The Zero-Conditionality IMF Loan

♠ Posted by Emmanuel in Bretton Woods Twins,Credit Crisis at 10/30/2008 01:06:00 PM

The IMF has just come out with a new lending facility designed for countries that have a "strong track record" but are nonetheless experiencing balance-of-payments difficulties. Again, the IMF is presenting itself as adjusting with the times with this facility by hastening disbursement and removing conditionalities altogether for country borrowers that can avail of the so-called Short-Term Liquidity Facility (SLF). What remains to be seen is just how many countries qualify for this new facility to make it a usable one in these uncertain times. From the IMF website:

The IMF said it will create a new short-term lending facility to channel funds quickly to emerging markets that have a strong track record, but that need rapid help during the current financial crisis to get them through temporary liquidity problems.

In a press announcement, the IMF said the Short-Term Liquidity Facility (SLF) is designed to help emerging market countries with a track record of sound policies address the fallout from the crisis. The new facility, approved by the IMF's Executive Board on October 28, comes with no conditions attached once a loan has been approved and offers large upfront financing to help countries restore confidence and combat financial contagion.

"Exceptional times call for an exceptional response," said IMF Managing Director Dominique Strauss-Kahn. "The Fund is responding quickly and flexibly to requests for financing. We are offering some countries substantial resources, with conditions based only on measures absolutely necessary to get past the crisis and to restore a viable external position," he said.

Until recently, emerging markets were one of the few bright spots left in a world economy hit by massive deleveraging, failing banks, and corporate profit warnings. But now, the crisis is spreading beyond the advanced economies where it originated, with emerging markets all over the world suffering from the squeeze in global financial markets. The IMF has already reached outline financing agreements with Iceland, Hungary, and Ukraine, and is in advanced talks with several other countries.

The SLF will allow the IMF to help its members at a critical time. "Even countries that have excellent track records of implementing strong macroeconomic policies have been caught up in the global financial market crisis. They need support, and the IMF is ready to give it," Strauss-Kahn said.

"The SLF will support the authorities' efforts to reduce the impact of the crisis. Approval of a request for support under the SLF will help members fortify defenses against temporary capital account outflows, boost confidence and provide needed policy space," he said.

Despite the current surge in demand for IMF resources, there is a growing recognition that the Fund's traditional facilities may not be the optimal means of addressing short-term balance of payments pressures in every case.

"While existing Fund loan facilities offer flexibility, they are fundamentally used for countries that require both financing and policy adjustment [read: "structural adjustment"], and not for countries that despite strong initial macroeconomic positions and policies are facing short-term liquidity pressures. This facility addresses that gap in the Fund's toolkit of financial support," Strauss-Kahn said.

IMF First Deputy Managing Director John Lipsky told an October 29 news conference in Washington that the SLF "is designed to be easy to use and very rapid for those countries where use is appropriate."

The unique features of the SLF will address the needs of emerging market countries more directly than would a traditional IMF stand-by arrangement:

• Purpose. Provide large, upfront, quick-disbursing, short-term financing to help countries with strong policies and a good track record address temporary liquidity problems in capital markets.
• Eligibility. Countries with a good track record of sound policies, access to capital markets and sustainable debt burdens may qualify (the IMF's standard debt sustainability analysis should indicate a high probability that both public and private debt will remain sustainable). Policies should have been assessed very positively by the IMF's most recent country assessment.
• Conditions. Financing is made available without the standard phasing and loan conditions of more traditional IMF arrangements. However, borrowers are expected to certify that they are committed to maintaining strong macroeconomic policies.
• Size of loan. Disbursement of IMF resources can be up to 500 percent of quota, with a three month maturity. Eligible countries are allowed to draw up to three times during a 12-month period.

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Currency Swapping: Hotter Than Wife Swapping?

♠ Posted by Emmanuel in Credit Crisis,Hegemony at 10/30/2008 10:56:00 AM

OK, so the post title is idiotic (but catchy!) I can explain the former, though the latter is beyond the scope of this blog's coverage. Anyway, to no one's real surprise, the US Fed has cut the federal funds rate to 1.00%. Skeptics like myself naturally ask, "If several economic commentators attribute the housing crisis to Greenspan cutting this rate to 1.00% and keeping it there for a while after the Internet bubble burst, how can this action help? You can of course say that, having been burned bigtime before, banks will be more circumspect this time around. I certainly hope so, but there is always the possibility that as money flows more freely once again, there will be another bubble in the offing: tech stocks...real estate...heaven knows what next.

While we await the results of this latest Fed reflation play, something that seems to have brought more immediate benefits is the Federal Reserve establishing $30B swap lines with the likes of Brazil, Mexico, South Korea, and Singapore. There are surely political-economic reasons for choosing these countries; While it's true that Mexico and South Korea have had their share of troubles in recent times, Brazil and Singapore are on more solid footing relatively speaking. Dave Altig at the (newly resurrected!) Macroblog has a neat explanation of how these currency swaps work. Basically, a country having trouble obtaining FX funding swaps the domestic currency for a foreign currency at the prevailing exchange rate to help tide over its current FX funding needs. At an agreed date, the process is reversed, with the future exchange rate determined by the interest rate differential between both currencies.

Brad Setser has already spoken of how beneficial these swap lines have been to European countries, enabling them to avoid funding problems currently afflicting many developing countries despite the former having problems with their financial institutions that are, if anything, larger than those of many LDCs'. To the FRB press release, then:

Today, the Federal Reserve, the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies.

In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $30 billion each by the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore.

These reciprocal currency arrangements have been authorized through April 30, 2009. The FOMC previously authorized temporary reciprocal currency arrangements with ten other central banks: the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank.

Separately, the Federal Reserve welcomes the announcement today by the International Monetary Fund of the establishment of the Short-Term Liquidity Facility, which is designed to help member countries that are facing temporary liquidity problems in the global capital markets. The Federal Reserve is supportive of the IMF's role in helping countries address and resolve their ongoing economic and financial difficulties.

One of the principal discussions in IPE concerns hegemony, or if a single country still maintains the "rules of the game" which others must observe whether they like them or not (see the ever-useful "What is IPE?") It is of course no surprise that I am one of the naysayers in the argument over whether the US still maintains hegemony. OTOH, those of a different opinion that the US maintains this stature can reason that, by extending swap lines, the US can singlehandedly improve the economic fortunes of other countries. Certainly, the aforementioned countries with newly-established swap lines are now faring better. Here is news from South Korea:

South Korea's stock index rose by a record and the won surged after the central bank signed a $30 billion currency swap with the Federal Reserve and President Lee Myung Bak said he's ready to take more steps to aid the economy.

The swap line is part of the Federal Reserve's efforts to alleviate a credit freeze in emerging nations, with the U.S. also providing dollars to Singapore, Brazil and Mexico. Korean lawmakers today approved the government's $100 billion guarantee of bank debts to help lenders struggling to access foreign funds.

Korea's currency jumped 14 percent, the most in a decade, as policy makers' actions allayed concern the nation was headed for a repeat of 1997, when it needed an International Monetary Fund bailout to help repay offshore debt. The Fed's dollar provisions are part of increased global endeavors to thaw money markets, with Hong Kong and Taiwan lowering interest rates today following cuts yesterday by the U.S. and China.

``This is the strongest measure so far,'' said Chang In Whan, chief executive officer of KTB Asset Management Co. in Seoul, which manages the equivalent of $4.3 billion in equities. The Fed deal ``will create a buffer for Korea's foreign- currency supply and improve foreigners' confidence in the country,'' Chang said. ``It shows the Fed won't just sit back and watch overseas markets go down.''

Default protection costs on South Korean government debt fell by the most in more than four years. Five-year credit- default contracts on the country's external debt fell 130 basis points to 435, according to a Bloomberg survey of three dealers.

And here is news from Singapore:

Singapore stocks led the surge in Southeast Asian equity markets on Thursday, with financials in the spotlight, as investors cheered the Federal Reserve's rate cut and a slew of government efforts to boost bank liquidity.

The benchmark Straits Times Index closed 7.8 percent higher at 1,801.91, with a heavy 1.84 billion shares changing hands.

It will be interesting to see what happens in Brazil and Mexico when their markets open.

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Yesterday Once More: Indonesian Rupiah Besieged

♠ Posted by Emmanuel in Credit Crisis,Southeast Asia at 10/28/2008 09:03:00 AM

I sometimes despair that we are revisiting the dark days of the Asian financial contagion. South Korea's plight has already been discussed [1, 2]; now let us turn our attention to Indonesia. Though Indonesia's fundamentals are reckoned to be much sounder this time around, there are several things roiling the country at the current time:

The default by the Netherlands-based Indonesische Overzeese Bank (Indover) had prompted some investors to ignore Indonesia’s relatively healthy economic fundamentals amid concerns that south-east Asia’s largest economy might be at risk of a sovereign default.

Credit default swap spreads over US Treasuries, regarded as a key indicator of a nation’s sovereign risk, have ballooned to 1,245 basis points, more than five times higher than a few months ago and several hundred basis points higher than the spreads for Vietnam and the Philippines.

Increasing liquidity pressures in the banking sector, pressure on government bonds, high interest rates, a prolonged billion-dollar solvency crisis in the business empire of Aburizal Bakrie, the welfare minister, and rumours of disunity in the government are exacerbating pressures driven largely by negative sentiment towards emerging markets.

