Post-Subprime: A Bloodbath in Trader Bonuses

Ladies and gentlemen, rest assured that I do not read the British lifestyle magazine Trader Monthly on a regular basis. Imagine a combination of Forbes, Stuff, and GQ and you can probably imagine its contents. While visiting a rather well-to-do relative, however, I came across this particular magazine. Something that caught my attention among the endless articles about shorting housing stocks, £40,000 wristwatches, and £3,000 power suits [what, there are women traders?] was a 2007 Bonus Survey projecting "average compensation levels for top-performing trading professionals at major banks globally, based on the best information available." The results, while unsurprising, are interesting for a number of reasons.

Let's begin with the new dregs of the trading world, those who trade mortgage-backed securities:
Bonuses are down across the board for these folks in 2007. In the meantime, all isn't hunky-dory for those who need to package these mortage-backed securities and the like into collateralized debt obligations and other sorts of weapons of financial destruction:

Things ain't too hot either in asset-backed securities or collateralized mortgage-backed securities (for commercial real-estate):

So in what asset classes are traders doing well? According to the survey, investment grade traders are doing well as folks flee subprime-related riffraff. Emerging markets ain't doing too badly, either (see the online article for more). However, the ones who take the cake are, drum roll please...the commodities traders. As if that's any wonder:

I very much suspect that layoffs will hit more traders in the first three asset classes mentioned above sooner or later. Better buy a metal detector and hunt for gold, Charlie, like those crazed Californians.

Climate Change Investing Ain't Too Hot, Eh?

The Bjorn Lomborg "global warming doesn't matter" set may be pleased by this news. While perusing today's edition of the Wall Street Journal, my eye was drawn to an ad asking me to dress up Zwinky for a global warming investment fund. Apparently, DWS Scudder, an asset management subsidiary of Deutsche Bank, has just set up a fund whose cause celebre is global warming. Call it an offshoot of the oh-so-trendy socially conscious investing. (Do view the slick videos about the DWS Climate Change fund if you've got the scratch.) Anyway, the fund info sheet has this to say about why future opportunities are plentiful in this area:

1. Due to scientific analysis, governments are regulating, creating economic and business opportunities;
2. Carbon prices are emerging and are central to the whole process;
3. Some corporates will take action on competitive and reputational grounds;
4. New technologies will play a central role in mitigating the problem;
5. These all interact with each other to create a dynamic pool of investment opportunity.

The rationale sounds pretty good to me, and the chart above depicting investment opportunities (click for a larger image) seems straightforward. However, the fly in the ointment is this particular fund isn't doing very well at the moment. In fact, it is underperforming the benchmark MSCI World Index. So, what's the lesson here? These are a handful of possible explanations:

1. The portfolio manager has not selected the "best performing" green firms;
2. While climate change-conscious firms will do better in the long run, short-term returns are volatile;
3. It doesn't pay to be green.

The first explanation is indeed possible. However, the film clip mentioned above suggests that the second one is more at work, as you would expect. Meanwhile, the acolytes of Lomborg would probably take the third. In any event, this particular fund has only been open since September 2007, so it will take some time to establish a long-run pattern. Besides, there a whole lot of other funds touting similar socially responsible credentials so this sample of n=1 isn't exactly representative. Perhaps in a downturn of this severity everyone will get hit--the good, the bad, and the ungreeny.

The Next Real-Estate Bubble is in Farmland

Call it Emmanuel's Bubble Theory: the popping of one bubble eventually begets another bubble. The implosion of the dot-com bubble led to interest rates being cut, thus giving rise to the housing bubble. Now that the latter is fast deflating and interest rates are again being cut to soften the blow of an oncoming recession, where are we (or at least the US) headed? I'll put my money on a new farmland craze that's taking shape. The reasons for this new craze are simple and require little explanation: First, growing prosperity overseas--especially China and India--ensures a steady source of demand for farm produce in yonder lands. Second, the biofuel craze--fueled in large part by government incentives--makes investment in agriculture a seeming sure-fire bet. Third, historically low interest rates have been mooted by the likes of Jeffrey Frankel as a mechanism for making commodities relatively more attractive. The end result is rising prices for agricultural lands. However, this Reuters article also points out that just as the owner-renter ratio got out of whack in the US housing market, so too is the ratio between the cost of farmland and the rents obtained from farmers. Interesting stuff...

Investors who have never sat behind the wheel of a tractor are helping drive the price of U.S. farmland to record levels, attracted by its assumed safety following the meltdown in mortgage-related securities and excited by the potential of plant-based biofuels. But is agricultural land really a good long-term investment? Or could the rush into rural real estate be just another Wall Street craze -- one that ends like the Internet and housing manias that preceded it?

An analysis of rents -- a key measure of U.S. cropland values -- suggests the returns investors can expect from farmland are not only substantially below those available in the stock market but in a long-term decline to boot. That disconnect -- between fast-rising farmland prices on the one hand and fast-falling returns from farmland rents on the other -- has some growers and government officials worried a bubble may be forming, one similar to the one that took hold 30 years ago and left rural America reeling once it popped.

Iowa Bank Superintendent Thomas Gronstal is among those concerned. "Current agricultural conditions," Gronstal told lawmakers in U.S. Senate testimony on March 4, "are reminiscent of conditions experienced in the 1970s, which led to the economic and financial collapse of the 1980s." Gronstal said soaring crop prices made "the agricultural sector look strong." But he warned that retreats in those prices could have an immediate and devastating effect on land values. "If there has been too much leveraged or loaned against the inflated value of farmland, the bubble will burst and we will once again experience an economic crisis similar to that of the 1980s," Gronstal said.

Over the past decade, the average price of an acre of U.S. cropland has doubled, according to the U.S. Department of Agriculture, from $1,340 in 1998 to $2,700 in 2007. Last year alone, average prices nationwide jumped 13 percent. Several factors are driving the increase. Farmers are scrambling to ramp up production to take advantage of record prices for many crops -- from corn to soybeans to wheat.

Big city investors, meanwhile, have also gotten in on the act, optimistic that a government push to commercialize biofuels like ethanol is fundamentally altering the rural landscape. But while land prices have surged, cash rents -- the price that landowners charge farmers who work their land -- have failed to keep pace. Last year, according to U.S. Agriculture Department data, average cropland rents rose just 7 percent to $85 an acre. Over the past 10 years, the data show, they've only risen 28 percent.

As a result, rents as a percent of cropland value -- a metric akin to the earnings yield on a stock -- have declined over the past 10 years nationwide, from about 4.96 percent in 1998 to 3.15 percent last year. (By comparison, from January 1926 through December 2007, the annualized total return for the S&P 500 was 10.4 percent per year.) So while the cost of U.S. farmland is rising, the real returns that land generates have fallen.

If that disconnect between purchase price and rents doesn't sound eerily familiar, it should. In 2002, several years before the U.S. residential housing bubble popped, Ed Leamer, an economist at the UCLA Anderson Forecast, warned that the run-up in house prices in some markets had already reached unsustainable levels because prices were rising faster than rents.

Indifference to the relationship between price and earnings on any asset, Leamer said, "is the same error that Wall Street analysts made during the Internet Rush when they imagined that the New Economy changed the rules and created a fundamental disconnect between corporate earnings and stock prices. "We know differently now," Leamer said.

Investors bullish on farmland say, essentially, that things are different because the world is in the midst of an unprecedented agricultural supercycle, driven by growing food demand and wealth in the developing world and a U.S. government mandate for plant-based alternative fuels. Rents, they say, which typically lag changes in land values, will catch up. "Purchase prices have been going up faster than rents," said Iowa State University economist William Edwards. "But I think we're going to see a pretty big push on rents this year."

But rents will have to be pushed pretty hard to get them back to levels seen even five years ago. With other costs rising, including fertilizer, seed and farm equipment, it's difficult to see how land owners make such hikes stick. Ominously, it's growers who seem most worried about the surge in farm prices.

When Iowa State canvassed farmers recently as part of its annual land value survey, it reported that many respondents "expressed a great deal of concern that land values were too high and that the market might be due for a correction." And this week, a survey of farmers by the University of Illinois found "people looking over their shoulder," according to the report.

The California Gold Rush Circa 2008

This article from the Financial Times had me thinking a bit. Regardless of what the cause of rising commodity prices is--a slumping US dollar, strong demand from fast-growing Asian economies, an extended period of low interest rates, or a combination of all three--laws of supply and demand are taking effect as gold diggers of the non-figurative variety are going to California with an achin' for the precious metal. Go west, young speculator, go west:

It has been almost 160 years since the first California gold rush but, with prices hitting record highs, prospectors are once again flocking to the state’s rivers and deserts in search of the precious metal. Gold’s ascent – prices crossed the $1,000 an ounce barrier this month and remain well above $900 – has sent sales of mining equipment soaring.

“There’s been a dramatic change . . . our sales have risen four-fold in the last three months,” said Harrigan McGregor, owner of GoldFeverProspecting.com, an equipment retailer in northern California. “This is the second big California gold rush. We’ve had a lot of phone calls from people who are quitting their jobs and prospecting full-time.”

The growth of prospecting by individuals has been accompanied by a sharp increase in commercial mining activity. Commercial claims, most of which involve gold mining, rocketed to 2,274 in the first quarter of this year, up from 132 in the same period of 2005, the Bureau of Land Management says.

Roger Haskins, senior specialist for mining law at the BLM, said the high price of gold was “obviously driving [mining] activity up tremendously. We have a market imbalance at the moment and there’s more demand than supply,” he added. “Gold sits in a little niche because it’s speculative . . . People buy it as a hedge for the future.”

Membership in the Gold Prospectors Association of America “has tripled in a very short space of time”, said Corey Rudolph, an official of the southern California-based group, which organises events for recreational miners.

The hotspot is a 320km strip known as the Gold Belt, or “Motherlode”, which runs near Highway 49 (named for prospecting “49ers” of the 19th century) and the Sierra Nevada mountains. Mr Rudolph said 5-10 per cent of available gold had been mined. “There’s still a lot of gold out there for the smart guys.”

The market in second-hand gold is also booming, with southern California pawnshops reporting increased trade as people sell unwanted gold items. Depending on the quality, these items can be refined and resold. However, Mr McGregor said raw gold can fetch even higher prices. “If you find a nugget larger than your pinkie finger, it could sell for up to 30 per cent more than the spot price.”

That's Progress 2: Cubans Can Own Cell Phones

Whoa, Cuba's new Maximum Leader Raul Castro is making all sorts of socioeconomic advances that would fill the heart of a Taliban mullah with rage. After lifting a ban on owning DVD players and assorted gringo consumerist filth, the Cuban authorities are now in the process of allowing ordinary citizens the privilege of wielding cell phones. Who knows what will follow this consumerist revolucion. From the Guardian:

The Cuban president, Raúl Castro, today lifted restrictions on ownership of mobile phones. Castro's move was another indication that he is prepared to grant more freedom to the island's residents. The right to own mobile phones had been restricted to the employees of foreign firms or those holding key posts in the communist-run state.

Some Cubans had evaded the ban by asking foreigners to sign contracts in their names, but mobile phones remain relatively uncommon in Cuba compared with the rest of the world.
Castro - who formally assumed power from his brother, Fidel, in February – promised in his inaugural speech to ease some of the restrictions on daily life within weeks. He pledged "structural changes" and "big decisions" in the near future.

An internal memo, leaked to Reuters earlier this month, suggested Castro intended to lift restrictions on the ownership of electrical appliances including DVD players and computers, although no mention was made of mobile phones.

Last week, the Cuban government lifted its ban on farmers buying their own supplies in an attempt to improve agricultural production. All supplies had been previously been assigned by the central government, but small-scale farmers on some parts of the island are now permitted to buy such items as seeds, fertiliser and clothing equipment from state stores.

Such changes have been viewed as evidence that Castro is prepared to make concessions to residents, albeit in the context of a one-party state. Days after Castro was sworn in as president, Cuba signed two legally-binding human rights agreements, forming part of the Universal Declaration of Human Rights, at the UN in New York.

He has also held talks with the Vatican's leading diplomat, Cardinal Tarcisio Bertone, who is seen as a potential emissary between the US and Cuba.

Fearful of HillaryCare? Try al-SadrCare

Many in the United States fear that the election of a second President Clinton may mean the resurrection of HillaryCare. Well, there is something out there that is much more frightening because it's, well, real. For some reason I can't recall, I was led to the pages of USA Today and this article on "Sadrists' Grip on Iraqis' Health Care Takes Toll." What you have here is a situation in which the health ministry as well as the main importer of medicines is run by Muqtada's acolytes. It just furthers my conviction that the illusory gains made by the US in Iraq as of late have been bought by paying protection money to various groups who would like nothing else than kick the "crusaders" out. Awakening [to the payoff] Councils, al-SadrCare...it's all bound to end in disaster. So, American voters, keep in mind that there are much, much worse things than HillaryCare:

A 6-foot-wide picture hanging at the front gate of Iraq's Health Ministry removes any doubts about who runs the place. The photo is of the father and uncle of radical Shiite cleric Muqtada al-Sadr, both of whom were religious leaders killed by Saddam Hussein's regime. Employees of the ministry, many of whom are loyalists to al-Sadr, pass their images every day as they go to work. Al-Sadr's ironclad control over Iraq's health system and other key ministries has come under renewed scrutiny following recent clashes between his Mahdi Army militia and the Iraqi army.

