearn for a taste of the good life. In an interesting article, The Guardian looks at 'Tory Chic: the return of poshness.'

-The financial impact of Tiger Woods' indiscretions is massive, not just for the golfer, but the game he plays.

“Wake up, gentlemen”

2009-12-16T13:00:00.001-05:00

That was Paul Volcker's message to the Future of Finance Initiative, delivered earlier this week. Responding to what he viewed as timid proposals from the private sector on how to go about their business, Volcker proceeded to lay out what he saw as the key priorities. I can't find a useful way to cut this down, so I will quote it as a whole:

Let me just suggest, if I may, the way that I would go about this. I am not alone in this, and in fact I think that I am probably going to win in the end.
First, let us agree that we have a problem with moral hazard. I do not think that there is any perfect answer in dealing with it, but I would suggest that we can approach an answer by recognizing that elements of finance have always been risky and that's certainly true of the commercial-banking system.
I think we need the commercial banking system for more than automatic teller machines. Commercial banks are still at the heart of the system. In a crisis, everybody runs back to the commercial banks. They, after all, run the payment system. We cannot have this global economy without commercial banks operating an efficient payment system globally as well as nationally. They provide a depository outlet for individuals and businesses, and they are still big credit providers for small and medium-size businesses, but they backstop most of the big borrowers as well. The commercial-paper market is totally dependent on the commercial banking market. They are an essential financial institution that has historically been protected. It has been protected on one side and regulated on the other side.
I think that fundamental is going to remain. People are going to think it is important, it is important, it needs regulation and in extremis it needs protection—deposit insurance, lender of last resort and so forth. I think that it is extraneous to that function that they do hedge funds, equity funds and that they trade in commodities and securities, and a lot of other stuff, which is secondary in terms of direct responsibilities for lenders, borrowers, depositors and all the rest.

There is nothing wrong with any of those activities, but let you nonbank people do it and you can provide fluidity in markets and flexibility. If you fail, you're going to fail, and I am not going to help you, and your stockholders are going to be gone, and your creditors will be at risk, and that is the way that it should be.

How can I be so blithe about making that statement? We need a new institutional arrangement which I believe has a lot of support. We need a resolution facility. What can that resolution facility do? If one of you fails and has systemic risk, then it steps in, takes you over and either liquidates or merges you, but it does not save you. That ought to be a kind of iron cross.

In other words: Old Man Volcker is back and he's handing out detentions to the unruly schoolchildren. This is the kind of ballsy speech that only someone with Volcker's authority and experience could pull off.

I find this vision very compelling. There is no obvious reason why "too big to fail" financial institutions should have the competitive advantage of government guarantees while at the same time being free to dive head-first into the riskiest types of financial tools that may or may not be beneficial to the economy. We've just seen what the downside looks like, and it is ugly.

As Simon Johnson explains, this could well be Volcker's moment. It's true that his vision is glossing over the challenging details that would need to be worked out, but so be it. If Volcker can shift the public consensus in his direction, he will have accomplished a great deal.

Monday Readables

2009-12-14T17:00:00.000-05:00

- "We have not yet achieved self-reinforcing recovery... We are on a government support system, both in the financial markets and in the economy." Paul Volcker is interviewed by Der Speigel.

- The Catholic Church gets all up in Berlusconi's face. The Economist explains.

- The award for healthiest teeth in the OECD goes to the British. The British!?

- The rate of return on cancer research: looks good. Now if only we had some numbers like this for green technology...

The passing of Paul Samuelson

2009-12-13T16:23:00.007-05:00

Paul Samuelson, Nobel Prize-winning economist and giant of the 20th century, has died aged 94.

Samuelson's impact on the economics profession, public policy and education is immeasurable. His Economics was the very first text book that I, and generations of students, read on the dismal science. His Stolper-Samuelson Theorem, theory of public goods and synthesis of Keynesian and neoclassical economics are hugely significant to my intellectual development.

Paul Krugman, a student and colleague of Samuelson, reflects here.

Sovereign Debt Woes: UFO edition

2009-12-13T09:10:00.005-05:00

One of my favourite stories from the past week has been from the United Kingdom's Ministry of Defense: under pressure from Treasury to reign in expenditures, DoD has pulled the plug on their UFO hotline. This drastic measure will save a whopping 50,000 pounds a year.

It's a sad day for skywatchers, alienophiles, crop-pattern-investigators and attention-seeking nutjobs of all stripes. According to the Guardian, this is also a sad day for science. Nobody said recessions were going to be easy.

Copenhagen in 'disarray'

2009-12-08T11:21:00.002-05:00

That's according to The Guardian, after the draft agreement world leaders will be asked to sign next week leaked. Developing countries have reportedly 'reacted furiously' to the so-called 'Danish text.'

You can read it here.

Sovereign debt woes: Fitch downgrades Greece

2009-12-08T11:00:00.003-05:00

Fitch ratings has downgraded Greece to BBB+. See FT Alphaville for their reasoning.

Obama's big climate play

2009-12-07T20:40:00.006-05:00

Everyone knows that the prospect of a binding international agreement to reduce the emission of greenhouse gases rests in part on the potential for ratification by the US Congress. The failure to ratify Kyoto gave the Bush administration the opening to pull out of the agreement, while the inability of the Obama administration to get a cap-and-trade bill through a Senate absorbed by the health care debate is a big reason why a 'political agreement' is being debated today in Copenhagen.

In fact, given the political capital expended by Obama in the health care fight, and heading into an election year dogged by stubbornly high unemployment, its unlikely that Senate Democrats will risk being labeled 'job-killers' in tight reelection battles.

But what if Obama could take the global lead on climate change by skirting the US Congress all together? What if he was unable to get an international agreement ratified after the Bonn summit next year, but implemented a regulatory policy that in practice reduced emissions just as much? Cap-and-trade is needed, but saving the planet is necessary, and the Obama administration might have found a way to do its a part in achieving this goal.

Today, the Environmental Protection Agency (EPA), an executive branch agency under the authority of the US president, issued an historic finding that carbon-dioxide emissions are a 'public threat,' which paves the way for the EPA to directly regulate emissions under the Clean Air Act. This would require neither congressional approval nor enforcement, and the finding follows the 2007 Supreme Court ruling that greenhouse gases fit the Clean Air Act's definition of air pollutants, which means that a legal challenge to the EPA's authority is all but impossible. The EPA says it will now issue technical guidelines and work with the states to implement them.

This is a really big deal in the United States, and strengthens Obama's hand in Copenhagen. For the first time in over a decade, a US president can credibly claim that he is actively fighting the emission of greenhouse gases. And until the political will forms in Congress to ratify an international, legally-binding agreement, the US president can do the dirty work of cleaning up the environment.

Who knew that the biggest headline on the first day of the conference would come out of Washington and not Copenhagen?

The call of history: Copenhagen Climate Change Conference

2009-12-07T00:08:00.006-05:00

The Copenhagen Climate Change Conference opens today in the Danish capital, with expectations raised after progress from the US and China in announcing hard targets and the revelation that US President Obama will now attend the final days of the summit, a sign the White House believes a real political framework is achievable. We will do our best to cover the developments over the next two weeks and start by highlighting a remarkable editorial run by 56 of the world's leading newspapers this morning in support of real reform, of inspired collective action, of 'the better angels of our nature.'

You can find it in The Guardian here.

I can only speak for myself, but I endorse their message.