However, the government has adopted a proactive approach to increasing liquidity in the banking sector and the country’s economy remains fundamentally robust. The country’s debt to gross domestic product ratio is among the lowest in the region at 28 per cent, while the banking sector remains well capitalised.

“Indonesia’s economy is in a lot better shape than 11 years ago [during the Asian financial crisis], said Fauzi Ichsan, an economist with Standard Chartered in Jakarta. “The question is how strong will it be in standing up to the deterioration of the global economy.”

In light of these difficulties, Indonesian President Susilo Bambang Yudhoyono (SBY) finds himself in the same position as any number of other LDC heads at the current time: pressed to find solutions in keeping bad times from getting worse. He understands that defending the rupiah is a reserve-depleting strategem that probably won't work in the long run. Then again, alternatives are limited. Hopefully, the Carpenters song Indonesians will be playing is "Only Yesterday" and not "Yesterday Once More." Bloomberg hints at plans in the offing to quell the forces battering Indonesia:

Indonesia's President Susilo Bambang Yudhoyono said the government plans to announce a policy tonight to boost the rupiah after the currency plunged as much as 29 percent in the past month. The rupiah fell as much as 8.7 percent today before recovering to trade down 0.9 percent at 11,050 against the dollar, the lowest since July 2001...

``The most effective measure would be'' the central bank selling dollars, said Aldian Taloputra, an economist at PT Mandiri Sekuritas in Jakarta. ``But this problem is of global scale, so what the government could do is to minimize the impact of the outflow...''

``We cannot always solve this through intervention,'' Yudhoyono told reporters in Jakarta today, referring to the central bank buying the local currency. ``If the decline is because of fundamental reasons, what we must solve is the fundamental reasons.''

The Jakarta Composite index has declined 59 percent this year. Government bonds have dropped 17 percent, according to data from HSBC Holdings Plc, the worst among 10 Asian nations. Overseas holding of bonds have declined 11 percent from a record in August.

The rupiah is declining even as the government said it expects the budget deficit to narrow to 1 percent of gross domestic product, from its previous forecast of 1.3 percent, on declining oil prices. Southeast Asia's biggest economy is forecast by the government to expand between 5.5 percent and 6 percent next year.

The government is also considering lowering subsidized fuel prices after crude oil futures fell to the lowest since May 2007, with the contract for December delivery dropping 93 cents to close at $63.22 a barrel in New York yesterday.

Indonesia's central bank had $57.1 billion of reserves as of Sept. 26. The nation paid back its last loan from the IMF in 2005, four years before schedule. The Washington-based institution had arranged a $25 billion package between 1997 and 2003 to help rescue Indonesia's banking system and rehabilitate the economy by restructuring private and government debt.

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Sachs's 7 Steps to Avoid Global Recession

♠ Posted by Emmanuel in Credit Crisis at 10/28/2008 08:49:00 AM

I hereby dub this week "Big Name Economists Try to Save the World" week. Hot on the heels of Joseph Stiglitz offering a five-point plan to fix the global financial crisis comes Jeffrey Sachs's own recipe for avoiding a global recession. Like Stiglitz, Sachs offers a rather Keynesian recipe. Notable wrinkles here are "pro-poor" measures such as low conditionality loans from the IMF and asking presumably loaded Middle Eastern countries to invest in other emerging markets. As if it weren't apparent before, we're in this together now. From the Financial Times:

Any co-ordinated expansion should include the following actions. First, the US Federal Reserve, the European Central Bank and the Bank of Japan should extend swap lines to all main emerging markets, including Brazil, Hungary, Poland and Turkey, to prevent a drain of reserves. Second, the International Monetary Fund should extend low-conditionality loans to all countries that request it, starting with Pakistan. Third, the US and European central banks and bank regulators should work with their big banks to discourage them from abruptly withdrawing credit lines from overseas operations. Spain has a role to play with its banks in Latin America.

Fourth, China, Japan and South Korea should undertake a co-ordinated macroeconomic expansion. In China, this would mean raising spending on public housing and infrastructure. In Japan, this would mean a boost in infrastructure but also in loans to developing nations in Asia and Africa to finance projects built by Japanese and local companies. Development financing can be a powerful macroeonomic stabiliser. China, Japan and South Korea should work with other regional central banks to bolster expansionary policies backed by government-to-government loans.

Fifth, the Middle East, flush with cash, should fund investment projects in emerging markets and low-income countries. Moreover, it should keep up domestic spending despite a fall in oil prices. Indeed, the faster a global macroeconomic expansion is in place the sooner oil prices will recover.

Sixth, the US and Europe should expand export credits for low and ­middle-income developing countries, not only to meet their unfulfilled aid promises but also as a counter-cyclical stimulus. It would be a tragedy for big infrastructure companies to suffer when the developing world is crying out for infrastructure investment.

Finally, there is scope for expansionary fiscal policy in the US and Europe, despite large budget deficits. The US expansion should focus on infrastructure and transfers to cash-strapped state governments, not tax cuts. This package will not stop a recession in the US and parts of Europe, but could stop a recession in Asia and the developing countries. At the least it would put a floor on the global contraction that is rapidly gaining strength.

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Thriller: Will G7 Launch Coordinated Yen Effort?

♠ Posted by Emmanuel in Credit Crisis,Japan at 10/27/2008 09:45:00 AM

The G7 has just made a very terse statement which goes like this:

We reaffirm our shared interest in a strong and stable international financial system. We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. We continue to monitor markets closely, and cooperate as appropriate.

The mighty yen is attributable in part to the continuing unwinding of the carry trade. Given the low interest rates on yen borrowing that have existed for quite some time to combat domestic deflation, many speculators have used the yen as funding currency to obtain higher yielding ones such as the Australian and New Zealand dollars, pocketing the interest rate differential. With risk aversion setting in, the carry trade is going the way of the dodo. The super-strong yen is hurting the prospects of Japan's export industries, and this is now causing further concern for G7 officials. From Reuters:

The Group of Seven warned on Monday the surging yen posed a threat to financial and economic stability, the latest coordinated effort by the world's richest nations to curb the worst financial crisis in 80 years...Japan was in focus with a brief G7 statement singling out the yen, fanning speculation of the first Bank of Japan currency intervention in four years...

The yen's rapid 12 percent ascent against the dollar has threatened Japanese exports as the world's second-largest economy lurches toward recession...The dollar, however, is rising against major currencies, except for the yen, so there was some skepticism about whether any coordinated action on the economy would be forthcoming.

Meanwhile, three of Japan's top lenders -- Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group -- were said by Japan's media to be looking to raise cash to offset share losses...Prime Minister Taro Aso said after an emergency meeting the government would expand a scheme that allows banks access to public funds and tighten rules on short-selling shares.

Will (or can) the G7 get together and launch a Plaza Accord-style joint agreement to weaken the yen? Or, will Japan try to go it alone and intervene for the first time in four years? Lest we forget, it has the world's second largest pile of reserves at a trillion plus dollars. Then again, intervening may be a drop in the bucket in this day and age. It will be interesting to watch, although the expected size of any effective effort may preclude one from being launched. Here are some other comments to consider collected again by Reuters:

- "The G7 statement showed the group's willingness to stabilise foreign exchange rates, particularly to curb excessive volatility in yen moves, with an eye on a possible joint currency intervention," former Bank of Japan official Eiji Hirano.

- "Given the panicky and irrational movements of the yen of late, the Japanese authorities may conduct intervention independently," - Kazuyuki Kato, Mizuho Trust & Banking.

- "Launching intervention independently is like a drop in the bucket, and like fighting against the whole world," Ryohei Muramatsu, Commerzbank, Tokyo.

Bloomberg chips in a contrary quotation from "Mr. Yen" himself, Eisuke Sakakibara:

``Issuing such a statement is a sign of failure to intervene,'' said Eisuke Sakakibara, a professor at Tokyo's Waseda University who was the Finance Ministry's top currency official from 1997 to 1999. ``The Japanese government may have consulted with their counterparts in the EU and the U.S. and they couldn't persuade them to intervene.''

Certainly, things are getting really bad in Japan with the Nikkei reaching a twenty-six year low at 7,162.90. Bloomberg adds that the Dow Jones was at 965.97 back then and Michael Jackson's Thriller wasn't even released yet (yes, it is a milestone of sorts). The lyrics of the title song are oddly appropriate for Japan with its current situation: You're fighting for your life inside a killer, thriller tonight...

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Ukraine Reaches $16.5B IMF Deal; Hungary Awaits

♠ Posted by Emmanuel in Credit Crisis,Europe at 10/27/2008 09:31:00 AM

Dear readers, I hope you visit this blog in the belief that I get a reasonable number of things right. Before many did, I called for Iceland to approach the IMF. Here's further proof: I was correct in believing that Ukraine would beat Hungary to the IMF's doorstep, reasoning that the latter would last longer due to its recourse to EU funding as a freshly minted member. It now transpires that the IMF has announced $16.5B worth of lending to Ukraine, with Hungary waiting in the wings:

The IMF said it has reached a tentative agreement with Ukraine to lend the eastern European country $16.5 billion to help it combat a series of economic problems tied to the international financial turmoil and announced broad agreement with Hungary on a set of policies designed to bolster near-term stability...