Under the influence of the militia and other Sadrists, Iraq's hospitals and clinics have been at the center of some of the country's worst sectarian violence, although recent improvements in security nationwide have made Iraqis less afraid to seek medical attention. Doctors such as Haydar al-Kawaz, the director of the emergency room at Baghdad's Yarmouk Hospital, say that security has slowly improved even though sectarian divisions have not disappeared. "If you come calm and you're not shouting political slogans, it will be safe," al-Kawaz said. "But if you say, 'I am from this group or that group,' it is not safe still."

The Health Ministry has been under al-Sadr's control since 2005, when his political party gained more seats than any other group. His ensuing decision to staff the Health Ministry with his loyalists provided al-Sadr with a critical boost to his reputation among his followers, said Agron Ferrati, the Iraq director for the International Medical Corps, a non-profit group. "It was a brilliant move," Ferrati said. "Provide medicines, doctors and services, and you become a hero in your society."

During the height of Iraq's sectarian violence in 2006, many Sunni patients avoided hospitals they knew were Shiite-controlled, fearing they'd be targeted by al-Sadr's militia. Militia members frequently used ambulances to ferry around weapons instead of patients.

Al-Sadr's control over Kimadia, the state-run company that is responsible for importing and distributing drugs and supplies to Iraq's hospitals, also poses problems, Ferrati said. "Kimadia has a stranglehold on the whole medical sector, and that is a source of power through which Sadr can control the health sector and threaten the country," Ferrati said. "If they decide to stop working, then you cut off all the drugs into Iraq."

The cleric's followers have reacted harshly when their power was threatened. When one hospital challenged Kimadia's monopoly by importing drugs on its own, someone planted a rumor that the drugs were infected with HIV, sending panic through the community, said Hilal Shawki, a cardiologist.

The turmoil in the health sector, plus an open campaign by militants to target trained professionals, has severely damaged Iraq's ability to care for its sick. Since 2003, 2,200 doctors and nurses have been killed, and 250 more have been kidnapped, according to a report published last week by the International Red Cross. Of the 34,000 doctors registered in 1990, at least 20,000 have left the country.

That has left fewer doctors to tend to more patients, and Yarmouk Hospital treated an astounding 45,000 patients last year, said al-Kawaz, the emergency room director. It's now 90% safe to come to Yarmouk Hospital, al-Kawaz said. Of course, that means it's also 10% unsafe, he acknowledged. "I am wearing jeans and a T-shirt, which means I am hiding from something," the unshaven 37-year-old said. "I dress like an assistant so I will not stand out. Being a doctor here threatens our lives."

Lyndon LaRouche's Take on Neoliberalism's End

Conspiracy theorists of all stripes will welcome this latest work from the acolytes of Lyndon LaRouche. The man has "run" for the US presidency continuously without any apparent success. In some ways, his jail time is more memorable to many than his forgettable electoral exploits. Nevertheless, while LaRouche has decided to sit out the 2008 campaign, his Executive Intelligence Review is still putting out all sorts of, ah, interesting stories. This sample purporting "The End of the Line of the Anglo-Dutch System" makes for entertaining if not quite accurate reading. It is beyond me how a drastically weakened Britain at the end of WWII set out to "systematically the American economy" by undermining the Bretton Woods system. Wouldn't such a weakened country have a similarly degraded bargaining position? Nor is it explained why the British Bretton Woods delegation led by John Maynard Keynes of all people would be more keen on "neoliberal" principles than his American counterpart, Harry Dexter White. Ah, but why quibble about historical accuracy when you can do creative writing? In any event, it makes for an interesting contrast to the Financial Times writers' thoughts, to say the least:

During July 1944, a United Nations Monetary and Financial Conference was held at the Mount Washington Hotel in Bretton Woods, New Hampshire. The 44-nation conference established what became known as the Bretton Woods monetary system, a key component of which was the establishment of a fixed system of currency exchange rates among nations. Under Bretton Woods, a gold reserve standard was established, with the U.S. dollar pegged to gold at $35 an ounce. This arrangement was the economic bedrock upon which the post-World War II world was rebuilt, led by the industrial might of the United States.

Bretton Woods was a victory for President Franklin Roosevelt, and his view that the post-war world should be free of empires and their colonies. FDR intended to use the power of the United States and other nations to elevate the status of the common man worldwide, and end the domination of the economic royalists. It was a grand vision, and had he lived to implement it, the world would be in far better shape than it is today.

The British were apoplectic at the prospect of a Rooseveltian/American System world, and pulled out all the stops to defeat it. With the death of Roosevelt in 1945, and the ascension of Harry Truman, the empire struck back. The fear of a Soviet attack and the spread of communism was used to create a Cold War environment, under which the British empire became the top strategic ally of the United States, and FDR's grand vision was swept away. In the name of fighting communism, Truman and his Anglophile controllers sold FDR and America down the river. (The parallels to today's "war on terror" should not be missed.)

The British set out to systematically dismantle the American economy, as a way of restoring their own dominance in the world. They had to move slowly, because the memory of FDR and what he had done for the nation was fresh in people's minds, as were the abuses of the economic royalists he had fought, and because the American people would fight back if they understood what was planned.

One of the biggest obstacles to their plan was the Bretton Woods system, and the stability it provided to the U.S. and the global economy. For the British plan to succeed, Bretton Woods would have to be eliminated...

As the speculative bubble came to dominate the U.S. and world economies, feeding it became paramount. Among other things, this led to a sharp run-up in real estate values, to provide "wealth" which could be turned into mortgage debt, and then into a wild assortment of securities to be used, with lots of leverage, to play in the derivatives markets. To keep the mortgage-debt flowing, as prices rose into the stratosphere, the bankers repeatedly loosened the requirements for home loans. This process, which was driven by the banks and the derivatives market, ultimately exploded. This was falsely portrayed as a "subprime" crisis, but in reality it was the death throes of the financial system itself...

It has taken 37 years for the process set into motion by Richard Nixon in 1971 to destroy the global economy. During that entire period, LaRouche and his international political movement have been a consistent voice for reason, organizing in the streets and in the halls of government for a return to the sound economic policy of the American System, and an end to Anglo-Dutch Liberalism.

We have now reached the point where all of us must decide: Do we go back to what works, or do we descend into fascism and chaos, and a new Dark Age? That is the question we ask you to keep in mind, as you read the following reports.

A Petition to Restrict Capital Flows in the EU

If you are an A-1 member of the anti-globalization set, consider signing up to this petition below to bar finance from "destroying society." Actually, I am relatively unperturbed by the usage of capital controls. In a number of instances, they may be useful in helping spur economic development. However, the idea that going back to a mythical pre-globalization age would somehow turn back the tide on financial manias, panics, and crashes is rather unlikely. The record of history indicates that even in a world where capital had nowhere near the mobility it has now, there were recurrent crises. Somehow, I do not think this will do the trick, but you may think otherwise and sign up yourselves. I've made an extended comment on Martin Wolf's blog on this very same topic. Anyway, here is the statement:

Freedom for finance is destroying society. Every day, in both North and South, shareholders silently pressure firms and workers to extract higher and higher returns. The situation becomes dramatically visible when major crises display the excesses of speculative greed and its backlash on growth and employment. Lay-offs, precarious work, deepening inequalities: workers and the poor suffer most from both the speculation and the toxic effects of subsequent financial collapse.

During the last two decades, world finance has brought little but crisis: 1987: stock market crash; 1990: housing crisis in the US, Europe and Japan; 1994: US Treasury bonds crash; 1997 and 1998: international financial crisis; 2000-2002: the internet bubble bursts; and now 2007-2008: the subprime mortgage crisis spilling over into sector after sector and possibly becoming a major global financial crisis.

We refuse to wait passively for the next crisis to occur and to endure any longer the enormous inequalities fuelled by market finance and the dangers it creates for everybody. Because instability is intrinsic to financial deregulation, calls for greater “transparency” or “morality” are worthless and can have no effect, much less prevent the same causes from leading to the same outcomes. Ending the speculative scourge requires radical change in the rules of the “game”, namely those of the financial structures themselves. Any such project is, however, immediately thwarted in the European Union by the outrageous protection granted to deregulated financial liberalisation via the treaties.

As European citizens, we therefore demand the abrogation of article 56 of the Lisbon Treaty which forbids any restrictions on capital flows and thus sets the perfect conditions for the overwhelming hold of finance on society. We also call for restriction of the freedom of establishment (art. 48), leaving capital free to migrate wherever conditions are most favourable and financial institutions free to seek asylum in the City of London or anywhere else they choose.

If “freedom” merely means the right of the dominant power, in the present case finance capital, to suppress the rest of society, we deny that freedom and call, rather, for the people’s right to live free from the tyranny of profit.

Here We Go Again: The Day Neoliberalism Died

Love 'em or hate 'em, you must acknowledge the consistently pro-market outlook of the Financial Times. Yet, here are two recent op-eds by FT stalwarts in response to Deutsche Bank CEO Josef Ackermann stating "I no longer believe in the market's self-healing power." Well, I for one never did. Both authors specifically mention the Fed bailout of Bear Stearns as a turning point. For all the disagreements I have with one Karl Polanyi--a folk hero of the anti-globalization set--I do agree with him that the self-regulating market (SRM) is a myth. Furthermore, the invisible hand trope of Adam Smith has been tortured to mean that market mechanisms have a built-in self-correcting mechanism. (As an aside, visit Gavin Kennedy's blog to disabuse yourselves of the "Chicago School" iteration of the invisible hand. Or, better yet, read his book on the topic.) Well, current events seem to question the validity of those neoliberal leanings.

Let us begin with Michael Skapinker on why the Reaganite / Thatcherite revolution may have run its course in the wake of the subprime debacle:

The US Federal Reserve is providing a $30bn safety net to engineer the fire sale of Bear Stearns to JPMorgan Chase and who knows how many more rescues there are to come? The British government has nationalised failed mortgage lender Northern Rock. This is a remarkable change after three decades in which the market appeared to be the answer to everything.

Facing defeat to Margaret Thatcher in 1979, James Callaghan, then UK Labour prime minister, observed that there were times when the tide of ideas shifted and there was nothing anyone could do about it. “I suspect there is now such a sea-change – and it is for Mrs Thatcher,” Callaghan said then. Mrs Thatcher’s victory, followed by the election of Ronald Reagan as US president a year later, set off a period of deregulation, privatisation and enterprise that greatly enriched both their countries, influenced policymakers everywhere and, thrillingly, swept away the moribund communist empire. When Reagan said “the nine most terrifying words in the English language are ‘I’m from the government and I’m here to help’,” people laughed appreciatively in many languages.

Government ownership of industry began to look as archaic as leeching and bloodletting – relics of an age when people knew no better. Private enterprise, competition, consumer choice – these were the ways to organise economies. If one company was not providing decent goods and services at competitive prices, another one would. Competing enterprises came up with better ideas. Government provision, by contrast, produced queues and shortages.

Tony Blair, former UK prime minsiter, insisted the Labour party scrap its commitment to nationalisation. Only marginal malcontents ever talked about restoring it. This is why Gordon Brown dithered before taking Northern Rock into public ownership, even though his government had guaranteed the bank’s savings accounts – and thereby the savings accounts of every British bank, because if Northern Rock could not be allowed to fail, neither could the others.

Even before the current financial crisis, there were hints that a hands-off approach by government was perhaps not the only way to organise an economy. Russia was not much of an advertisement for a state-controlled economy, but China’s government-administered capitalism appeared to be doing fine. The purchase of chunks of western companies by sovereign wealth funds was a worrying sign that governments were buying their way back into free market economies.

And now we have the great financial unravelling – with governments and central bankers playing a role for which past decades have left us unprepared. Many people remember what Callaghan said about the sea-change in ideas. Fewer remember his observation that these changes seemed to happen every 30 years or so, or that he said that 29 years ago.

So what sort of change might be we witnessing? If the Thatcher-Reagan era is at an end, what might replace it? Trawling leftwing and far-left websites is instructive, because they clearly have not got a clue either. They are not demanding the nationalisation of the banking system, perhaps because that has already happened, either explicitly or implicitly. But they do not seem to be calling for anything else…

However this ends, and however widespread the damage, most of our economies will remain in private hands. There is still no better way to apportion and price our goods and services. There will, on the other hand, be better ways to regulate and police our financial services industry. There will have to be. But the triumphalism of the past 30 years is over. The market is no longer the answer to everything. It certainly does not heal itself.