The IMF is moving quickly to help emerging markets battered by fallout from global financial turmoil and the sharp slowdown in the economies of advanced industrialized countries. It is in discussions with several other countries about possible new lending programs. The 185-member institution has more than $200 billion of loanable funds and can draw on additional resources through two standing borrowing arrangements with groups of IMF member countries.

On October 25, a 43-nation conference of Asian and European nations issued a statement calling for new rules to guide the global economy following the financial crisis triggered initially by the subprime meltdown in the United States. The Asia-Europe Meeting in Beijing, China, called on the IMF to take a leading role to aid crisis-hit countries. "Leaders agreed that IMF should play a critical role in assisting countries seriously affected by the crisis, upon their request," the statement said.

IMF Managing Director Dominique Strauss-Kahn said an IMF staff mission and the Ukraine authorities had reached agreement, subject to approval by IMF Management and the Executive Board, on an economic program supported by a $16.5 billion loan under a 24-month Stand-By Arrangement. Consideration by the Board would follow approval of legislative changes to Ukraine's bank resolution program.

"Ukraine has developed a comprehensive policy package designed to help the country meet the balance of payments needs created by the collapse of steel prices, and the global financial turmoil and related difficulties in Ukraine's financial system. The authorities' program is intended to support Ukraine's return to economic and financial stability, by addressing financial sector liquidity and solvency problems, by smoothing the adjustment to large external shocks and by reducing inflation," Strauss-Kahn said. "At the same time, it will guard against a deep output decline by insulating household and corporations to the extent possible."

"The IMF is moving expeditiously to help Ukraine, and this program is focused on the essential upfront measures needed to maintain confidence and economic and financial stability. The strength of the program justifies the high level of access, equivalent to 800 percent of Ukraine's quota in the Fund," Strauss-Kahn added.

On Hungary, the IMF said that an IMF staff mission and the Hungarian authorities, in close consultation with the European Union (EU), have reached broad agreement on a set of policies that will bolster the Hungarian economy's near-term stability and improve its long-term growth potential. The authorities' program will ensure fiscal sustainability and strengthen the financial sector.

"A substantial financing package in support of these strong policies will be announced when the program is finalized in the next few days. Participants will include the IMF, the EU, and some individual European governments, together with regional and other multilateral institutions," Strauss-Kahn noted.

"With Hungary's commitment to strengthened economic policies, we expect that banks and other financial institutions operating in the country will continue to provide adequate financing. "The Fund's assistance, in the form of a Stand-By Arrangement, will be considered by the IMF's Executive Board for approval under the Fund's expedited procedures. The policies Hungary envisages justify an exceptional level of access to Fund resources," Strauss-Kahn added...

Strauss-Kahn, who helped spearhead the international response to the global financial turmoil during the IMF-World Bank Annual Meetings in Washington on October 10-13, has emphasized the IMF's readiness to lend quickly to member countries that need help during the ongoing crisis through its emergency financing procedures...

What will be interesting to watch is if famed IMF conditionalities will be lessened this time around as promised by Dominique Strauss-Kahn. With the IMF standing accused of, among other things, causing thousands of tuberculosis fatalities in Eastern Europe post-Soviet era, this is certainly a sensitive issue. On this, the Economist adds:

In part, their reluctance is a sign of the stigma of an IMF bail-out. The delay can cost valuable time while countries scramble to find other sources of help. Governments also worry about the damaging domestic political fallout of being forced to accept tough conditions as part of a rescue package. Critics have argued that the IMF is overly hung up on conditionality—although, in countries like Pakistan and Ukraine, which have enormous deficits, the need for conditions is clear. More generally, however, the fund needs to be flexible and it has indeed rethought its approach in recent years. It now aims to impose policy prescriptions only when absolutely critical to a programme’s success. Details emerging from the talks with Iceland suggest these guidelines are being followed: there appear to be no punitive strings attached. That will help the IMF dispel concerns that it is too rigid in its ideology.

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Stiglitz's 5 Step Fix for Financial Crisis

♠ Posted by Emmanuel in Credit Crisis at 10/27/2008 08:54:00 AM

Nobel Laureate Joseph Stiglitz has come up with five items on his "to do" list in order to fix the current financial crisis. While most of these prescriptions concern American policymaking, we'll cut him slack as it is a TIME article. Never let it be said that Stiglitz fails to think big. The Economist has faulted him in the past for prescribing remedies that are, if anything else, too ambitious. Here, I would like have liked more discussion from Stiglitz about how steps 2 and 3 are going to be funded. After all, he is an economist, and "there's no such thing as a free lunch" remains operative. In step 5, he calls for a new global regulator. Here I have two questions. First, why can't we work with the current set of institutions like the Bretton Woods twins, the Bank of International Settlements, and so on? Second, why does he cite the French as inspirational in promoting new regulatory regimes when they are self-serving more often than not?

1 Recapitalize banks. With all the losses, banks have insufficient equity. Banks will have a hard time raising this equity under current circumstances. The government needs to provide equity. In return, it should have voting stakes in the banks it helps. But equity injections also bail out bondholders. Right now the market is discounting these bonds, saying there is a high probability of default. There needs to be a forced conversion of this debt to equity. If this is done, the amount of government assistance that will be required will be much reduced.

It's good news that Treasury Secretary Paulson seems to finally realize that his original proposal of buying what he euphemistically called distressed assets was flawed. That Secretary Paulson took so long to figure this out is worrying. He was so bound by the idea of a free-market solution that he was unable to accept what economists of all stripes were telling him: that he needed to recapitalize the banks and provide new money to make up for the losses they incurred on their bad loans.

The Administration is now doing this, but three questions are raised: Was it a fair deal to the taxpayer? The answer to that seems fairly clear: taxpayers got a raw deal, evident by comparing the terms of Warren Buffet's injection of $5 billion into Goldman Sachs, and the terms extracted by the Administration. Second, is there enough oversight and restrictions to make sure that the bad practices of the past do not recur and that new lending does occur? Again, comparing the terms demanded by the U.K. and by the U.S. Treasury, we got the short end of the stick. For instance, banks can continue to pay out money to shareholders, as the government pours money in. Thirdly, is it enough money? The banks are so nontransparent that no one can fully answer the question, but what we do know is that the gaps in the balance sheet are likely to get bigger. That is because too little is being done about the underlying problem.

2 Stem the tide of foreclosures. The original Paulson plan is like a massive blood transfusion to a patient with severe internal hemorrhaging. We won't save the patient if we don't do something about the foreclosures. Even after congressional revisions, too little is being done. We need to help people stay in their homes, by converting the mortgage-interest and property-tax deductions into cashable tax credits; by reforming bankruptcy laws to allow expedited restructuring, which would bring down the value of the mortgage when the price of the house is below that of the mortgage; and even government lending, taking advantage of the government's lower cost of funds and passing the savings on to poor and middle-income homeowners.

3 Pass a stimulus that works. Helping Wall Street and stopping the foreclosures are only part of the solution. The U.S. economy is headed for a serious recession and needs a big stimulus. We need increased unemployment insurance; if states and localities are not helped, they will have to reduce expenditures as their tax revenues plummet, and their reduced spending will lead to a contraction of the economy. But to kick-start the economy, Washington must make investments in the future. Hurricane Katrina and the collapse of the bridge in Minneapolis were grim reminders of how decrepit our infrastructure has become. Investments in infrastructure and technology will stimulate the economy in the short run and enhance growth in the long run.

4 Restore confidence through regulatory reform. Underlying the problems are banks' bad decisions and regulatory failures. These must be addressed if confidence in our financial system is to be restored. Corporate-governance structures that lead to flawed incentive structures designed to generously reward CEOs should be changed and so should many of the incentive systems themselves. It is not just the level of compensation; it is also the form — nontransparent stock options that provide incentives for bad accounting to bloat up reported returns.

5 Create an effective multilateral agency. As the global economy becomes more interconnected, we need better global oversight. It is unimaginable that America's financial market could function effectively if we had to rely on 50 separate state regulators. But we are trying to do essentially that at the global level.

The recent crisis provides an example of the dangers: as some foreign governments provided blanket guarantees for their deposits, money started to move to what looked like safe havens. Other countries had to respond. A few European governments have been far more thoughtful than the U.S. in figuring out what needs to be done. Even before the crisis turned global, French President Nicolas Sarkozy, in his address to the U.N. last month, called for a world summit to lay the foundations for more state regulation to replace the current laissez-faire approach. We may be at a new "Bretton Woods moment." As the world emerged from the Great Depression and World War II, it realized there was need for a new global economic order. It lasted more than 60 years. That it was not well adapted for the new world of globalization has been clear for a long time. Now, as the world emerges from the Cold War and the Great Financial Crisis, it will need to construct a new global economic order for the 21st century, and that will include a new global regulatory agency.

This crisis may have taught us that unfettered markets are risky. It should also have taught us that unilateralism can't work in a world of economic interdependence.

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IMF Twofer: $2.1B for Iceland, Strauss-Kahn Cleared

♠ Posted by Emmanuel in Bretton Woods Twins,Credit Crisis at 10/26/2008 07:32:00 AM

In case you missed them, here's a short take on two stories which have been featured on this blog. First, as predicted so many days ago, Iceland has reached an agreement with the IMF functioning as lender of last resort. From the IMF press release:

The IMF announced an initial agreement with Iceland on a $2.1 billion two-year loan to support an economic recovery program to help the island restore confidence in its banking system and stabilize its currency.