Now, let us move to the thoughts of Martin Wolf. Let it be noted that he does not take very kindly to the term "neoliberalism" in his book Why Globalization Works. Market-led globalization, arm's length transactions, neoliberalism, whatever; I think the concept is pretty much the same. Despite his reputation, though, Wolf delivers some pretty good lines as to why the SRM is a goner. Neoliberalism, we hardly knew ye:

Remember Friday March 14 2008: it was the day the dream of global free- market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over…

The implications of this decision are evident: there will have to be far greater regulation of such institutions. The Fed has provided a valuable form of insurance to the investment banks. Indeed, that is already evident from what has happened in the stock market since the rescue: the other big investment banks have enjoyed sizeable jumps in their share prices (see chart below). This is moral hazard made visible. The Fed decided that a money market “strike” against investment banks is the equivalent of a run on deposits in a commercial bank. It concluded that it must, for this reason, open the monetary spigots in favour of such institutions. Greater regulation must be on the way.

The lobbies of Wall Street will, it is true, resist onerous regulation of capital requirements or liquidity, after this crisis is over. They may succeed. But, intellectually, their position is now untenable. Systemically important institutions must pay for any official protection they receive. Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted. This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency. An unregulated, but subsidised, casino will not allocate resources well. Moreover, that subsidisation does not now apply only to shareholders, but to all creditors. Its effect is to make the costs of funds unreasonably cheap. These grossly misaligned incentives must be tackled…

If the US itself has passed the high water mark of financial deregulation, this will have wide global implications. Until recently, it was possible to tell the Chinese, the Indians or those who suffered significant financial crises in the past two decades that there existed a financial system both free and robust. That is the case no longer. It will be hard, indeed, to persuade such countries that the market failures revealed in the US and other high-income countries are not a dire warning. If the US, with its vast experience and resources, was unable to avoid these traps, why, they will ask, should we expect to do better?

These longer-term implications for attitudes to deregulated financial markets are far from the only reason the present turmoil is so significant. We still have to get through the immediate crisis. A collapse in financial profits (so significant in the US economy), a house-price crash and a big rise in commodity prices are a combination likely to generate a long and deep recession. To tackle this danger the Fed has already slashed short-term rates to 2.25 per cent. Meanwhile, the Fed also clearly risks a global flight from dollar- denominated liabilities and a resurgence in inflation. It is hard to see a reason for yields on long-term Treasuries being so low, other than a desire to hold the liabilities of the US Treasury, safest issuer of dollar- denominated securities.

“Some say the world will end in fire, Some say in ice.” Harvard’s Kenneth Rogoff recently quoted Robert Frost’s words in describing the dangers of financial ruin (fire) and inflation (ice) confronting us. These are perilous times. They are also historic times. The US is showing the limits of deregulation. Managing this unavoidable shift, without throwing away what has been gained in the past three decades, is a huge challenge. So is getting through the deleveraging ahead in anything like one piece. But we must start in the right place, by recognising that even the recent past is a foreign country.

Japan Estimates Reserve Reval Losses at $187B

Here is a perfect illustration of the so-called balance of financial terror inherent in export-reliant Asian economies accumulating excess reserves. The Japanese FinMin Fukushiro Nukaga suggests that Japan has breathtaking unrecorded losses on its FX dollar assets which were acquired when the yen was rather weaker. It's a lose-lose situation for them: accumulate more dollars which have a tendency to go nowhere but down and you get losses of this magnitude ($187B). OTOH, slowing down the rate of accumulation of dollar assets and you face an even steeper loss on accumulated dollars as the wretched currency plunges at an even faster pace. To extend the Cold War analogy, I see this system as one of Mutually Assured Financial Destruction (MAFD), with America becoming a distinctly subprime economy. Before I get more carried away with this military-industrial complex, just read the following Reuters article:

Unrealised losses on Japan's $1 trillion foreign currency reserves amount to about 18.5 trillion yen ($187.2 billion) when the dollar is around 100 yen, Finance Minister Fukushiro Nukaga said on Thursday. Nukaga again declined to comment on specific levels but said a strong yen could benefit the Japanese economy in the long run as it will bring down the country's import costs.

The dollar fell to a 13-year low below 96 yen earlier this month as the U.S. credit mess deepened, increasing valuation losses on Japan's external reserves, which are thought to be mostly made up of dollar assets. On Thursday it traded around 98.9 yen.

Japan intervened heavily in the currency market in 2003 and early 2004 to help the economy tackle deflation. It sold a total of 35 trillion yen for dollars in the 15 months to March 2004, during which the dollar traded between 105 and 120 yen.

"Unrealised losses are certainly increasing. The amount of losses is estimated at around 18.5 trillion if the dollar is at 100 yen," Nukaga told parliament. He defended the government's stance of sticking with the dollar, saying if Japan had sold the dollar it could have had an unexpected outcome on currency markets.

Nukaga also declined to say if he is considering intervening in currency markets and repeated the ministry's stance that currencies should reflect economic fundamentals and excessive moves are undesirable. "I've made it clear that I see last week's currency moves as excessive," Nukaga said when asked about the recent fall in the dollar.

Asked about the impact of the yen's rise on Japan, the world's second-biggest economy, Nukaga said it has both benefits and ill effects but will help the economy in the long run. "If the yen rises, goods will be coming into the country cheaply and could turn the economy for the better while benefiting Japanese consumers, although it could hurt exporters. "I think it would be good in the medium to long run," he said.

Nukaga also said he expects Japan's economic recovery to pick up pace eventually but is closely watching developments in the U.S. economy and financial markets. "Japan's economic recovery is at a standstill," he told a financial committee of parliament's upper house.

Is Mother Russia Nearing WTO Accession?

Perhaps spurred by the Ukraine beating it to WTO membership, Russia is now pulling out all the stops in its efforts to also join the "nefarious" WTO. To gain entry into the organization, Russia needs to obtain the consent of all the WTO's members. For understandable reasons, negotiations with the Russia-fearing and NATO-joining (well, almost) republic of Georgia are among the most contentious discussions. RIA Novosti has a report on the negotiations between the two antagonists:

Russia will hold negotiations with Georgia on joining the World Trade Organization in late April, Moscow's chief WTO negotiator said on Tuesday. Russia has been seeking membership of the WTO since 1993. So far, Russia has concluded bilateral talks with over 60 states but still needs to complete discussions with the WTO members - Saudi Arabia, the United Arab Emirates and Georgia - that have trade disagreements with the country.

"We are discussing the possibility of a new meeting with Georgia, which is likely to take place in late April in Geneva where a new round of negotiations will be held," Maxim Medvedkov said. Tbilisi earlier vetoed Russia's accession to the world's largest trade body. Relations between the two former Soviet republics have rapidly deteriorated since the Western-leaning Mikheil Saakashvili came to power in Georgia in 2004.

Moscow imposed a transportation and postal blockade on Georgia in October 2006 in apparent retaliation for the detention on espionage charges of four Russian army officers. Russian officials cited commercial reasons, while Tbilisi called the move politically motivated. However, flights are set to resume to Georgia from Russia on Tuesday after a deal was struck in late February.

The South Caucasus republic says it will cease to block Russia's WTO bid only after Moscow honors its 2004 commitment to close down its border checkpoints with Georgia's breakaway republics of Abkhazia and South Ossetia. The two de facto independent republics recently appealed to Moscow for recognition of their sovereignty in the wake of Kosovo's unilateral declaration of independence on February 17.

At the same time, Medvedkov said that Russia would possibly sign a protocol on concluding WTO talks with the United Arab Emirates soon. "We hope to complete negotiations with the United Arab Emirates this week and after that we'll sign a protocol at a time convenient for the parties," Medvedkov said, adding that the document could be signed in late April.

Russia's has already completed bilateral WTO talks with both the U.S. and the EU. Multilateral talks are underway now on agricultural support, export duties, veterinary matters and intellectual piracy.

Aside from the negotiations with Georgia, Saudi Arabia, and the UAE, Russia is facing some contentious discussions with the EU, especially on timber export duties that are having deleterious effects on Nordic paper makers. It's interesting to hear what Alexei Kudrin, Putin's point man on economic matters, has to say. This from Reuters:

Russia is nearing the end of its bid to join the World Trade Organisation (WTO) but still faces "difficult" talks with the European Union on timber export duties, Finance Minister Alexei Kudrin said on Tuesday.

"The WTO accession talks are nearing conclusion. There is intense work going on. Officials from the United States and the European Union are constructively working with us," Kudrin said in a speech. "We are holding difficult but constructive talks on timber duties (with the European Union)," Kudrin, who heads the government's WTO commission, told reporters later. Russia is the largest economy outside the WTO.

Kudrin said he would travel next week to Saudi Arabia and the United Arab Emirates, two of the three countries with which Russia has yet to conclude bilateral deals. Ex-Soviet neighbour Georgia is the third.

"Almost every week we undo a knot. The number of unsolved issues is diminishing," Kudrin said. He declined to predict a date for Russia's accession, but said: "We have a feeling that there is positive movement." Kudrin said WTO accession would be the next major milestone in Russia's economic development after the 2006 liberalisation of capital movement. Kudrin, Russia's economic policy tsar and said to be the leading authority on economic issues for outgoing President Vladimir Putin, met European Trade Commissioner Peter Mandelson in Brussels last week.

His schedule indicated he wanted to achieve a breakthrough in the talks before an expected government reshuffle in May after the inauguration of President Dmitry Medvedev. Brussels has yet to give final clearance for Russia's WTO bid, mainly because of the dispute over Russian export duties on timber that hurts paper and pulp producers in Nordic EU states.

President Vladimir Putin imposed export duties on raw timber in 2007 to promote the development of Russia's wood-processing industry, adding to the costs of Swedish and Finnish paper firms such as Stora Enso, the world's biggest paper producer, UPM-Kymmene, and M-Real.

The duties are due to rise to 25 percent from 20 percent on April 1, one of a series of planned increases. Credit ratings agency Standard & Poor's said a planned increase in the duty to 80 percent from January 2009 would be "potentially devastating" and raised the risk of downgrades for companies in the Nordic forest products sector.

The Bank of Finland has said the higher duties could lead to job cuts and lower national economic output. About 20 percent of raw wood used by Finnish paper mills comes from Russia. Russian WTO negotiator Maxim Medvedkov, who said last year Russia had a solution to the timber export duties row, said the issue was still being discussed with the EU, along with six or seven other duties.

"Our disagreements are diminishing but we have not so far reached common ground. We need a little bit more time," Medvedkov told Reuters. Russian officials declined to reveal the proposals.

Welcome to the Terrordome 2: WTO Headquarters

I sometimes get the feeling from the anti-globalization movement that the World Trade Organization is the seat of all evil, responsible for about 99.9% of what's wrong with the world from growing income inequality, environmental destruction, to the endless marketing of the talentless and disastrous Spears family. (The latter case would constitute "trade in services.") And that's just for starters: view this film clip of arch globophobe Walden Bello outside the WTO building cataloging the organization's infinite sins against mankind. Anyway, the WTO building struck me as a rather attractive base for this arch-organization of money grubbers, charlatans, reprobates, and other evildoers. Fortunately, there is a new publication up on the WTO website detailing the (sordid?) history of this building. It's interesting stuff. For example, did you know that the building used to house the ILO? Or, does the architecture of WTO headquarters reflect the nefarious neo-Satanic activities going on within its walls as depicted by the anti-globalization movement? Decide for yourselves...

It was an optimistic time. World War I had ended. Hopes were rising for a new era of international cooperation, and new international institutions were being built. In 1923, work began on what was to become the Centre William Rappard. The building that would first house the International Labour Office (ILO) and later the World Trade Organization (WTO), fully reflected that optimism. Its location could hardly be more appropriate. The building is in a lakeside park in neutral Geneva; across the tranquil waters and beyond the foothills are the immaculate snowcaps of Mont-Blanc and the Alps. With one of the most beautiful views in the city, the site embodied peace and stability.

Three years later, the building was completed and became the headquarters of the ILO, the only organization created at the same time as the League of Nations, which would itself later become the United Nations. At its birth and over the next decades, the ILO received gifts from its member governments and labour unions: artworks of many kinds, taking up themes of peace, social justice, human progress and the glorifi cation of labour. The commissioned artists were in their prime, artistically and by reputation.

India Buys Britain, Cont'd: Land Rover and Jaguar

Boy oh boy, you're likely to have read it here first: the famous British marques Land Rover and Jaguar are to be sold to India's sprawling conglomerate the Tata Group for the tidy sum of £1 billion. Speculation had been running high about the potential suitors of Land Rover and Jaguar, but now the deed is done. Fortune once called the process of Indian companies buying up British ones "reverse colonization" in action, and I guess you can chalk this deal up under the same category. Selling off these brands is part and parcel of the seemingly unending woes at Ford Motor Company. When this deal concludes, Ford will no longer have any car manufacturing facilities in Blighty. Sad but true. From the Times of London:

Jaguar and Land Rover, two of Britain’s most prestigious car brands, will be sold today in a £1 billion deal to Tata, the Indian conglomerate famous for manufacturing the world’s cheapest car. The sale of the two iconic names marks the end of carmaking in Britain by Ford. It follows the US company’s decision to sell its other big British brand, Aston Martin, last year. Production of its own blue-badged brand cars in Dagenham ended eight years ago. Jaguar and Land Rover will sit alongside Tata’s other automotive assets — including the £1,200 Nano vehicle — Corus, the Anglo-Dutch steelmaker, and Tetley’s Tea.

Land Rover, Jaguar and Aston Martin were part of Ford’s premier automotive group, a division that it had hoped would deliver substantial profits. However, Jaguar struggled after Ford failed to make it a volume producer. Now Ford retains only Volvo from the original stable of prestige brands. But both brands are now perceived as being on the rise after the launch of successful new models. Jaguar’s new XF, the replacement for the retro-styled S-type, has been hailed as having all the style and power qualities of a true Jaguar. By contrast the X-type Jaguar, the cheapest model, was criticised for resembling a Ford Mondeo after the US car group based the car on a Mondeo platform. The X-type had been Jaguar’s big hope to move into volume sales.

Jaguars and Land Rovers will continue to be manufactured in Britain for the immediate future, safeguarding 13,500 jobs. The new owner will stick to business plans drafted by Ford. Ford put Land Rover and Jaguar on sale last year when it was reeling from a $12.7 billion global loss for 2006. The company decided to jettison its prime British marques to try to sort out its difficulties in its home market.

Tata has been in exclusive talks with Ford since the beginning of the year after winning a bidding race that originally attracted strong interest from private equity groups working in conjunction with senior former Ford executives. Winning the brands will open a radically new chapter in the company’s history. While Tata’s trucks dominate Indian highways and the company has made cars since 1991, acquiring the marques will represent a foray into luxury territory.

Ratan Tata, the chairman, has acknowledged that the image disparity Tata will face in owning two such prestigious brands while producing what it claims will be the world’s cheapest car: the “one lakh” Nano (one lakh is 100,000 rupees, or £1,200), which was unveiled earlier this year. But at the recent Geneva Motor Show he said: “There is no need to tinker with the brands. Our challenge is to make them thrive and grow.”

Tata’s acquisition is its second big move into the British market in just over a year. In January last year the company, whose interests run from tea plantations to IT, bought the Anglo-Dutch steelmaker Corus for £6.7 billion. Its buying spree has also included Tetley, the tea maker, Daewoo’s commercial vehicle arm and the Ritz-Carlton hotel in Boston, Massachusetts.

Last month Ford smoothed the way for the completion of the sale by offering a £300 million injection into the pension fund. An announcement of a sale had been expected at the start of March but was delayed while the two sides finalised their future working relationship.

Reuters also has more on the pending deal's implications:

But analysts have questioned how Tata will incorporate the luxury brands into its stable of sturdy trucks and functional passenger cars, including the Nano, the world's cheapest car which it unveiled in January.

While Land Rover has generated three years of record sales with its SUVs, the fit of Jaguar is far less clear.Ford, which lost $2.7 billion in 2007 and $12.6 billion in 2006, is selling off Jaguar and Land Rover to focus on turning around its loss-making operations in North America.

I Don't Buy It: Disney's Green Message in Toons

File this one under "academics with too much free time on their hands." The Times of London has written a feature on author David Whitley's The Idea of Nature in Disney Animation which purports that Disney has long carried the green message to young children. I am exceedingly skeptical about this: as you will read below, most of the Disney films mentioned below do not have an overtly environmental message compared to, say, Dr. Seuss's The Lorax. Now that was a cartoon with a strong warning about the perils of over-industrialization. When I was a tiny tot, The Lorax scared the bejesus out of me. However, the same cannot be said for the Disney movies mentioned here, methinks. Your mileage may vary. All I can say is "yeah sure, and Harry Potter is really about subprime mortgages":

Walt Disney films such as Bambi, The Jungle Book and Pocahontas have played an important role in educating the public about the environment, a new book by a University of Cambridge academic has claimed. The stories of animated Disney characters, from Snow White in 1937 to the clownfish Nemo in 2003, have built “a critical awareness of contested environmental issues”, according to David Whitley, a lecturer in English.

While Disney movies are often regarded as little more than escapism, and have even been criticised as bland populism, many feature messages about conservation and the relationship between people and the natural world that have proved to be highly influential, Dr Whitley said.

His book, The Idea of Nature in Disney Animation, argues that the films’ cute animals have systematically encouraged generations of children to ally themselves with the natural world and protect it. Dr Whitley singled out Bambi, which was released in 1942, as particularly influential, saying that many green activists had credited it as the inspiration that first made them interested in environmental issues.

He said: “Disney films have often been criticised as inauthentic and pandering to popular taste rather than developing the animation medium in a more thought-provoking way. “In fact, these films have taught us variously about having a fundamental respect for nature. Some of them, such as Bambi, inspired conservation awareness and laid the emotional groundwork for environmental activism. “For decades Disney films have been providing children with potent fantasies, enabling them to explore how they relate to the natural world.”

The book, published by Ashgate, concentrates on two periods in the Walt Disney Company’s history – between 1937 and 1967, when Walt Disney was in charge, and between 1984 and 2005, when Michael Eisner was chief executive. Both moguls “saw themselves as having a sustained and strong commitment to wild nature and the environment”, but in subtly different ways, Dr Whitley said...

How animation brought green issues to life

Snow White and the Seven Dwarfs (1937)
The jealous Queen arranges for the death of Snow White who escapes to the forest and befriends dwarfs and woodland creatures.
The message “The forest’s pastoral setting gives viewers a sense of the integrity and separateness of nature from the world of humans, which is shown as oppressively unbalanced. Snow White is also a role model, showing how humans can protect nature and even bring order to it.”

Bambi (1942)
The plot follows Bambi through his friendships with Thumper the rabbit and Flower the skunk, the death of his mother at the hands of hunters and his ascent to prince of the forest.
The message “A classic example of the use of animated detail to represent the idyllic realm of nature rendered vulnerable by human incursions. The film is credited with having influenced a generation of conservationists.”

Cinderella (1950)
Under the thumb of her cruel stepmother and stepsisters, Cinderella’s only friends are animals. After attending the royal ball, the mice help the Prince to find her.
The message “Cinderella’s relationship with an extensive subculture of friendly animals demonstrates that she is wholesome and good. The animals help to subvert the authority of a repressive, self-regarding human culture cut off from nature and represented by the ugly sisters.”

The Jungle Book (1967)
Ten years after he was found by Bagheera, the panther, it is decided that Mowgli, a feral child, should return to the world of human beings to escape Shere Khan, the tiger.
The message “Mowgli demonstrates not just a desire to protect the animal kingdom but to become part of it. The film introduced young viewers to some of the competing theories about the consumption of natural resources.”

The Little Mermaid (1989)
Ariel, the mermaid princess, longs to be part of the human world. She falls in love with Prince Eric and temporarily becomes a human being.
The message “This suggests a fundamental division between humans and the natural world that can, at least partially, be overcome. The film persuades viewers that the human and natural worlds are comparable and equivalent.”

Pocahontas (1995)
Pocahontas, a Native American, falls in love with John Smith, an English settler. She shows him that her people have an intimate and spiritual relationship with nature.
The message “Pocahontas’s decision to stay among her own tribe teaches that the natural world is not there to be harnessed by the civilising effects of humans. The historically inaccurate reconciliation with the colonists implies that our rift with nature can be healed.”

Tarzan (1999)
Tarzan is raised by gorillas. A group of humans arrive, including Jane, who falls in love with Tarzan after he rescues her. Tarzan saves the gorillas from Clayton, a hunter who wants to capture them.
The message: “The human impact on the environment is seen at its destructive worst in the form of Clayton’s efforts to exploit the natural world for commercial gain.”

Finding Nemo (2003)
Nemo, a clownfish, is embarrassed by his overprotective father, Marlin. He is captured and taken to Sydney.
The message: “The theme of letting go of one’s protective anxieties accepts the dangerous aspect of nature, but we are encouraged to tolerate freedom with all the precariousness that entails.”

How Have Other LDCs Fared Against China Post MFA?

The phasing out of the voluntary export restraint (VER) known as the multi-fibre agreement (MFA) imposed by developed countries on textile exports from developing countries was thought to be potentially disastrous for countries in export competition with China. Indeed, the so-called bra wars between the EU and China over the sudden glut of Chinese textile exports is evidence of China's unleashed capabilities after the removal of the MFA. Justifiable fears have been raised by other LDCs which do not have the same manufacturing prowess as China about being literally killed off in global textile markets by the PRC juggernaut.

Interestingly, I was reading the 2008 Global Economic Prospects publication of the World Bank which has a box section (page xlviii, Box 1.1) on the topic. How have other textile exporting LDCs fared post-MFA vis-a-vis China? Has China overwhelmed everyone else? While others have not done particularly well, some of the more doom-laden prognostications have failed to materialize. Bangladesh, for instance, has actually increased its textile exports in the post-MFA period. This topic is sufficiently important that I am including the section in its entirety:

The system of quantitative restrictions that managed rich countries’ imports of textiles and clothing from developing countries for 30 years, especially those produced in China and India (the Multi-Fiber Arrangement), was finally dismantled at the end of 2004, although restrictions for a number of categories of Chinese textile and clothing exports to the EU and the United States remained because of measures that are due to expire in 2008 [see the link above on the bra wars].

China’s exports of clothing soared 22 percent in 2005 and 32 percent in 2006, increasing its market share in those two years to 24 percent and 28 percent, respectively, but the impact on competitors has been less drastic than some had feared. The increase in the size of the world market for clothing has allowed exports from many other countries to grow, including the Arab Republic of Egypt, India, Peru, Sri Lanka, and Turkey. In Bangladesh, where 1 million jobs were predicted to be lost, exports to the EU and the United States gained continuously between 2004 and the first four months of 2007.

Nevertheless, some countries have seen declines in clothing exports that may entail substantial adjustment. For example, exports to the U.S. and EU markets from Brazil, the Dominican Republic, Swaziland, and Taiwan (China) declined substantially in 2005 and 2006. With the exception of Swaziland, clothing exports from these countries continued to decline into 2007. In addition, for Sub-Saharan Africa as a whole, where the end of the clothing sector had been foreseen, exports to the EU and the United States fell by 7 percent in 2004 and 17 percent in 2005 (on a trade weighted average). In 2006, Sub-Saharan African textile exports to the EU grew 3 percent, whereas exports to the United States declined by 6 percent. In 2007, to the extent that data are available, Sub-Saharan African textile exports to both the EU and the United States grew by 7 and 2 percent, respectively. A number of countries, including Madagascar, Mauritius, and Swaziland, managed to reverse an initial decline in clothing exports and return to growth in 2006 or early 2007.

How vulnerable are other countries when the final restrictions on Chinese textile and clothing exports to the EU and the United States expire? In 2006, 19 percent of Chinese exports to the EU and 20 percent of exports to the United States were subject to quota restrictions, and exports of these products will likely grow significantly after removal of the quotas. In the EU market, Colombia, the Dominican Republic, Mauritius, Peru, and Sri Lanka appear to be most at risk with more than 40 percent of their 2006 exports in product categories for which China is currently still subject to quotas. For other countries, the ratio is between 20 and 40 percent, and for Sub-Saharan Africa as a whole stands at 51 percent, mainly driven by the high exposure of Mauritius (74 percent). In the U.S. market, exposure is generally lower: only the Dominican Republic, India, and Sri Lanka export more than 20 percent of their textiles and clothing in categories where Chinese exports are currently subject to quotas. For most other countries, the ratio is between 5 and 20 percent. However, looking at the impact of the elimination of Multi-Fiber Arrangement quotas in 2004, many competitors managed to defend their market shares in recent years, and they might be able to do so in 2008 as well.

The clothing sector still provides an opportunity for export diversification and the expansion of manufactured exports for low-wage countries, even in the face of unfettered competition from China. The countries best able to expand their exports of clothing will be those that have a supportive business environment, low trade costs (efficient customs, ports, and transport infrastructure), and competitive firms that are flexible enough to meet the changing demands of the global buyers that now dominate the industry.

At the same time, significant adjustment pressures may arise as more efficient firms expand, while those unable to compete in the global market decline. In the absence of other employment opportunities, especially for women, workers made redundant from the textile and clothing sector may fall back into poverty. Minimizing the costs incurred by released workers and their families and facilitating their adjustment into alternative employment will be a major challenge for a number of developing countries.

Japan Inc: Yes, Decoupling is Possible

Just out is news that Japanese exports for the month of February increased by 8.7%, somewhat assuaging those concerned about Nihon's exports slowing down in line with the US economy entering recession land or somewhere thereabouts. Combined with healthy export growth in January as well, this may be a good portent. Indeed, strong demand growth from LDCs is making up for the subprime-induced coma of the American economy. USA, who needs ye? From Bloomberg:

Japan's export growth accelerated in February as demand from emerging markets helped automakers ride out the U.S. slump.

Exports, which contributed more than half of the economy's expansion last quarter, climbed 8.7 percent from a year earlier after increasing 7.6 percent in January, the Finance Ministry said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for a 7.5 percent gain.

Hino Motors Ltd. and Honda Motor Co. are relying on consumers in emerging economies to make up for waning demand in the U.S., Japan's largest market. Exports may cool this year as the U.S. slowdown spreads around the world and the yen's surge against the dollar hurts exporters' profits.

``Global demand so far has held up far better than people have hoped,'' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. ``We've got the Chinese and the Russians to thank for that. They've got money and they're spending it.''

Imports increased 10.1 percent, and the trade surplus widened 0.9 percent to 969.9 billion yen ($9.7 billion), the ministry said...