Following review by the IMF's management, the agreement could be presented to the IMF Executive Board for approval in early November. Iceland would be able to draw $833 million immediately after Board approval.

"Iceland has put together an ambitious economic program, which aims to restore confidence to the banking system, to stabilize the krona through strong macroeconomic policies, and to help the country achieve medium-term fiscal consolidation following the collapse of its banking system," said IMF Managing Director Dominique Strauss-Kahn. "I believe these strong policies justify the high level of access to Fund resources—equivalent to 1,190 percent of Iceland's quota in the IMF—and deserve the support of the international community.

"The authorities' program is focused on the essential upfront measures needed to restore confidence and economic and financial stability. The overarching goal is to support Iceland's effort to adjust to the economic crisis in a more orderly and less painful way," Strauss-Kahn said.

Meanwhile, the earlier furore over IMF Managing Director Dominique Strauss-Kahn having an affair with an IMF staffer should be quelled somewhat by the findings of an Executive Board inquiry that he did not abuse his authority. What remains to be seen is if this episode undermines Strauss-Kahn further down the road. Will he still command respect from IMF staff in particular and the wider global governance community in general?

Based on the facts established by the external counsel's report, and the advice provided by the General Counsel and the Ethics Officer regarding the applicable standards of conduct, the Board has concluded that there was no harassment, favoritism, or any other abuse of authority by the Managing Director.

Nevertheless, the Executive Board noted that the incident was regrettable and reflected a serious error of judgment on the part of the Managing Director, as he has acknowledged and for which he has apologized. The Executive Board stressed that the personal conduct of the Managing Director sets an important tone for the institution and, as such, must be beyond reproach at all times.

The Executive Board took note of the concluding observations by the external counsel with respect to best practices, and will take them into account in the work underway in the Fund to review the standards of conduct applicable to the Managing Director, the staff, and the members of the Executive Board.

The Board would like to thank all those who have cooperated with this inquiry. It considers that this matter is now closed, and looks forward to continuing to work with the Managing Director and staff on the daunting challenges facing the membership.

Errant finance and errant romance--there is a strange congruity at work here aside from the obvious alliterative one.

UPDATE: Also see TIME discussing the fallout from the affair from the standpoint of Europeans wishing to push through changes at the IMF--especially Sarkozy:

But many leaders-particularly French President Nicolas Sarkozy, and British Prime Minister Gordon Brown-want to go beyond that activity and place the IMF at the center of a reformed, unified, and better-regulated global finance system. Sarkozy has gone so far as to call for the "moralization of finance markets" and "re-foundation of capitalism". Though the most rabid adepts of laissez-faire systems like the U.S. are expected to rebuff such efforts to impose international strictures, Strauss-Kahn's profile as a respected economist and market-friendly leftist leaves him in a rare spot: The head of an international agency about to extend its powers that political and business leaders on both sides of the Atlantic and Asia feel they can deal with.

That credibility, however, seriously suffered from the uproar over Strauss-Kahn's affair. That will leave him with the difficult challenge of taking up the leading role many global politicians now call for the IMF to assume, even as many of his own staffers-particularly women-continue to regard Strauss-Kahn with resentment and disdain. Proving his reformist talents in a time of crisis as he also demonstrates unimpeachably monogamous behavior will not only be vital for Strauss-Kahn to up the IMF's role in a re-regulated international finance system; it may also be essential to his hopes to win the Socialist candidacy to challenge Sarkozy for the Elysee in 2012.

"The risk for Strauss-Kahn is that this thing may be dragged out again as campaigning starts to raise questions about his responsibility and stability," says Laurent Joffrin, editor of the left-leaning daily Liberation. That threat is especially true given Strauss-Kahn's long-standing reputation in France as a man with formidable and proven powers of seduction.

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Did the IMF Cause TB Deaths in Eastern Europe?

♠ Posted by Emmanuel in Bretton Woods Twins,Health at 10/25/2008 03:26:00 PM

This post is a timely one for very unfortunate reasons. As you probably know, Hungary, Ukraine, and Belarus have entered discussions with the IMF for lender of last resort funding. One of the points the IMF is emphasizing with this round of crises is that it will be sparing with the use of politically unpopular conditionalities. (I hope so.) Think of these conditionalities as similar to loan covenants. For instance, you may lend money to an errant relative provided that he cuts spending on alcohol and looks for gainful employment. Like other lenders, the IMF is interested in getting paid back. Accordingly, it has used conditionalities that it believes are conducive to placing a borrowing country in a position to make repayments and improve its financial outlook.

Unlike many other lenders, however, the IMF's status as lender of last resort allows it further discretion than most over a country's economic policies. Among other things, conditionalities have included targets for budget deficits, current account deficits, and inflation. A common assertion made by (usually left-leaning) critics of the IMF is that its conditionalities include strict limits on national spending that have resulted in cuts in health and education expenditures. Insofar as these cuts have resulted in adverse social effects, the IMF is implicated.

Something that recently caught my attention was an academic study concerning how IMF lending during the post-Soviet era is said to have resulted in increased difficulties with tuberculosis in Eastern European countries through the mechanism described above. The chart to the left is taken from this study of Eastern European countries. The IMF has famously been faulted for exacerbating crises by ignoring the social effects of its policies--policies which may have instead worsened matters via instability-inducing social dislocations. If true, this study would serve as more ammunition for the IMF's legion of critics (admittedly including myself on occasion) at a time when it is about to swing into motion in a big way.

The IMF offers many points of contention as to why this particular study has doubtful conclusions. In quoting several studies with the IMF imprimatur for counterarguments, I think few critics will be convinced. However, one thing that strikes me as curious is that the authors do not appear to have incorporated the most important study variable of all: spending on health. A Millennium Development Goal that Eastern Europe is having difficulty meeting is halting and reversing the incidence, prevalence, and death rates associated with tuberculosis by 2015 (see target 6.9). Accordingly, the study's authors are considering if this goal has been hindered by IMF lending conditionalities. The following line of argumentation must hold:

[IMF lending in Eastern European countries][led to cuts in public health expenditures],[resulting in increased tuberculosis problems].

Notice the three brackets I have placed. What the IMF points out is that the middle part of the argument has gone missing in the study cited, leading to an argument in this form:

[IMF lending in Eastern European countries][resulted in increased tuberculosis problems].

Notice how omitting the middle bracket makes the argumentation uncertain. Some might even say it sounds like a conspiracy theory. In the specification of their regression model, the authors have used the presence of IMF lending as an independent variable together with control variables such as democratization, occurrence of military or ethnic conflict, urbanization, population dependency ratios, and population education levels. (Control variables account for possible alternative causes of tuberculosis problems.) Each in turn, they use tuberculosis incidence, prevalence, and mortality rates as the dependent variable. As you can read in their study, "IMF program participation was associated with increases in tuberculosis incidence, prevalence, and mortality by 13.9%, 13.3%, and 16.6%, respectively."

Firing back at the IMF, David Stuckler, one of the study's authors, cites a whole list of variables they also incorporated in post-hoc tests. However, throwing in the kitchen sink does not address the study's Achilles heel which the IMF pointed to above: changes in health expenditures are not accounted for. Although "government spending as a percentage of GDP" is considered, this clearly isn't identical to changes in health expenditures during the period in which IMF lending was present.

Thus returning to the question posed in the title, I cannot offer a definitive answer here based on this study. The process by which IMF lending led to increased problems with tuberculosis is not given adequate exposition. OTOH, while the IMF points out a fundamental flaw with the paper, it doesn't offer conclusive proof that it is not complicit here, either. Another of the study's authors, Sanjay Basu, makes a pretty strong statement in a Huffington Post interview:

Question: Are you able to say what the increased mortality rates mean and what the increased incidence rates mean in terms of overall numbers?

Basu: In a statistical sense, you can say how many statistical deaths have resulted. In terms of deaths, it was on the order of tens of thousands. In terms of incidence of new cases, it was on the order of hundreds of thousands. Of course, these are all jumbled in reality, but in a statistical sense, that is part of the effect due to the IMF programs.

Associating IMF programs with thousands of deaths from tuberculosis is no laughing matter. To make such an assertion stick requires that a study be nearly unimpeachable. At this point in time, I am unconvinced that it is for reasons given above. That a main variable of interest is omitted doesn't inspire confidence. To their credit, the authors move in the preliminary direction of using a path analysis or structural equation model (SEM) instead of a regression model. The advantage of the likes of SEM over regression is that the former can handle different levels of variables. In plain English, instead of just considering two of the brackets above as the authors do with regression, SEM can consider all three brackets simultaneously. Again, however, what's in the middle bracket is important here--public health spending, not government spending as a percentage of GDP or any other variable.

If the authors are serious about fending off what are legitimate criticisms, then they should earnestly work towards addressing them to convince us that methodological issues are ironed out.