Japan's sales to Russia doubled in the past two years. Those to China expanded 45 percent. That growth has reduced the importance of the U.S., which accounted for only 20 percent of total exports last year, compared with about 30 percent in 2000.

PRC Actually Loves Bloggers, Ban or Not

Well this is funny. The Chinese government, the folks who've banned Typepad and my dear Blogger from polluting the minds of the Chinese people, are now trumpeting the efforts of overseas-based Chinese bloggers in pointing out Western bias in the coverage of the Tibet riots. There are also accusations that images are being manipulated to portray China as a country that is backwards on human rights and what else have you. Here's what I suggest to our favorite totalitarian regime: if the Chinese official media is so keen to use bloggers' posts to point out the flaws in Western media portrayal of the Tibet riots, then maybe actually allowing the Chinese people access to the likes of Typepad and Blogger would be welcome. What a radical idea. From our favorite official publication, the China Daily:

Chinese netizens, including students studying overseas, have been angered by biased and sometimes dishonest reports about the recent riots in Tibet by some Western media. Pictures from some media websites, including CNN and BBC, with untrue reports about the riots have been posted on chatrooms, drawing criticism. "I used to think the Western media were fair. But how could they turn a blind eye to the killing and arson by rioters?" asked a posting at pic.qikoo.com.

The pictures illustrate how news can be manipulated. The BBC News website carries a picture with the caption saying "There is a heavy military presence in Lhasa", while the photo clearly shows an ambulance bearing the red cross symbol. The American Fox News website published a photo with the caption "Chinese troops parade handcuffed Tibetan prisoners in trucks", while the photo shows Indian police dragging a man away. CNN.com used a cropped photo of Chinese military trucks, cutting off the half of the picture showing a crowd of rioters throwing rocks at the trucks.

More notably, the websites of Germany's Bild newspaper, N-TV and RTL TV, and the Washington Post all used pictures of baton-wielding Nepalese police in clashes with Tibetan protesters in Kathmandu, claiming that the officers were Chinese police.

"To tarnish China's image, the West is doing whatever they can, no mater how mean and vicious," said one netizen on www.huanqiu.com. "Is this what they call Western democracy and freedom of speech?" asked another netizen.

Huai Bao, a student studying filmmaking in Vancouver, Canada, said: "I have read some news and online discussions made by those who have never been to Tibet, who have zero knowledge about China and the history of Tibet. These people have no rights to comment on Tibet." Bao, from Beijing, became a believer in Tibetan Buddhism after meeting his master, a high-profile lama, in the Chinese capital. He said that some Tibetan monks set fire to shops, schools and hospitals, and attacked Han and Tibetan people, including women and children. "My master told me that the monks involved in the riots were not real monks, as violence and crimes are absolutely against the teachings of Buddha," he wrote in an e-mail to China Daily.

Netizens also mentioned a blog (kadfly.blogspot.com) [gee, how are they going to access this site in the PRC?] run by a group of Western tourists traveling in Tibet during the riot, where photos and video clips of Tibet are posted. Although their photos were used by the New York Times and the BBC, the following words did not make it into the Western press. One blogger wrote: "I want to make one thing clear because all of the major news outlets are ignoring a very important fact the protests yesterday were NOT peaceful."

He wrote that all of the eyewitnesses agreed that "the protesters went from attacking Chinese police to attacking innocent people very, very quickly. They appeared to target Muslim and Han Chinese individuals and businesses first but many Tibetans were also caught in the crossfire."

A video clip was posted on the blog, in which a Han motorcyclist, an obvious passerby, was stoned by a crowd of mob. Bao said there is a unanimous feeling of anger among his Chinese friends in Vancouver. "Any news about China has to be negative so that they will believe it - from 'poisonous toys to poisonous dumplings'. Some foreign media have a particular interest in bashing China over human rights and pollution. They turn a blind eye to all progressive changes."

What's This, the SWF Magna Carta?

Two things: the Financial Times reported earlier on that SWFs from the UAE and Singapore have acceded to US requests on their conduct so as not to invite protectionist ire or government scrutiny Stateside. However, there are more forthcoming guidelines to be put out, especially by the IMF. Here is part of the official statement from the US Treasury site:

Sovereign wealth funds (SWFs) represent government-owned investment vehicles, funded by foreign exchange assets and commodity export receipts, etc., which invest internationally for financial objectives such as stabilization and intergenerational savings.

The United States, Abu Dhabi, and Singapore, being a group of nations with SWFs and a country receiving investments from SWFs, have a common interest in an open and stable international financial system. We support the processes underway in the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) to develop voluntary best practices for SWFs and inward investment regimes for government-controlled investment in recipient countries, respectively. International agreement on a set of voluntary best practices will create a strong incentive among SWFs and investment-recipient countries to hold themselves to high standards. We hope that the IMF and OECD's work can build upon these basic principles:

Policy Principles for Sovereign Wealth Funds (SWFs)

SWF investment decisions should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals of the controlling government. SWFs should make this statement formally as part of their basic investment management policies. [What happened to point #1?]

2. Greater information disclosure by SWFs, in areas such as purpose, investment objectives, institutional arrangements, and financial information – particularly asset allocation, benchmarks, and rates of return over appropriate historical periods – can help reduce uncertainty in financial markets and build trust in recipient countries.

3. SWFs should have in place strong governance structures, internal controls, and operational and risk management systems.

4. SWFs and the private sector should compete fairly.

5. SWFs should respect host-country rules by complying with all applicable regulatory and disclosure requirements of the countries in which they invest.

Policy Principles for Countries Receiving SWF Investment

1. Countries receiving SWF investment should not erect protectionist barriers to portfolio or foreign direct investment.

2. Recipient countries should ensure predictable investment frameworks. Inward investment rules should be publicly available, clearly articulated, predictable, and supported by strong and consistent rule of law.

3. Recipient countries should not discriminate among investors. Inward investment policies should treat like-situated investors equally.

4. Recipient countries should respect investor decisions by being as unintrusive as possible, rather than seeking to direct SWF investment. Any restrictions imposed on investments for national security reasons should be proportional to genuine national security risks raised by the transaction.

However, Singapore now says US Treasury concerns are overblown for a number of reasons. First, Singapore disputes that Temasek, one of its two SWFs, is really an SWF per se for obscure technical reasons I think few buy. Actually, there are several ways SWFs are funded which do not mean they are not SWFs. Second, Singapore claims that its procedures already comply with what the US Treasury is asking for. Actually, research exists pointing out this same thing: Temasek is already quite transparent in a neoliberal sense, but it's the other Singaporean SWF, GIC, that isn't quite transparent. Still, the message seems to be one of Singaporean indifference at US intrusion than the tone of getting SWFs' paymasters to acquiesce to American demands. From Bloomberg:

An agreement by government-run funds of Abu Dhabi and Singapore to increase transparency won't shed more light on Temasek Holdings Pte's $118 billion portfolio, because the company said it already meets disclosure guidelines.

U.S. Treasury Secretary Henry Paulson said yesterday that funds including the Government of Singapore Investment Corp. agreed to adopt rules for greater disclosure. Temasek, owned by Singapore's finance ministry, said it already provides more information than government-run funds.

``Temasek is not a sovereign wealth fund,'' spokesman Mark Lee said by telephone today. ``Temasek has to sell assets to raise cash for new investments and doesn't require the government to give approvals.''

The U.S. is pushing sovereign wealth funds to adopt new disclosure rules because of concern that a lack of transparency could spark a rise in protectionism. The European Commission has called for an international accord to limit the political influence of the state-owned capital pools, which have grown in number to about 40, managing between $2 trillion and $3 trillion.

Singapore's GIC and counterparts in China, Russia and Dubai have deployed record central bank reserves of as much as $2.9 trillion, buying stakes in U.S. financial services companies. GIC invested in UBS AG and Citigroup Inc. in the past three months as banks sought to replenish capital after the value of their U.S. subprime mortgage-related assets plummeted.

In January, Temasek paid $6.2 billion for a 9.4 percent stake in Merrill Lynch & Co. after the largest U.S. brokerage had the biggest loss in its 93-year history because of writedowns on subprime mortgages and related securities.

``These types of groups play a more important role because of their investments in large financial institutions,'' said David Cohen, a Singapore-based economist with Action Economics. ``They will be under pressure to move towards greater disclosure to show that their investments are business transactions and not politically motivated.''

Temasek, set up in 1974 to manage S$350 million ($252 million) of Singapore's state assets, now owns stakes in ICICI Bank Ltd. of India, Bank of China Ltd. and DBS Group Holdings Ltd., Southeast Asia's biggest bank.

The company, which has about S$164 billion ($118 billion) portfolio of assets, started publishing an annual review of its investment strategy and performance in 2004, while GIC first publicly disclosed details on its performance in 2006.

``Temasek discloses a lot more than GIC and always has a strong sense of corporate governance,'' Lee said. Paulson's statement ``will not any impact,'' he said. The company seeks approval from a board consisting of independent directors and a representative from the Ministry of Finance, its only shareholder, Lee said...

``Temasek is ultimately controlled by the government and it is not a private organization,'' said Cohen of Action Economics. ``Temasek has many similarities to GIC.''

The company's net income fell 29 percent to S$9.1 billion in the year ended March 31, 2007, Temasek said in its annual report released Aug. 2. Total assets under management rose 27 percent to S$164 billion after Temasek bought shares in companies including Standard Chartered Plc, and is the U.K. bank's biggest investor.

Temasek has given a return on investment of more than 18 percent by market value since its inception more than three decades ago, according to the company's most recent annual report.

Paulson said yesterday the three countries agreed that all investments must be based only on commercial grounds, and the funds should increase the disclosure of information and make sure they have strong risk management and governance controls. They also agreed that countries that receive investment shouldn't set up protectionist barriers and have consistent, non-discriminatory investment rules.

BMW Deals with Strong Euro, Weak US Demand

Folks, let me assure you that I use the BMW for transportation. But, it's not what you're thinking. Rather, I use the bus, metro rail, and walk to get where I need to [rimshot! Take my wife pleeze, etc.] Seriously, though, the famed German automaker whose luxury sedans are technologically advanced enough to make Toyota's Prius seem like a gas guzzler by comparison is dealing with two ominous and interrelated headwinds. First is the infamous declining dollar and, conversely, the excessively mighty Euro denting profits. While BMW does hedge its transactions as most of its sales are outside the Eurozone--think forward purchases of euro--hedging is not exactly a costless endeavor. Moreover, the fallout from the subprime contagion is having effects on key markets like the US, home of the infamous Beemer-loving upwardly aspirational yuppies. Unsurprisingly, the company is looking to make more cars Stateside to lower production costs. From the BBC:

BMW's glitzy new showroom, BMW World, dominates the Munich skyline. Walking into the futuristic building, with its steel roof, everything is geared towards promoting the BMW brand. There are restaurants, a café and a shop selling BMW merchandise. Since the luxury showroom opened its doors last autumn, more than a million visitors have flocked here. BMW chose the showroom as the venue for the company's annual press conference.

The world's biggest premium carmaker sold a record 1.5 million vehicles in 2007, and says its on course to meet its target of selling 1.8 million cars in 2012, confident that sales of its BMW, Mini and Rolls-Royce brands will continue growing. The company's profit before tax was 3.9bn euros ($6.1bn; £3.0bn) in 2007, 6.1% down on the previous year, but still high.

Managers told reporters that despite the weak dollar and high commodity prices, the carmaker is hoping to increase its earnings this year. But there is one big cloud on the horizon. The BMW group is battling to limit the fall-out from the weakening dollar. In an interview with the BBC, BMW's chief executive, Norbert Reithofer, confirmed that the carmaker would be increasing production at its plant in the US.

"If I look into the future, we will increase our production capacities in the US from 150,000 units to 240,000 units, the car plant in the US helps us on the natural hedging side, it can reduce your total exposure," Norbert Reithofer said. The United States is BMW's biggest single market and the group has a big plant in Spartanburg, South Carolina. Four out of five BMW Group cars are exported, so the company is exposed to exchange rate fluctuations.

The carmaker knows that it is operating in a tough economic climate. "During the first two months of this year, in January and February, we had a challenge in the US," said the company's chief executive. "We were able to compensate for the losses in car volume in the US elsewhere in the world. We have a very good market situation in China, Germany is going up, and we had good results in the UK. We are a global player and we are not just dependent on one market," he said. "From a financial hedging point of view, we are in a good position this year," Mr Reithofer said, smiling broadly. "It's not just one currency. We have three important markets, Japan, the UK and the United States," Mr Reithofer explained.

BMW said that it has hedged itself completely this year with "all of the main currencies". However, currency fluctuations are taking their toll. They cost BMW 517m euros last year, while raw material price increases cost the group 288m euros. But that was offset by higher sales and improvements in efficiency.

Faced with tough competition from rivals, the German group is bent on cost-cutting. "Our major production cost is materials, which amounts to 26bn euros," Mr Reithofer said. We have to have discussions with our supplier networks about prices and we have to start an initiative to find out if we can we reduce the costs of our supplier companies and cut logistics costs. We have to buy more goods, that means more components for our cars, in the US. For our car plants in the US and Europe."

The premium carmaker has announced that it is planning to axe more than 8,000 jobs, a decision that provoked outrage in Germany. And it is worried that a slowdown in the US market could affect its sales. "A slowdown of the car market in the US in 2008 could affect the whole car market. Look at our customers, we are a premium car manufacturer and that helps," Mr Reithofer said. "Over the last 10 years, during a recession, first volume car manufacturers are affected, then later it's premium carmakers. Will it affect us? We don't know, it depends on how deep the crisis will be," he added, sounding an ominous tone.

Di Plane Pt. 3: 787 in Trouble + EADS v. Boeing

This post is a follow-up to two I made earlier regarding the troubles brewing at Boeing over its now thrice-delayed 787 and the continuing row over EADS winning a $35B contract to supply the US Air Force with air tankers at the expense of Boeing. These do not seem to be the best of times for the famous Chicago-based firm. Let us begin with the 787 being officially delayed for a third time and the customers who are now harrying Boeing over late delivery. Worse, the whole program may require a major overhaul in light of ongoing difficulties:

Boeing admitted on Wednesday that it would have to redesign parts of its troubled 787 Dreamliner, raising the prospect of a third delay in recent months to delivery of the new aircraft. The company’s comments came in response to a warning from Steven Udvar-Hazy, chairman of International Lease Finance Corporation (ILFC), the 787’s biggest customer. Mr Hazy told a JPMorgan Chase conference that the state of the Dreamliner programme was “not pretty”. He said first deliveries would be delayed for at least another six months because its centre wing box – which holds the wings in place – needed to be redesigned.

Boeing refused to comment on the specifics of the redesign work but said Mr Hazy was not painting an accurate picture of the overall programme. “We are doing some redesign work but things are more complex than what he said,” said Yvonne Leach, for Boeing. “There’s a whole load of things going on.” Mr Hazy said he expected delivery of the long-range, 250-300 seat jet to be delayed until the end of the third quarter of next year. Boeing’s most recent guidance was that the Dreamliner would be ready “early” in 2009.

Boeing said it was sticking to its most recent guidelines, but added that it was undertaking a review of the 787 and would report its findings publicly at the end of March or early in April. There is now widespread expectation in the industry that the company will at that point announce a further delay.

Mr Hazy’s warning echoes a report from Goldman Sachs this month, which also said delivery of the 787 would not begin until the third quarter of 2009. A further delay would be hugely embarrassing for the company, which replaced Mike Bair, the former head of the 787 programme, after the first delay was announced in October last year. His replacement, Pat Shanahan, who was drafted in from Boeing’s missile defence unit.

Mr Shanahan has found it difficult to stick to the aggressive timetable laid out for the aircraft and in January the programme was delayed again. The two earlier delays were both attributed to assembly problems rather than issues with the aircraft’s design.

Boeing now faces having to make penalty payments to customers of the sort that have plunged Airbus, its European rival, into heavy losses. Last month ILFC said it would seek compensation “on a large scale” from Boeing for the 787 delays. Qantas, the Australian flag carrier, has also said it will ask for damages.

The 787 is Boeing’s most successful new aircraft, with 857 orders in place, worth about $140bn. But analysts are asking difficult questions about how profitable the whole programme could be if penalty payments are added to other cost concerns. “The large number of 787s sold at low prices, combined with rising recurring costs, are steadily eating away at programme margins and long-term programme profitability,” wrote Joseph Nadoll of JPMorgan in a research note on Wednesday.

ILFC, the world’s leading aircraft leasing firm, has ordered 74 Dreamliners, making it the biggest buyer for Chicago-based Boeing’s fastest-selling aircraft. The company has already struck leasing contracts with a string of international carriers such as Air Berlin, Lan Chile, Royal Jordanian, AeroMexico and Air Seychelles.

Meanwhile, Boeing is now battling EADS in a race to gather the biggest guns in the DC lobbying clique. As the Government Accountability Office (GAO) decides whether Boeing's complaints have merit, there will be no lack of political bickering in the meantime. The international political economy angle is interesting in that (a) improved US relations with France and Germany in the aftermath of the Iraq invasion may be damaged and (b) Boeing and Airbus--the commercial airline making subsidiary of EADS--have lodged complaints against each other at the World Trade Organization. Whoever said IPE was staid? When big money is at stake, the calculus of political consent often ratches up, too:

Northrop last week hired a lobbying firm run by Trent Lott, the former Mississippi Republican senator, and John Breaux, a former Democratic senator from Louisiana. Northrop and EADS are relying on a group of Washington firms – including Hill & Knowlton, Quinn & Gillespie, and Public Strategies – to counter Boeing’s powerful lobby on Capitol Hill.

Boeing supporters have challenged the unexpected decision on several fronts, including that it would cost American jobs and damage the US defence industrial base. They have also lambasted the air force for choosing EADS while Airbus and Boeing are involved in a World Trade Organisation dispute.

Boeing last week lodged a protest with the Government Accountability Office, the oversight arm of Congress. Boeing allies allege that the air force changed the requirements of the competition at a late stage in a manner that favoured EADS. The company has also suggested that the air force misled Boeing by encouraging it to offer the 767, a smaller aircraft than the Airbus A330 which won.

The GAO has 100 days to respond to the protest. While the air force is not legally required to follow the agency’s recommendation, it almost always does. One congressional aide familiar with the process said government departments were inclined to treat GAO recommendations as mandatory because they are given great deference in the courts.

Major David Small, an air force spokesman, on Sunday said the air force “will follow the recommendations of the GAO.” If the GAO ruled in Boeing’s favour, it would also provide ammunition to politicians on Capitol Hill who want to reverse the deal.

Last week, Sue Payton, head of air force acquisitions, says the air force was legally required to ignore the impact on US jobs and the industrial base. With Robert Gates, US defence secretary, and Admiral Mike Mullen, chairman of the joint chiefs, Ms Payton has strongly defended the competition as fair.

While the GAO considers Boeing’s protest, lawmakers from states with a strong Boeing presence – particularly Washington and Kansas – are trying to engineer broader opposition to the deal on Capitol Hill. EADS and Northrop are hoping to counter that by urging politicians without a direct stake in the fight to stay on the sidelines.

Another element of the Northrop-EADS strategy is to downplay the role of the European company in public statements. While EADS will supply the Airbus tanker, Northrop, which is the prime contractor, generally comments publicly instead of its European partner.

EADS and Northrop must decide whether to start the tanker programme soon or wait until the GAO has issued its recommendation. A source familiar with the planning said the companies had already decided to proceed with a groundbreaking ceremony in Mobile, Alabama, where the tankers would be assembled. Randy Belote, a Northrop spokesman, said only that the companies “hadn’t announced plans”.

The companies have had some success pushing back against Boeing. Last week, John Warner – the Republican on the Senate armed services committee who backed Senator John McCain’s investigation of the original Boeing deal – reminded lawmakers the defence industry was increasingly globalised.

”Until the GAO acts and reports to Congress their findings, we should lower the emotional rhetoric, be accurate with the facts, and withhold judgment of the work done by a large dedicated group of uniformed and civilian acquisition specialists,” said Mr Warner.

Mr Warner also defended John McCain, the Arizona senator and presumptive Republican presidential nominee, who aggressively investigated a previous Boeing contract to provide the air force with tankers. Congress cancelled that deal in 2003 after investigations revealed that a senior air force officer had held illegal job negotiations with Boeing.

Some Boeing supporters have blamed Mr McCain’s investigation for ending the original deal. Others have accused Mr McCain of pressuring the air force to change the requirements of the competition to suit EADS. Mr McCain responds that he only forced the air force to remove language that would have tilted the competition unfairly towards Boeing.

Richard Aboulafia, an aerospace analyst at the Teal Group, said that while Boeing faced a “long fight” to try to regain part of the tanker contract, the outcome might depend on whether the Democrats won the presidency and retained control of Congress in November, which he said would produce a 60 per cent chance of a split-buy.

Loren Thompson, an analyst at the Lexington Institute, said he doubted whether there would be enough evidence “within the narrow confines of a GAO inquiry”, but added that “a combination of GAO findings and legislative action could stall or reverse the decision”.

Paul Nisbet, an aerospace expert at JSA Research, said the GAO decision was also likely to be “engulfed in politics”. He added that there was also the possibility that the recent improvement in US relations with Germany and France could work against Boeing.

“It would be a blow to these improved relations with these Airbus countries if the US air force decision were to be reversed. The GAO, looking out for its own well being, will likely be ‘politically correct’ regarding its ruling.”

Mr Nisbet says he believes Boeing’s chances are a “long shot”, and said he doubts that “there is sufficient resolve in the Congress to pass legislation that would unfund the tanker or reverse the US Air Force’s decision.”

Olympic Hurdles: Gebrselassie Out, Tibet Rages

I found the graphic above while using the search term "Beijing Olympics," and it pretty much sums up the grievances of many activists with China hosting the event. What are you going to do Wen your Olympic dreams are turning into nightmares? Hu will you turn to when world opinion sours on your Games? Legendary Ethiopian distance runner Haile Gebrselassie has already decided not to participate, calling the air in Beijing bad enough for "suicide." Meanwhile, the Tibet situation is worsening. To most of the rest of the world, the 14th Dalai Lama is known as a Nobel Peace Prize winner. To the Chinese leadership, however:

"The Dalai is a wolf in monk's robes, a devil with a human face but the heart of a beast," [secretary of the Party Committee of Tibet Autonomous Region] Zhang Qingli was quoted as telling officials. "We are now engaged in a fierce blood-and-fire battle with the Dalai clique, a life-and-death battle between us and the enemy."

Wen Jiabao certainly has his work cut out for him, and this sort of hyperbole doesn't seem to help. The Olympics may turn out to be a pretty large PR fiasco, if it isn't one already. If Beijing doesn't get the air pollution problem mitigated soon and Tibet gets further out of hand, who knows how much worse things can get for the Beijing Olympics? From Bloomberg:

China, facing criticism over pollution and human rights, is experiencing "problems'' in the run-up to its first Olympics, Premier Wen Jiabao said.

The International Olympic Committee yesterday said it may reschedule endurance events affected by Beijing's smog, while China's actions in Sudan and Tibet have pushed human rights groups to seek a boycott of the Aug. 8-24 games.

Concern before recent Summer Olympics, including Athens in 2004 and Atlanta in 1996, centered on venues being ready or too spread out. Criticisms directed at Beijing organizers stem more from government policies, prompting Wen to accuse detractors of mixing politics and sports.

"We are still a developing country and it's inevitable that we may have some problems when organizing the Olympics,'' Wen told reporters in Beijing today. "We need to respect the principals of the Olympics and the Olympic charter, that is, we shouldn't politicize the Olympic Games.''

Wen said Tibetan protesters were trying to "undermine'' the Olympics, while United Nations Secretary-General Ban Ki-moon asked China to exercise restraint in Tibet, adding that events there shouldn't be linked to the staging of the Olympics. Even the Dalai Lama, Tibet's spiritual leader, who accuses China of engaging in cultural genocide in the Himalayan region, doesn't want an Olympic boycott.

Ma Ying-jeou, the leading candidate for Taiwan's March 22 presidential election, said he may lead a boycott over the crackdown in Tibet. "If I'm elected president, I won't rule out stopping sending teams to the Beijing Olympics,'' Ma, China's preferred choice as president, said in an e-mailed statement today.

At least 80 people have died in Tibet during the biggest protests against Chinese rule in 20 years, according to Tibet's government-in-exile. China, which invaded the Himalayan territory in 1951, refuted March 16 the Dalai Lama's assertion that a "cultural genocide'' is taking place.

Other politicians, including European Union ministers, have rejected the idea of a boycott, feeling it "would not be the way to work for the respect for human rights,'' Christiane Hohmann, a European Commission spokeswoman, said yesterday.

U.S. Olympic Committee spokesman Darryl Siebel told the Associated Press a boycott would be "one of the worst ideas ever conceived. Any boycotts won't win the hearts of the people,'' Wang Wei, the top official at the Beijing Olympic Games Organizing Committee, said in an interview today. "The Olympics is for the world and it's especially for the young people…''

Meantime, China's pollution has raised concern among athletes and International Olympic Committee officials. Arne Ljungqvist, chairman of the IOC's medical commission, said yesterday "some events will not be conducted under optimal conditions'' and the committee is drawing up contingency plans for endurance events.

Beijing organizers have yet to receive notice of such plans, Liu Wenbin, deputy director of the sports department, said in a telephone interview today. "Competition schedules aren't set by the IOC alone,'' Liu said. Any changes "will be a joint decision by the IOC and the international sports federations.''

Chinese promises to clear the air in time for the Olympics, including a $17 billion clean-up, haven't convinced all athletes, with world record holder Haile Gebrselassie last week pulling out of the marathon because of health fears. "It's suicide,'' Gebrselassie, an asthmatic, said in an interview with Spanish newspaper El Pais published today.

Wen said allegations China is using the Olympics as an excuse to silence dissenters were "totally unfounded.'' China said last week it broke up a Muslim separatist group that was planning an attack at the Olympics.