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Mallaby on a 21st Century Bretton Woods

♠ Posted by Emmanuel in Credit Crisis,Hegemony at 10/25/2008 01:47:00 PM

Don't miss the CFR's Sebastian Mallaby commenting on the prospects for a 21st Century Bretton Woods at the November 15 G-20 summit called at the behest of the White House. For those of you who are familiar with Mallaby's writing, it comes as no surprise that he's not quite sanguine on its prospects. He cites China and the US as pivotal figures and the Europeans as peripheral ones. Plus, unlike the original Bretton Woods, key issues on the table do not include currencies. Here is an excerpt from the Wall Street Journal article:

Persuading China to change its currency policy would be a worthy goal for a new Bretton Woods conference. But currency reform is low on the agenda of the summit that the Bush administration plans to host on Nov. 15. (The administration styles this gathering a "G-20 meeting," ignoring the European talk of a Bretton Woods II.) The British and French leaders who pushed for the meeting want instead to talk about financial regulation -- how to fix rating agencies, how to boost transparency at banks and so on. But many of these tasks require minimal multilateral coordination.

If the Europeans shrink from demanding that China cease pegging to the dollar, it's perhaps because they anticipate the concession that would be asked of them. China isn't going to give up its export-led growth strategy for the sake of the international system unless it gets a bigger stake in that system -- meaning a much bigger voice within the International Monetary Fund and a corresponding reduction in Europe's exaggerated influence. When you strip out the blather about bank transparency and such, this is the core bargain that needs to be struck. Naturally, the Europeans aren't proposing it.

It will be up to the two great powers -- the U.S. and China -- to fashion the deal that brings China into the heart of the multilateral system. Here, too, is an echo of the first Bretton Woods, for underneath the camouflage of a multilateral process there was a bargain between two nations. Britain, the proud but indebted imperial power, needed American savings to underpin monetary stability in the postwar era; the quid pro quo was that the U.S. had the final say on the IMF's design and structure. Today the U.S. must play Britain's role, and China must play the American one.

There's a final twist, however. In the 1940s the declining power practiced imperial trade preferences; the rising power championed an open world economy. When Franklin Roosevelt told Winston Churchill that free trade would be the price of postwar assistance, he was demanding an end to the colonial order and the creation of a level playing field for commerce. "Mr. President, I think you want to abolish the British empire," Churchill protested. "But in spite of that, we know you are our only hope."

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Socialism's Joys: Energy Shortages...in Venezuela

♠ Posted by Emmanuel in Anti-Globalization,Latin America at 10/24/2008 12:13:00 PM

In these days of globe-spanning economic turmoil, socialist ideologies are making something of a comeback. The excesses of laissez-faire are leading those hurt by it to now seek protection. Karl Polanyi called it the "double movement," defined as the continuing tension and conflict between the efforts to establish, maintain, and spread the self-regulating market and the efforts to protect people and society from the consequences of the working of the self-regulating market. Although I am not a Polanyi fan, you may say that today's newspaper headlines are endless variations on this theme: citizens have been hurt by the credit crunch, causing country x to implement policies y and z.

Being of the non-ideological sort, I can see how things can swing to the opposite extreme after a period of laissez-faire. An undoubted hero of the anti-globalization movement is none other than Venezuela's Hugo Chavez. Still, how can it be that a country blessed with abundant energy reserves finds itself in the midst of recurrent power outages? Venezuela provides a cautionary tale for those hankering for a worldwide Bolivarian Revolution. Proletarians are hurting:

Despite having some of the world's largest energy reserves, Venezuela is increasingly struggling to maintain basic electrical service, a growing challenge for leftist President Hugo Chavez. The OPEC nation has suffered three nationwide blackouts this year, and chronic power shortages have sparked protests from the western Andean highlands to San Felix, a city of mostly poor industrial workers in the sweltering south.

Shoddy electrical service is now one of Venezuelans' top concerns, according to a recent poll, and may be a factor in elections next month for governors and mayors in which Chavez allies are expected to lose key posts, in part on complaints of poor services. The problem suggests that Chavez, with his ambitious international alliances and promises to end capitalism, risks alienating supporters by failing to focus on basic issues like electricity, trash collection and law enforcement.

"With so much energy in Venezuela, how can we be without power?" asked Fernando Aponte, 49, whose slum neighborhood of Las Delicias in San Felix spent 15 days without electricity -- leading him to block a nearby avenue with burning tires in protest. Just next door, Carmen Fernandez, 82, who is blind and has a pacemaker, says she has trouble sleeping through sultry nights without even a fan to cool her.

Experts say Venezuela for years has skimped billions of dollars in electrical investments, leaving generation 20 percent below the level necessary for a stable power grid and increasing the risk of national outages. Officially Venezuela has a capacity of 22,500 megawatts for a population of 28 million people, but a sizeable proportion is not working, analysts say.

Neither a Randian nor a Chavista be, I say. Countries lurching from one ideological extreme to the other would be an unwelcome phenomenon. Cycling through Friedmanites and Bolivarians doesn't seem to to solve much, does it?

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Europe, Asia Ask China to Help Save the World

♠ Posted by Emmanuel in China,Europe at 10/24/2008 11:04:00 AM

There are good reasons why you probably haven't heard of the Asia-Europe Meeting (ASEM). Aside from gaining limited attention from Asia specialists in the academic community [that'd be us], these conferences did not usually amount to much more than UN-esque talk shops. I do not need to say that times have changed; the 7th ASEM Summit in Beijing is proving to be a rather livelier affair. Having accumulated an almost unfathomable $1.9 trillion in reserves, China's margin of safety is no small beer. Also, it has caused Europeans and Asians to take notice.

Let us begin with the Europeans asking China to participate more fully in the upcoming US-sponsored meeting. Are the Europeans finally letting an LDC have full say in global economic governance? From Reuters:

The European Union wants China, with the world's biggest stash of currency reserves, to play a full part at a crisis summit that U.S. President George W. Bush is convening next month to help shape global financial reforms and tackle the economic imbalances at the root of the crisis.

French President Nicolas Sarkozy said he hoped the ASEM summit would agree on a joint position for the November 15 talks. "I have wanted this meeting," Sarkozy said referring to the Bush summit, "and I hope that we can come up with a common set of initiatives so that the same causes don't produce the same effects," Sarkozy told Hu ahead of the formal ASEM sessions.

German Chancellor Angela Merkel said China was receptive to taking part an international drive for new rules to avert a repeat of the present crisis. "There's support over here for the idea that we need order in financial markets and a financial market constitution with international character," Merkel, who had earlier met Hu, said. "I think China will make its contribution to the stabilization of the world economy," she told reporters.

More interestingly, other Asian economies are soliciting more guarantees of support from China. Although the region already has a system of currency swaps in place worth some $80 billion (we should call it Chiang Mai Initiative Plus or CMI+ to acknowledge the switch from bilateral swaps previously in place), many are now doubting if that amount will suffice given the magnitude of today's problems. The CFR's Brad Setser has highlighted how instrumental swap lines have been in keeping industrialized countries afloat. Further turmoil may mean that Asian countries will lean on them as well:

On Friday morning, the ASEAN group of Southeast Asian states agreed at talks with Japan, China and South Korea to upgrade a long-established $80 billion web of currency swap lines among central banks in the region. The purpose is to allow a country facing a foreign exchange crisis to rapidly call up financial firepower by swapping its currency for those of its neighbors, or for dollars.

The aim would be to sell the borrowed money in the foreign exchange market to stem pressure on the currency under attack and so avert a repeat of the market meltdown that plunged several Asian countries into deep recession a decade ago.

Asia has fared better during the latest bout of turbulence on global markets. ASEAN's leaders expressed confidence that the group's financial sector remained "solid and sound."

"Nevertheless, precautionary actions are needed to send a clear and unequivocal signal that ASEAN is resolute and better prepared than 10 years ago when the financial crisis hit the region in 1997," ASEAN said after its own pre-summit talks. ASEAN groups Cambodia, Malaysia, Indonesia, Singapore, Vietnam, Philippines, Laos, Thailand, Myanmar and Brunei.

Governments worry that banks throughout the region will come under pressure as global economic conditions worsen. South Korea, even though it has $240 billion in currency reserves, had to unveil a $130 billion bailout package for its banks on Sunday.

"Leaders at the meeting shared the need of stepping up regional cooperation to cope with the global financial crisis and to coordinate policies," South Korea's presidential office said after the talks with ASEAN that endorsed beefing up the swaps scheme.

For what it's worth, don't forget that China was reluctant to make a major financial commitment to Pakistan. Still, countries which were badly affected by the 1997 Asian financial crisis--Thailand and the Philippines--are unsurprisingly pushing hard for an expanded agreement at ASEM:

Thailand said on Wednesday it would propose that Asian countries expand a short-term liquidity support scheme to at least $150 billion at a meeting in Beijing this week. In May, East Asian finance ministers agreed to create $80 billion in currency swaps to replace existing arrangements of mainly bilateral swaps, called the Chiang Mai Initiative.

Olarn Chaipravat, a Thai deputy prime minister in charge of economics, told Reuters Thailand would propose "an implementation of the proposed multilateralisation and expansion of the short-term liquidity support scheme, or the Chiang Mai Initiative, to at least 150 billion U.S. dollar equivalents". He would also propose "the pooling of sovereign wealth funds to invest in long-term Asian equities and bonds ... to finance infrastructure projects across Asia up to 200 billion U.S. dollar equivalents".

Olarn said in an interview he would propose a pooling of reserves around the region to facilitate trade, investment and tourism during an expected recession in the West. "Last, and the most important, I would propose that Asian countries put up initially 10 percent of our combined foreign reserves, an initial down payment of 350 billion U.S. dollar equivalents," he said. It would be held in what he called Asian convertible currencies, he said, adding: "This will be the beginning of the Asian financial community." Southeast Asian leaders meet in Beijing this week to discuss measures to deal with the global financial crisis.