"To host an Olympics is a dream shared by people of many generations in this country,'' Wen added. "I also hope that by hosting the Olympics we will be able to further friendships and cooperation with people from all over the world.''

The Killing of Alitalia

It's not only Bear Stearns that's in distress. Across the Atlantic, the money-losing and nearly bankrupt Italian national carrier Alitalia is the subject of a political quarrel over its fate. Air France-KLM is proposing to purchase the semi-comatose airline at a heavily discounted price, prompting howls from militant unions, the opposition party, and the mayor of Milan. The airline's unionists are upset over the deal. While the incumbent government backs the sale, the forthcoming elections may see Silvio Berlusconi become Italian prime minister for, what, the hundredth time? He does not back the deal, and government backing is crucial as the Italian government holds nearly half of all Alitalia's shares. Meanwhile, the mayor of Milan wants Alitalia to stick to its agreement to use that city's infamously crappy airport despite it being an unprofitable one to serve. Why does Air France-KLM even bother, I sometimes think. From the International Herald Tribune:

Scuffles broke out as Air France-KLM's chief executive, Jean-Cyril Spinetta, met Tuesday with union leaders at Alitalia, the ailing Italian airline whose board has approved an offer from the French-Dutch carrier of €747 million.

As Spinetta carried out a series of meetings in Rome, Alitalia shares plunged for a second day. The stock has lost 48 percent since the company said Sunday that the board had approved Air France-KLM's $1.2 billion offer, which values Alitalia at about 10 euro cents a share compared with the 53-cent closing share price Friday. The shares closed Tuesday at 27.6 cents.

Maintenance workers briefly scuffled with police before Spinetta's arrival at a meeting and eggs were thrown, according a person at the scene who declined to be identified, fearing reprisals. One worker sustained a head injury, the ANSA news agency said.

Spinetta already has a green light from Alitalia's board and the Italian government, which owns 49.9 percent of the carrier, but he is having a tougher time with the unions, which have already promised to fight the accord in its current form.

Unions and several senior politicians in both major coalition groups have said that Air France-KLM is attempting to pick up Alitalia at a fire sale price. Spinetta has warned that if the unions do not give their approval to the offer by month's end, it will be rescinded.

Even if he gets through the unions, Spinetta's road to the acquisition remains lined with obstacles and it is not yet a foregone conclusion. Spinetta will need the approval of whatever government emerges as the winner in the Italian general elections next month. With polls showing a lead for the opposition leader Silvio Berlusconi, who has been critical of the Air France-KLM takeover plan, Spinetta might not get the rubber stamp from the government.

An important member of the center-right opposition coalition, the National Alliance party leader Gianfranco Fini, came out Tuesday against the deal as laid out at the weekend, Reuters reported from Rome.

Still, Spinetta might have an even bigger problem in the form of Mayor Letizia Moratti of Milan. Milan is the leading shareholder in SEA, the company that runs the city's two airports - Linate, near the city center and the much maligned Malpensa. Air France-KLM wants to radically scale back Alitalia's flights at Malpensa.

SEA is suing Alitalia for €1.25 billion for not meeting an obligation to make Malpensa a hub. In return for a major upgrading of the infrastructure of the airport, Alitalia had agreed to move workers and resources to Malpensa, something that will not happen if the Air France-KLM plan is adopted.

Spinetta has said that the Italian government must accept to pay any damages that are awarded SEA as a result of the sale of Alitalia. Rome asked SEA on Tuesday to revoke the suit, but Moratti said that she was ready to take responsibility for the deal falling through and pushing Alitalia into bankruptcy.

"The lawsuit was meditated over for a long time and is based on solid arguments," Moratti said in an interview published Tuesday in the newspaper La Repubblica. "For us to withdraw the suit is unthinkable," she added.

"Air France has put forth such outrageous proposals that I have been led to doubt that they really want to buy Alitalia. Before arriving at bankruptcy it is obligatory to search for another solution. But bankruptcy would not be a catastrophe," Moratti said.

Politicians of different persuasions and from different administrations have approved about €4 billion in investments to the airline since 1998, while the company has proven incapable of returning to profit.

Spinetta's plans for Alitalia include cutting 1,600 jobs at the airline - 600 flight attendants, 500 pilots and 500 ground crew - and an unspecified number at the maintenance unit that is only partially owned by the airline.

The pilot's union, Anpac, has already said that it will oppose the Air France-KLM takeover unless there are changes. As it stands, the deal penalizes Alitalia and helps the French-Dutch carrier overcome its own problems, the union says.

Anpac and other critics of the Air France-KLM offer note that it has been changed significantly since the first nonbinding offer came in December. At the time, the ratio of the deal's share swap was 70 Alitalia shares for each Air France share, while the plan announced Sunday calls for 160 to 1. If the deal had gone through in December, Rome would have owned 3.4 percent of the enlarged company. At present share prices, it stands to own just 1.5 percent.

Clash of the Titans: Murdoch v. Berlusconi

Well this certainly looks interesting: Rupert Murdoch is taking his case to the European Commission against Silvio Berlusconi, the once and likely future Italian prime minister and owner of large chunks of the country over rights to air Italian football events. It's not the first time that Berlusconi has incurred the wrath of the EC over conflicts of interest as Silvio has his fingers in pretty much every pie in Italy as you'll read below. Interesting stuff, and things should heat up even further if and when Berlusconi regains the PM's office. From the Financial Times:

The Murdoch media group has begun a battle over football broadcasting rights that could bring it into conflict with its main Italian rival, Silvio Berlusconi, the former prime minister and television mogul.

Rupert Murdoch’s Sky­Italia has filed a complaint against Italy at the European Commission, claiming that a law adopted last month infringes competition law and favours Mediaset, the Berlusconi family’s television company.

Should Mr Berlusconi, the centre-right opposition leader, return to power as prime minister after parliamentary elections next month, as opinion polls indicate, then Italy’s lack of a conflict of interest law is set to revive tensions between Rome and Brussels. Mr Berlusconi is also the owner of AC Milan, one of Italy’s leading football clubs, and has close connections to the football league’s governing body.

Brussels has already opened infringement proceedings against Italy over the Gasparri communications law that was passed by the previous Berlusconi government.

Sky Italia’s satellite broadcasting, which relies on the pull of its football coverage, contributes 11 per cent of the revenues of NewsCorp.

In both Mediaset and NewsCorp, the two moguls’ offspring are playing growing roles in running the family business. The decision to resort to Brussels was made by James Murdoch, son of the media magnate, who has focused on Sky’s Italian business after taking on NewsCorp’s European operations in December.

The football broadcasting law challenged by Sky was passed by the outgoing centre-left government to provide a fairer distribution of income among clubs and in response to a match-fixing scandal.

Sky sees the law as an unprecedented intervention into markets. The law gives the powers of collective bargaining over broadcasting rights, starting with the 2010-2011 season, to the Lega Calcio, the football league authority. Individual clubs hold rights to production and filming.

“This is clearly a violation of competition law through collective selling,” said a source close to Sky, which lodged its complaint with the European Competition Commission on 21 February. “We want to go all the way to eliminate this law.”

Sky Italia’s pay television is limited to satellite broadcasting as part of the terms of its creation in 2003. Mediaset said it was aware of Sky’s complaint to Brussels but had no comment. The communications ministry, author of the law, said it defended the satellite broadcasting rights of Sky.

Very Bad Journalism: Clinton a PC, Obama a Mac

Dear readers, you can rest assured that I too like creating memorable taglines like the one above. However, I think that I have a responsibility to ensure that the content of the post illuminates the title. There is an article in today's New York Times that purports Missus Clinton as a Microsoft clone while Barack Obama is a sleek Macintosh. Notwithstanding my use of Windows Vista with no problems whatsoever and successfully updated today to Service Pack 1 status, it irks me that the media wants to get away with this sort of character assassination. I do not want to go over the entire article, but here is an example of egregious favoritism. Here is a snippet from the accursed piece:

“Hillary’s is way more hectic, it’s got all these, what look like parody ads,” said Ms. Twemlow, who is not a citizen and cannot vote in the election. [Well, neither can I.]

Jason Santa Maria, creative director of Happy Cog Studios, which designs Web sites, detected a basic breach of netiquette. “Hillary’s text is all caps, like shouting,” he said. There are “many messages vying for attention,” he said, adding, “Candidates are building a brand and it should be consistent.”

So the Clinton site has all caps. Is it an example of uncouth netiquette as the critics cited above yammer? Well, let's take a look at the polished effort of that sleek 21st century candidate, Barack Obama:

Gee, there seems to be plenty of "shouting" going on there as well, eh? Very bad show, New York Times. Overall, I rate the Clinton site higher for its usability than the Obama one--the latter has way too much dead space to look "pretty" which it really doesn't. Form over function--draw your own conclusions.

SWFs Not Seeking (Ineligible) Wall Street Firms

There was a big hullabaloo about sovereign wealth funds (SWFs) late last year when they were busy buying shares in Wall Street firms that needed to bolster their capital after subprime-related losses. Voluble CNBC commentator Jim Cramer famously remarked about them, "Do we want the communists to own the banks, or the terrorists? I’ll take any of it, I guess, because we’re so desperate.” Well, Mr. Cramer, it seems that even sovereign wealth funds (AKA the "communists" and the "terrorists") are not rushing in to save the latest damsels in distress, Bear Stearns, Lehman Brothers, and heaven knows who else. As SWFs who bought shares in Wall Street firms in late 2007 are getting burned as share prices of these firms drop, SWFs are learning about investing the hard way. Why "invest" in America if its currency keeps plunging and its banks keep going under? The US is today's economic basket case. From Reuters:

One group conspicuously absent from a last-minute deal to scoop up Bear Stearns on the cheap were the sovereign wealth funds that have recently spent billions of dollars on Wall Street. Given the hundreds of billions of dollars these state-backed funds control, that is bad news for Western firms or any other company hit by the credit crunch that is tightening its grip on the United States and Europe.

The funds look to have steered clear of the deal to rescue the fifth-largest U.S. investment bank, which JPMorgan Chase & Co. agreed to buy for just $2 a share on Sunday -- or one-fifteenth of Bear's stock price on Friday.

With no money coming from the Middle East or Asia in the latest deal for a struggling Wall Street bank, analysts said on Monday that sovereign funds are likely to keep away from U.S. financial assets for now.

"We are digesting all the information that is pouring out of the U.S.," said Chairman Sultan bin Sulayem, whose state-owned Dubai World owns 6.6 percent of casino operator MGM Mirage. Asked if he would invest in the United States now, he said: "I don't know."

Qatar's prime minister, who heads the country's $60 billion sovereign wealth fund, told Reuters last month he would rather invest in European over U.S. lenders because U.S. bank stocks were likely to fall further on subprime-mortgage writedowns.

Dubai International Capital, an investment agency owned by the ruler of Dubai, made similar noises about avoiding the United States for the moment, adding that it was going to take a "lot more money" than the minimum $5 billion the Kuwait Investment Authority and Saudi Prince Alwaleed bin Talal agreed to invest in Citigroup Inc (C.N: Quote, Profile, Research) to rescue the ailing lender.

And it's not just the big funds shying away from Wall Street. Shares in China's top broker, CITIC Securities, surged on Monday, driven in part by the firm distancing itself from a deal reached last year to invest in Bear Stearns.

As the funds and foreign investors stay away, there could be little comfort for Wall Street workers hoping a foreign investor will help them keep their jobs. "There's no way anybody's going to catch a falling knife. Why come in now?" asked Craig Russell, Beijing-based chief market strategist at Saxo Bank. "There's no one in the market place willing to re-establish confidence apart from the Fed, and that scares everyone. The U.S. dollar is the hot potato."

When Wall Street banks fell under the weight of exposure to sub-prime mortgage assets last year, sovereign wealth funds propped them up with huge cash injections. Since late November, Citigroup has raised about $30 billion of capital from Abu Dhabi, Kuwait and Prince Alwaleed, with its shares down roughly 38 percent in that period. Swiss bank UBS has seen its shares tumble since Singapore and the Middle East injected cash in December.

That same month, China's new investment fund agreed to pump $5 billion into Morgan Stanley after the U.S. investment bank posted $9.4 billion of losses in subprime mortgages and other assets. The bank's shares have since fallen 25 percent.

Financial shares have dropped as the credit crunch has deepened. The value of the U.S. dollar has fallen along with them. "Based on their earlier experience, sovereign wealth funds are going to be more hesitant," said Bill Belchere, regional economist at Macquarie Securities. "This would call for some diversification away from the U.S. dollar."

Belchere said Middle East sovereign funds are expected to diversify more across Asia. Hong Kong bankers say funds have indeed been running a slide rule over potential deals in the natural resources and financial sectors in China.

With sovereign wealth funds out of Wall Street's headlights for now, that spells trouble for employees hoping to keep their jobs at credit-hit institutions. Massive layoffs across Wall Street have been largely averted so far, as the capital injections took the form of minor stakes from foreign fund investors.

But if stricken financial institutions are forced to turn to fellow industry players for a bail-out, job overlap is inevitable. As it stands, JPMorgan has a large and successful investment banking franchise, leaving in doubt the future of Bear Stearns' own unit.