The Association of South East Asia Nations (ASEAN), along with China, Japan and South Korea, will have an opportunity to discuss ideas from various members as they gather for a two-day Asia-Europe summit opening on Friday. Last week, Philippine President Gloria Macapagal Arroyo announced a plan to set up a regional fund to help countries cope with the credit crisis. She said the World Bank had committed to initially provide $10 billion to a fund to buy toxic debt and recapitalise banks in the region hit by the crisis. The World Bank said it had not made such a commitment and other countries seemed taken aback.

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The Kinder, Gentler IMF? Easing Conditionalities

♠ Posted by Emmanuel in Bretton Woods Twins at 10/24/2008 10:30:00 AM

The IMF is now in the negotiating stages with several countries affected by the credit crunch. The troubles of these countries have been discussed elsewhere on this blog. Anyway, the introduction to the recent IMF release goes like this:

The International Monetary Fund (IMF), which has announced its readiness to lend billions of dollars to support nations hit by fallout from the global financial turmoil, is holding talks with several countries about possible new lending programs.

"I have been on the phone with leaders in several capitals who have asked the Fund for assistance. We now have mission teams in some of these countries assessing their needs and, where asked to do, discussing programs that could be supported by an IMF loan," says IMF Managing Director Dominique Strauss-Kahn.

The IMF is currently discussing possible loan packages for Hungary, Iceland, Pakistan, and Ukraine. It is also in discussions with a number of other countries about possible financing needs, and is providing confidential policy advice to governments in emerging and developing economies on how to adapt to the current turmoil. It said on October 22 that it would also begin discussions with Belarus.

With the exception of mentioning Belarus, there's new here. So what do I mean by "a kinder, gentler IMF?" Use "IMF conditionality" as a search term and you will see that loan covenants prescribing austerity measures and the like have been accused of nearly everything from social instability to further impoverishing the already destitute. Given that Western countries have taken the opposite tack to their credit crunch woes by pump-priming their economies, it is of little surprise that the IMF is promising to take it easy on conditionalities this time around. It would be hypocrisy for the IMF to do otherwise and economic fashions do change. Besides, isn't un grande seducteur Dominique Strauss-Kahn a French Socialist Party member? The IMF release continues...

Strauss-Kahn says that although some policy conditions will still be attached to loans from the IMF, the conditions will be fewer and more targeted than in the past. Given that the IMF is a financial institution, its lending has to be accompanied with some policy conditions, he adds.

However, he told IMF staff recently that "conditionality has to be defined as what is needed to achieve the goals of the program... it should not attempt to fix the world." These measures must be directly related to achieving the goals of the program, he emphasized. "This is the way for us to be recognized by the membership as addressing the needs they have and not the agenda we have."

I surely hope so: "fewer and more targeted" do not necessarily mean "less onerous." Just how politically onerous these conditionalities are will determine the willingness of others to approach the IMF.

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Conservative Thinktanks Selling the Unsaleable

♠ Posted by Emmanuel in Hegemony at 10/23/2008 12:48:00 PM

Laissez-faire reached full flower in Anglo-Saxon nations as Margaret Thatcher and Ronald Reagan came into office, providing fertile ground for libertarians and rational choice theorists alike. Accordingly, thinktanks espousing a minimal role for government--the "nightwatchman state" they call it--and a maximal role for market mechanisms gained favor in the UK and the US. In time, such models of political economy became more prominent in other countries, whether through imitation or pressure (via IMF and World Bank lending conditionalities.)

Nowadays, the troika of "liberalization," "privatization," and "deregulation" are no longer the mantras for change they once were in the Thatcher/Reagan eras. Whereas they used to be the rallying cry for unleashing capitalism's dynamism, they now symbolize its excesses. Obama, for one, styles himself as the candidate for change by promising to reverse this ideology. So it is no surprise that thinktanks which espouse such beliefs are waging a largely unsuccessful effort in the battle of ideas. Models of governance come in and out of fashion. Who can say if today's aspiring leaders will one day be looked with the same disdain as "Sunny Jim" Callaghan and Jimmy Carter were prior to being turfed from office by Baroness Thatcher and Ronald Reagan?

For now, however, let us inspect some conservative thinktank commentary in a world where Keynesian horses roam free once again. In some ways, it's like hawking leisure suits (or being John McCain)--not exactly in touch with today's fashions:

(1) Nigel Hawkins at the Adam Smith Institute believes that a wave of further British privatization is inevitable given the UK's strained finances. Auntie privatized? Heaven forbid:

Privatization - Reviving the Momentum calls for a new wave of privatizations, which could net the exchequer in excess of £20bn. Given the worsening state of the economy and the increasing tightness of the public finances, the report notes that such an inflow of funds would be very welcome. In addition to the revenues generated for the government, a new wave of privatizations would also deliver significant operational benefits. Previous privatizations have delivered a wide range of improvements, including increased investment, lower prices, greater choice and better service for customers – as well as underpinning billions of pounds worth of economic activity. The leading privatization candidates identified by the report include the Royal Mail, Channel 4, BBC Worldwide, Scottish Water, Northern Ireland Water, Glas Cymru, the National Air Traffic Control System, as well as government stakes in British Energy and the Nuclear industry.

(2) Back in America, Peter Wallison of the American Enterprise Institute (AEI) raps government-sponsored enterprises Fannie Mae and Freddie Mac for past excesses, while predicting worse is to come from government conservatorship:

Perhaps worst of all, the takeover of Fannie and Freddie by a government conservator does not end the problem. In fact, it might open a new and more costly era. In a statement to the House Financial Services Committee on September 25, James B. Lockhart III, director of the agency that serves as both regulator and conservator of Fannie and Freddie, insisted on meeting the affordable-housing goals required by HUD regulations: "The market turmoil of this year resulted in a tightening of underwriting criteria . . . thereby reducing the availability of traditionally goal-rich, high loan-to-value home-purchase loans. . . . I will expect each enterprise to develop and implement ambitious plans to support the borrowers and markets targeted by the goals."

If this is what a Republican administration says about the use to which Fannie and Freddie will be put in conservatorship, one can only imagine what a Democratic administration might do.

(3) The Heritage Foundation's James Gattuso increases the polemic factor by suggesting that, if anything else, the Bush administration did not go far enough down the road of deregulation. Had it done so, the current situation would have been mitigated:

In the wake of the financial crisis gripping the nation, it is tempting to blame "deregulation" for triggering the problem. After all, if the meltdown were caused by the ill-advised elimination of necessary rules, the answer would be easy: Restore those rules.

But that storyline is simply not true. Not only was there was little deregulation of financial services during the Bush years, but most of the regulatory reforms achieved in earlier years mitigated, rather than contributed to, the crisis.

This, of course, does not mean that no regulatory changes should be considered. In the wake of the current crisis, debate over the scope and method of regulation in financial markets is inevitable and, in fact, necessary. But this cannot be a debate over returning to a regulatory Nirvana that never existed. Any new regulatory system would be just that--complete with all the uncertainty and prospects for unintended consequences that define such a system. Policymakers must not pretend otherwise.

(4) Finally, one of rational choice's architects, William Niskanen, offers libertarians words of comfort at the Cato Institute:

There are three precedents for blank-check authorizations on this scale, and none is reassuring. One is the Gulf of Tonkin Resolution that authorized the Vietnam War. The next allowed Richard Nixon to impose wage and price controls and a 10% surcharge on imports. The third authorized the Iraq War. Our political system cannot maintain a balance of power between the Administration and Congress on such important matters when the authorizing laws are so unbalanced.

My first piece of advice to Congress: Don't be rushed. Very few decisions of any importance need to be made within days, even in an election year. In any election year two-thirds of incumbent senators are not running for reelection. They could provide a valuable forum for reviewing any important proposal from the Administration, while their colleagues and all the members of the House run to keep their jobs.

My second: Ask a bipartisan group of respected former government officials who have faced similar problems before to review the conditions that led to an Administration's proposal, evaluate the proposal, and consider and evaluate feasible alternatives to it. For the recent financial crisis I would have recommended a panel that included Alan Greenspan, Paul Volcker, William Isaacs and Lawrence Summers.

And what do I tell fellow libertarians? Stand your ground. You do not win elections, but you influence them. Work across party lines if you want to have any effect. The number of voters who have generally libertarian political preferences is larger than the vote difference between the major parties. On important issues libertarians must be among the best informed and be willing to support the position of whichever major party is most consistent with their beliefs.

I certainly don't consider myself a libertarian, but I too cringe at some of the more extreme measures being pushed threatening centralization of unwarranted power in the hands of government, unfashionable as it is to say. Then again, the degree to which "market fundamentalism" has helped bring about the current mess is an open question.

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The Melamine Messiah: Can Wal-Mart Go Green?

♠ Posted by Emmanuel in China,CSR at 10/23/2008 11:42:00 AM

Being the world's largest retailer, Wal-Mart poses an outsized target for activists on traditional corporate social responsibility (CSR) fronts: labor and the environment. With regard to labor, Wal-Mart's strong preference for non-unionized labor is one of the major grievances alongside allegations of hiring undocumented migrants and sex discrimination. Wal-Mart fighting the Chinese government's insistence to allow union membership--albeit a state-sponsored, highly non-activist sort--is well-known as it creates a precedent others may follow elsewhere. With regard to the environment, Wal Mart's supply chain literally spans the globe. Hence, its supplier selection, product packaging and distribution have a significant effect on the environment. Does Wal-Mart's famous stinginess encourage a "race to the bottom" among its suppliers?

A few months ago, I discussed Wal-Mart's efforts to take on green challenges with regard to its China operations. Wal-Mart has brought the issue to the forefront again as of late; for example with CEO Lee Scott discussing it on the company's investor relations webpage. What's driving Wal-Mart's recent push on these issues? Let's consider the following -

• Wal-Mart wants to create a "halo effect" of being green to attract investors;
• Being heavily invested in China, Wal-Mart wants to distance itself from various product safety scares ranging from defective toys to melamine-tained milk products;
• The company is responding to its plentiful critics to shed its image as a CSR villain
• Efficiency gains from going green such as using less energy and packaging should benefit the firm's bottom line;
• Wal-Mart wants to gain the most benefits from the current slowdown as consumers tighten their belts by portraying itself as a consciencentious choice.

All these probably hold to a certain extent. What we will be better placed to judge in the near future is if Wal-Mart has made significant changes to its business practices. Although there will always be some who are dead set against the very idea of Wal-Mart, more pragmatic sorts should welcome the possibility of Wal-Mart raising its CSR consciousness. It certainly appears that Wal-Mart is placing a large burden on its suppliers in meeting these standards. Given that Wal-Mart's Chinese partners are already having difficulty coping with a global slowdown--witness the Chinese government reintroducing export incentives--it will be incumbent upon Wal-Mart to demonstrate that its commitments are becoming longer term. That is, if Wal-Mart wants Chinese firms to adopt green practices, then it should make assurances that it's going to do business with them beyond the near future.

Again from the Financial Times:

Wal-Mart, the world's biggest retailer, yesterday told its Chinese suppliers to meet strict environmental and social standards or risk losing its business. "Meeting social and environmental standards is not optional," Lee Scott, Wal-Mart's chief executive, told a gathering of more than 1,000 suppliers in Beijing. "A company that cheats on overtime and on the age of its labour, that dumps its scraps and its chemicals in our rivers, that does not pay its taxes or honour its contracts - will ultimately cheat on the quality of its products."

Wal-Mart has been pursuing a drive to improve its reputation on environmental and social issues over the past three years, in response to growing criticism in the US over issues including labour conditions in its supplier factories.

The directive, which will be codified in a Wal-Mart suppliers' agreement, comes at a difficult time for China-based manufacturers, caught between rising production costs and the effect of the global financial crisis on consumer demand in their largest overseas markets.

The requirements include a clear demonstration of compliance with Chinese environmental laws, a 20 per cent improvement in energy efficiency at the company's 200 largest China suppliers, and disclosure of the names and addresses of every factory involved in the production process. The company will require a 25 per cent rise in the efficiency of energy-intensive products, such as flat-screen TVs, by 2011.

Mr Scott said the retailer also wanted to move away from the short-term focus that has characterised its relationships with Asian suppliers. "We have traditionally purchased in a very transactional manner," said Mr Scott. "We need deeper, longer-term relationships with suppliers so it is not based on the last penny."

Some suppliers grumbled about the conditions spelled out by Wal-Mart, which has a reputation for driving hard bargains. It is estimated that each year the company sells about $30bn-worth of China-made goods, giving it enormous negotiating power over suppliers. "It's going to make things a lot worse," said one manufacturer at the meeting, who asked not to be identified. Others were more relaxed. "If they don't like it, they are not going to be doing business with Wal-Mart," said one US-based Wal-Mart supplier who sources components from China.

Also see the Environmental Defense Fund (EDF) describing its participation in Wal-Mart's China effort.

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Fanning the Flames of Russian Conspiracy x 3

♠ Posted by Emmanuel in Middle East,Russia at 10/22/2008 03:44:00 PM

Western fears about Russia may increase given the trio of stories below concerning (1) the use of SWF money to buy into local companies, (2) attempts to create a gas cartel, and (3) plans to establish an oil reserve. Fears of communism have long since given way to Russia deploying its abundant natural resources to accomplish geopolitical objectives. As a large producer of energy, being able to influence global prices commanded by such commodities would certainly be a welcome outcome for Russia. It wants to be enabled, not hobbled, by oil and gas.

(1) Russia's SWF, the National Wealth Fund, is now allowed to put money into the debt and equity of Russian firms. As you'd expect from a TASS news agency report, there is little mention of propping up the country's bourses given that foreign investors are fleeing the country in droves. If you think like me, it's Russia merely asserting more ownership over the commanding heights less constained by Western pressures:

Russian Prime Minister Vladimir Putin has signed a ruling to allow the government to invest the National Wealth Fund on the Russian stock market, the government's press service reported Tuesday. Under the ruling, the National Wealth Fund, which accumulates a portion of the government's oil and gas tax revenues, may be invested in Russian companies' stocks and bonds, as well as in unit investment funds. The Russian government plans to deposit 175 billion rubles [around $6.7B] from the National Wealth Fund with state-owned Vnesheconombank, which will invest that money in domestic stocks, according to earlier reports.

(2) Plans for a natural gas cartel have long been mooted by countries such as Venezuela. As per an earlier post on Opegasur, the problems in establishing such a cartel are logistical: unlike oil tankers which can easily be rerouted, natural gas pipelines take time to build and are not easily rerouted. Although liquified natural gas (LNG) would make it easier to surmount such logistical difficulties, it's not entirely sure that the countries proposing this effort would be able to make a large-scale switch to LNG. Is it grandstanding, vaporware, or both? From the Associated Press:

Russia, Iran and Qatar made the first serious moves Tuesday toward forming an OPEC-style cartel on natural gas, raising concerns that Moscow could boost its influence over energy markets spanning from Europe to South Asia. Such an alliance would have little direct impact on the United States, which imports virtually no natural gas from Russia or the other nations.

But Washington and Western allies worry that closer strategic ties between Russia and Iran could hinder efforts to isolate Tehran over its nuclear ambitions...In Europe — which counts on Russia for nearly half of its natural gas imports — any cartel controlled by Moscow poses a threat to supply and pricing. Russia, which most recently came into confrontation with the West over its five-day war with Georgia in August, has been accused of using its hold on energy supplies to bully its neighbors, particularly Ukraine...

The 27-nation European Union expressed strong opposition to any natural gas cartel Tuesday, with an EU spokesman, Ferran Tarradellas Espuny, saying: "The European Commission feels that energy supplies have to be sold in a free market."

Together Russia, Qatar and Iran account for nearly a third of world natural gas exports — the vast majority supplied by Russia — according to U.S. government statistics. The three hold some 60 percent of world gas reserves, according to Russia's state-controlled energy company Gazprom...

A gas cartel could extend [Russia and Iran's] reach in energy and politics, particularly if oil prices bounce back to the highs seen earlier this year, prompting renewed interest in cleaner-burning natural gas and other alternative fuels. Tuesday's gathering in Tehran appeared to be the most significant step toward the formation of such a group since Iran's supreme leader, Ayatollah Ali Khamenei, first raised the idea in January 2007.

"Big decisions were made," said Iranian Oil Minister Gholam Hossein Nozari. His Qatari counterpart, Abdulla Bin Hamad al-Attiya, said at least two more meetings were needed to finalize an accord, according to the Iranian Oil Ministry's Web site. No timeframe was given.

Calling the grouping the "big gas troika," the chief executive of Russia's state-controlled energy company Gazprom, Alexei Miller, said it would meet three or four times a year. "We are consolidating the largest gas reserves in the world, the general strategic interests and — what is very important — the high potential for cooperation on three-party projects," Miller said...

Experts say a natural gas cartel would not have the same influence on prices as OPEC has on oil since natural gas is not subject to the same severe fluctuations. "There's always some worry when these guys get together that they'll try to replicate OPEC, but they know that's not doable," said Robert Ebel, senior adviser to the Energy and National Security Project at the Center for Strategic and International Studies in Washington. "They can try to get more control over gas, but it's not OPEC."

That's because gas, unlike oil, is traded on much longer-term contracts, of as much as 25 years. "Gas is a regional commodity and oil is an international commodity," Ebel said. "If you want to buy a tanker of crude, you can buy one at today's prices. When you want to build a natural gas pipeline, you have to have two things: enough gas to justify building a pipeline that will operate for 25 years, and ... customers that will agree to buy that gas at a range of prices for 25 years..."

Liquefied natural gas — a rapidly growing segment of the market — could be traded as a commodity similar to oil at some point in the future, and the move by Russia, Iran and Qatar appears to anticipate that, said Konstantin Batunin, an analyst with Moscow's Alfa Bank.

(3) In light of crude oil falling below $70 a barrel, Russia is now contemplating the creation of an oil reserve to influence oil prices in coordination with OPEC. I am certain that painful memories of the aftermath of the Asian financial crisis when oil was temporarily driven below $10 a barrel are partly behind this idea. Eventually, low energy prices made it seek IMF support. With another global slowdown in progress, Russia is wary of a repeat experience. From Reuters:

Russia may create an oil reserve to influence global prices, the country's top energy official said on Wednesday, as OPEC's Secretary General prepared for his first ever meeting with a Russian president. The resurrection of a decade-old idea of inventories comes as another sign of Russia's growing ties with OPEC, which has unnerved global consumers already worried by talks between Russia, Iran and Qatar to create an OPEC-style gas cartel.

"The Ministry of Energy is considering creating an oil production reserve, which would allow it to work more efficiently with prices on the market," said Russian Deputy Prime Minister Igor Sechin, who oversees the energy sector. Asked how big the reserve should be, Sechin told reporters: "Enough to reach efficient pricing parameters" [efficient for whom?] Russia is the biggest oil producer outside OPEC and the world's second-largest exporter after Saudi Arabia.

OPEC Secretary General Abdullah al-Badri, who arrived in Moscow on Tuesday, said he would meet Russian President Dmitry Medvedev to discuss the exchange of market data and would not raise the issue of oil production cuts. "I will meet the president this afternoon. I will not ask Russia for a cut ... But I will ask for data on markets," Badri said ahead of the first ever meeting between OPEC and the head of the Russian state.

Badri said he liked the reserve idea: "Russian reserves can help global oil shortages ... This idea is good. It is a technical matter. We will have to discuss it." Other top OPEC officials have this week called on Russia and other non-member states to join OPEC in cutting production. The organization will hold an extraordinary meeting on Friday and is widely expected to reduce its deliveries to global markets. Moscow agreed to reduce exports several times earlier this decade in tandem with OPEC, but market watchers then said the pledge never materialized as private companies raised shipments instead.

Russia has long toyed with the idea of an oil reserve, which could allow it to become a swing producer. But the expensive and logistically difficult plan was never implemented as the government and private companies failed to reach a compromise.

The current oil production scheme in Russia does not allow the country to change its flows significantly. The head of the International Energy Agency (IEA), attending the same industry conference as Badri, said he was worried by Russia's production outlook as the country heads this year for its first annual output decline in a decade.

"We see worrying signs in some producing countries, including Russia, in the ability to invest enough to meet demand," IEA Executive Director Nobuo Tanaka said. "We see Russian supply growth slowing, with all projects declining in production over the next decade. Further government incentives would be welcome to increase production," he said.

Russian oil firms have called on the government to ease taxes and slash export duties in November, one month earlier than planned, because of a steep price decline this month.

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Will UK Recession Finish Off Chav Culture?

♠ Posted by Emmanuel in Europe,Neoliberalism at 10/22/2008 12:32:00 PM

I was on a KLM flight to Birmingham once when the stewardess offered me and the Englishman next to me newspapers. As I was in the seat closer to the aisle, I had first crack at the last copy of the Financial Times. Instead of taking the remaining English language newspaper, the International Herald Tribune, he just smirked and said, "American--no thanks." This chap displayed a common British disdain for things American. Why this is so I cannot tell. In addition to a shared language, the British are rather similar to Americans in many not-so-desirable ways of consumerism run amok. Just as Americans are supposedly the fattest people on Earth, the Brits are the fattest people in Europe. Just as American household debt is over 100% of GDP, ditto in the UK.

A few days ago, I had an article commenting on how traditional American values of thrift and sacrifice have gradually been replaced by a debt-loving culture where financial planning is some sort of running gag. In contrast to my past co-passenger, I find much virtue in reading the IHT. Recently, it ran a similar feature suggesting traditional British virtues are becoming paramount once again of austerity and reserve. Much has been made of the emergence of "chav culture": vulgar and aggressive behavior infused with a dose of Stateside bling. Like Americans, Britons are becoming more acquainted with consumerism's limits--i.e., "foreclosure" and "bankruptcy" as the grips of recession take hold.

Unless there's more to the neoliberal model than loading up on ginormous boatloads of debt, then you can count me out. Excesses are excesses precisely because they need to be worked off. With the UK in the grips of a recession, that time is now:

The expensive stores along Bond Street and Sloane Street have fallen eerily quiet. So have the cheaper ones scattered all over town, the Monsoons and the Topshops and the Next outlets - ubiquitous staples of the insatiable British shopping diet. Britons, like everyone else, are coming down from their huge spending spree.

But mass consumer culture is relatively recent here. Britain's modern identity was forged in part by postwar values like thrift, prudence and living within your means. Even as alarm courses through the country like an electric current, there is a parallel thought in the air.

It is this: Perhaps the downturn, however difficult, will usher in a return to that elusive concept, traditional British values. Perhaps the last 15 years or so will be considered a sort of madness, an anomaly, a strange dream. Perhaps people will lower their widely inflated expectations and stop their habit of wanting things - whatever they are almost does not matter - that are flashier, bigger and better.

"I think there is a mood of austerity," Vince Cable, finance spokesman for the Liberal Democrat party, said in a recent speech, talking about society as a whole as well as the banking system. "A reaction against greed, excess, waste, tax cheating and selfish, self-indulgent behavior."

Already, people are losing their jobs and houses, and businesses are failing across Britain; the downturn is going to be very bad. But what is striking about the past era is that much of the incredible boom in consumer spending was stimulated by people who, even in good times, could not afford the things they were buying.

Buoyed by easy credit and inflated property prices, the British public spent itself into debt, a total of £1.44 trillion, or $2.56 trillion, of it. Britons now owe, on average, 180 percent of their disposable income. One-third of consumer debt in all of Europe is held by people in Britain, said Chris Tapp, deputy director of Credit Action, which counsels people about how to handle debt.

Audrey Hurren, a retired secretary of 65 who was waiting for the subway in central London the other day, put it a different way. "I think it wouldn't do any harm at all for some of the younger generation to be less greedy," she said. "It's not a very nice thing to say, but maybe they could behave a little more sensibly."

Hurren was raised just after World War II believing that if you couldn't afford it, you didn't buy it. By contrast, she said, her granddaughters have more than she ever dreamed of, and are still dissatisfied. "They don't appreciate anything - it's easy come, easy go," she said. "They get a mobile phone; if they don't like it, they throw it away and get a new one."

In an interview, Tapp said that different generations were likely to respond to the downturn, which is now being called a recession in Britain, in different ways. People in their 30s and younger, too young to remember the last recession in the early 1990s, have grown up in a world "where credit has always been cheap and easy and available," he said. For them, there is no precedent for frugality.

The austerity of the late 1940s and early 1950s, and the privations of the 1970s - when electricity was briefly rationed and the country put on a three-day work week to save fuel - are stories to read about in books. "The idea of saving up for what you buy - that's what you did when there weren't any credit cards," Tapp said.

In the boom years, the so-called soft sections of London newspapers grew fat on articles about ever more expensive goods and services geared toward the conspicuously consuming masses. But suddenly, even the papers are talking as if they have woken up with a jolt after a long drug-and-sugar binge.

"I am happy to observe that the decades of vulgar excess are finally over," the columnist India Knight wrote in The Times of London. "There is a strong collective sense of us all coming back down to earth. It's like a huge national reality check and, unwelcome as it may be, there is a possibility that it will result in us straightening out our priorities."

The left-leaning Guardian, whose detractors lampoon it as the kind of newspaper that encourages you to "knit your own lunch," has begun printing guides to surviving in the new age of austerity: cultivating an urban garden, cooking with leftovers, using less energy.

The Times recently featured an article about how to make old clothes newly fashionable by, for instance, cutting the sleeves off coats (and wearing the coats over long-sleeved sweaters). Another article, in the Sunday Times, offered tips on "Fifty Ways to be a Recessionista."

The author David Kynaston, whose book "Austerity Britain" discusses the privations of the post-World War II era, said that until the mid-1980s - the Thatcher era - Britain was "careful, cautious, understated, naturally socially conservative."

But, he added in an interview, "In the 1980s, there was essentially a psychic shift in how to use money. What went out the window was the old puritan self-consciousness, even a sense of guilt, about money."

After the recovery following the recession in the early 1990s, everything changed even faster. Spending was glorified; so was borrowing. Banks began offering 125 percent mortgages. Credit card debt soared. In a recent book, the psychiatrist Oliver James complained that the country was suffering from "affluenza."

People got used to more expensive things. Organic food was presented as a necessity for good health; supermarkets emphasized "luxury" ranges of foods. Britons abandoned traditional seashore vacations and began flying to Europe. Upmarket sandwich shops appeared across London, replacing the old, humble ones. The need for new gadgets at home soared.

All of that feels expendable now, Allison Burton, a 31-year-old hairdresser, said in an interview. She mentioned a friend whose husband had just lost his job. "She wrote down what their outgoings were and managed to save herself a grand a month," Burton said, by doing things like switching to a less-expensive cable-channel package.

Stores are now marketing themselves on the basis of cost rather than quality or exclusivity. Supermarkets have unveiled new no-frills foods and pledged to match their rivals' low prices. Tesco has refashioned itself as "Britain's biggest discounter."

Lindie Parry, 25, a transportation project manager walking down Victoria Street with her husband, James Bain, 40, said she had begun shopping at less-expensive supermarkets. Bain said that people were remembering that they could often get free coffee at work - not as good as Starbucks, but coffee nonetheless - and that bringing lunch from home was cheaper than buying it in a shop. "It was great while it lasted," Parry said of the boom time, "but nothing lasts forever."

There's a set of photos on Flickr cataloging a mock memorial outside the Bank of England - "In Loving Memory of the Boom Economy." Blatcher, we hardly knew ye.

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