China has also seen its stake in Blackstone Group cut in half since the private equity firm went public in June. Still, there may be some light at the end of the tunnel. Gulf sovereign wealth funds have stepped in before and, though they were not involved in Bear Stearns, they may do so again.

"They are keen to be seen to play an a responsible role in the global economy, and this is a region of surplus funds," said Marios Maratheftis, Middle East economist for Standard Chartered Plc in Dubai. "It's in no one's interest, including here in the Gulf, for the U.S. to go into deep recession."

Bloomberg columnist Andy Mukherjee also weighs in about these SWFs facing questions about their dwindling investments in US banks:

Sovereign wealth funds are long-term investors. They can afford to be patient. But that doesn't mean they have a complete license to bungle their trades in the short- to medium-term.

If there's still such a thing as ``fundamental value'' of a U.S. financial company, post-Bear Stearns no one can claim to know just what it is. “Bear Stearns's demise should probably be viewed as the first of many,'' Richard Bernstein, chief investment strategist at Merrill Lynch, wrote in a report yesterday.

Comments like those will make sovereign wealth funds in Asia and the Middle East cringe. No doubt they will now be extra- cautious about investing in U.S. financial stocks. But what about the billions of dollars they have already committed?

The fate of those investments is now in the domain of luck and prayers. The fund managers can only hope they haven't bitten off more risk than their political masters can chew.

Dilip Ratha, Godfather of Research on Remittances

Ace migration reporter Jason DeParle has yet another fine feature for us, this time about the World Bank's resident expert on remittances, Dilip Ratha. Dr. Ratha is the pioneer in the study of global remittances, which now comfortably exceed foreign aid flows to the developing world. What follows is a brief snippet about how his modest upbringing in India has made him a concerned researcher about remittance flows. Do read the entire article if you have the time or inclination. What is particularly interesting to me is how this article has been the most e-mailed article on the International Herald Tribune website. Soon, I will post some research of my own on remittances, so do look out for that...

An important man from the World Bank recently arrived in this isolated village, where monkeys prowl rutted roads, rain pours through the school roof and the native son who achieved the most did so by going away. Lessons about global poverty were waiting, but so were his sisters' chapattis. Migrant and migration scholar, Dilip Ratha was home.

No one has done more than Ratha to make migration and its potential rewards a top-of-the-agenda concern in the world's development ministries. And no place has done more to shape his views than this forgotten hamlet, where he studied under the lone streetlight and began a poor boy's improbable journey to the front ranks of an elite field. "When I think about the effects of migration, I think about Sindhekela," he said.

Working from his office in Washington five years ago, Ratha produced the first global tally of remittances, the money that migrants send home, and stunned experts from himself on down with the discovery of their size. Gathered from a trickle of hard-earned cash, the sums now exceed $300 billion a year.

In subsequent work, Ratha, 45, has pushed to reduce money-transfer fees and increase the productivity of the money that is sent. Allies say his work has prompted projects in governments and beyond that could benefit millions of people. Skeptics argue that if migration brought development, Mexico would be Switzerland.

A soft-spoken man whose seeming diffidence disguises his drive, Ratha is gripped by his cause. "Some people say I paint too rosy a picture of migration and what it can achieve," he said. "But I realize the importance of dollars coming in because I know poverty firsthand." If he is enthusiastic about migration, he has lived it on especially favorable terms. He has never crossed borders illegally or worked with dirty hands. He commands a salary 100 times higher than he would if he had never left home. With it, he has educated two younger siblings, paid for a nephew's life-saving operation, and built a big house for his father...

Got Nukes? The Big Bucks in Nuclear Power

The great song "Radioactivity" by the German synth pop pioneers Kraftwerk starts with "Chernobyl - Harrisburg - Sellafield - Hiroshima / Stop Radioactivity / It's in the air for you and me / Discovered by Madam Curie." You may not share Kraftwerk's morbid sense of humor, but I'll tell you what: the Russians are now keen on duking it out in the nuclear power arena by going head to head with power plant-making biggies General Electric (US) and Areva (France). What we have above is a catchy commercial by Areva touting the benefits of nuclear power. Whereas nuclear power was the cause celebre of environmental activists way back when, global warming has converted many of them to touting the virtually zero carbon emissions of nukes. How times change when there are now catchy ads for nuclear power on TV with nary a Homer Simpson-type in sight.

Unsurprisingly, the Russians are keen on capitalizing on their engineering expertise in selling next generation designs with more safety features to ensure that they won't be name-checked in Kraftwerk songs. According to Bloomberg, this is a potential $300 billion market for the country. Most of Russia's likely clients, however, are still former Soviet satellites like during the good ol' Cold War days which Putin so loves. Speaking of whom, Putin's backing of nuke power R&D and marketing ensures that Russia will be seriously looking at nuke sales in the future. Also, quite an number of LDCs are looking to nukes for power including--oddly enough--some Middle East petrostates. Chalk another one up for the peak oil theorists, perhaps?

Anyway, Russia is already the world's largest exporter of natural gas and the second largest of oil. Taking a large market share in the nuclear power industry would only cement its place as the energy exporting powerhouse of the world. Interesting stuff:

For decades, Russian civilian nuclear scientist Vladimir Asmolov lived in the shadow of the bomb makers. They were the elite, their names and work secret, building the arsenal behind a superpower.

While the Soviet Union lost the Cold War, the Russians are back as a nuclear force. Asmolov, deputy head of nuclear-plant operator Rosenergoatom in Moscow, is tapping yesterday's military brains to develop a new generation of atomic plants. Russia's reactor industry aims to compete with Westinghouse Electric Co., General Electric Co. and Areva SA.

Since the 1986 meltdown of a reactor at Chernobyl in Ukraine, Russian engineers have adopted safety measures similar to those used in the U.S., including reactors that shut down automatically when there's a fault. Rosatom Corp., the state-run nuclear holding company, expects to build as many as 42 plants in Russia and 60 abroad by 2030, according to Chief Executive Officer Sergei Kiriyenko. The value may total $300 billion, based on Russian estimates.

``Previously, the atomic energy industry was only a bastard child of the military program,'' said Kiriyenko, 45, who was a Russian prime minister under Boris Yeltsin. ``Growth in electricity demand has cardinally changed that.''

Global power needs will double by 2030, according to the Paris-based International Energy Agency, set up in the 1970s to counter the influence of oil exporting nations. Pressure to cut emissions of gases that contribute to global warming has made nuclear power more attractive, despite safety concerns.

Reactor orders may total 237 globally by 2030, according to the World Nuclear Association in London. ZAO AtomStroyExport, Russia's nuclear-reactor builder, says each megawatt of installed capacity costs about $3 million. The typical reactor size is about 1,000 megawatts.

After 20 years in which few nuclear generating stations were built, Kiriyenko faces shortages of contractors with experience building atomic plants, components such as turbines and nuclear engineers.

Factories that in Soviet days churned out enough equipment to build 10 or more reactors a year went bankrupt in the mid- 1990s or switched to making products such as machine tools or gear for the oil industry after the Iron Curtain collapsed. Many of the plants were sold to local businessmen, forcing Rosatom to repurchase the factories or swap assets to rebuild the industry...

Russia will also need to convince international customers that its VVER reactor can compete economically with alternatives made by Areva, Toshiba Corp.'s Westinghouse and GE, which say theirs are more efficient and have extra safety features.

Evgeny Reshetnikov, vice president of AtomStroyExport, said the VVER is the same price or cheaper taking into account all construction, operation and maintenance costs. While the Russian reactor has a shorter lifespan and needs to be refueled more often than those of its western competitors, the plants are cheaper to build and Russia guarantees fuel deliveries, he said. Reshetnikov said Rosatom will catch up with its rivals with a reactor at Novovoronezh in western Russia that is to start operating in 2014.

Outside of China and India, the competition for nuclear- plant sales may broadly play out along Cold War lines, with Russia grabbing contracts among former Soviet satellites such as Bulgaria and the Czech Republic and African allies including Namibia. Russia is likely to be shut out of U.S. and western European markets partly because of historical ties to local manufacturers, said Gene Clark, CEO of Denver-based consulting firm TradeTech LLC.

``The markets that Russia's going for, I'm not too worried about,'' said Dan Lipman, senior vice president for nuclear power plants at Monroeville, Pennsylvania-based Westinghouse. ``Myanmar's not on my list.''

Rosatom officials say they want to position Russia as a safe and affordable alternative in developing countries, which are projected to be the fastest-growing nuclear markets. They plan to build on the company's advantage of already having two of its VVER reactors up and running at the Tianwan power station in eastern China.

AtomStroyExport's order book will swell to $20 billion within two years, said CEO Sergei Shmatko, Russia's top reactor salesman. In 2006, it sealed a two-reactor deal worth $5.4 billion with Bulgaria.

The company has orders for two more VVER-1000s from China and a preliminary accord for four in India, pending a treaty on technology transfer. Vietnam, Indonesia and Thailand may also buy, said Shmatko, 41, a former nuclear-submarine officer. Russia has pledged support to develop nuclear energy in Namibia, Mongolia and Belarus. The focus on emerging markets is a strength, Shmatko said. ``The contractual rewards are roughly the same in any country where you build now, so why go where there is so much competition?'' Shmatko said.

After pursuing the Bushehr reactor project in Iran in spite of U.S. protests that the Tehran regime was planning to build an atomic bomb, Russia may tap demand in Middle Eastern states such as Qatar, Libya, Syria, the United Arab Emirates and Egypt, said Alexander Pikayev of the Institute of World Economy and International Relations in Moscow. The Arab nations may also buy fuel at the international enrichment center Russia set up last year in Angarsk in eastern Siberia, he said. It lets non-nuclear nations enrich uranium under United Nations supervision, alleviating proliferation concerns.

President Vladimir Putin has worked to resurrect the country's atomic industry, code-named the Ministry of Middle Machinery in Soviet times, as a third arm in Russia's energy arsenal. The country is already the world's biggest exporter of natural gas and second in oil behind Saudi Arabia.

The government will spend $27 billion through 2015 to develop atomic power. The industry will raise $32 billion more from sales and investors. Putin said Feb. 14 that Russia is ready to sell stakes in uranium and enrichment companies.

Putin, who's expected to be named prime minister when he's succeeded by Dmitry Medvedev as president in May, set Rosatom the goal of increasing nuclear energy output to as much as 30 percent of power production by 2030 from 16 percent last year. Rosatom started adding two reactors a year in 2007 and aims to accelerate that to three or more annually by about 2012.

``We think it optimal to have 30 percent of Russian energy coming from nuclear plants,'' said Rosenergoatom's Asmolov, 61. ``In terms of economics, in terms of everything.''

Asmolov has been charged with retraining the military's nuclear experts and converting defense contractors so they can help with the civilian power push. For example, OAO Air Defense Concern Almaz-Antei, the maker of S-300 missile systems, in September agreed to produce parts for nuclear reactors.

Russia needs new power sources including nuclear energy to develop parts of eastern Siberia and the Far East that are rich in natural resources but have little access to gas, said Victor Murogov, 69, a nuclear engineering professor and head of the Russian Association of Nuclear Science and Education in Obninsk.

In January, Rosatom started operating as a holding company for all of Russia's nuclear interests, rather than as a government agency. Within seven years, Rosatom will no longer need financial support from the state, Kiriyenko said.

Rosatom's energy arm includes reactor-operator Rosenergoatom, where Asmolov works, nuclear-gear maker OAO Atomenergomash and reactor builder AtomStroyExport, as well as uranium miners, fuel makers, traders and research institutes.

Russia rebuilt its nuclear industry with help from the U.S. After the 1979 Three Mile Island reactor leak in the U.S. and Chernobyl, the Cold War rivals stopped all new domestic construction and collaborated to improve nuclear safety, said Asmolov, who in 1991 spent six months with the U.S. Nuclear Regulatory Commission in Rockville, Maryland. As a result, most reactors today use similar safety systems, he said.

From his 25th-floor office in a central Moscow skyscraper, Atomenergomash Chairman Kirill Komarov is counting on alliances with international suppliers to make up for the components Russia lacks. He's starting a turbine venture with France's Alstom SA in nearby Podolsk.

``Today, 60 percent of electro-technical equipment for power plants in Russia is imported,'' said Komarov, a former vice president of Renova Group, the energy, metals and property empire of billionaire Viktor Vekselberg. ``I don't see any tragedy in this. It's a market: The fittest survive.''

Welcome to the Terrordome: Beijing Olympics

The current riots in Tibet seems to be a combination of the Tiananmen massacre and Hurricane Katrina. The violent crackdown represents a rehash of Tiananmen, while the picture of people being treated like second-class citizens in their own land is reminiscent of the aftermath of Katrina. To me, the moment when the US lost its prestige in the eyes of the world did not arise from its failure to calm Iraq or its ongoing economic woes. Rather, images from Katrina revealing the plight of African-Americans made the rest of the world think, "Why exactly would we want to be like this extremely unequal country?" Similarly, the current uprising in Tibet is reminding many about the inequality present in China where native Tibetans are treated with contempt in their own homeland. Given such a level of economic repression as exists in Tibet, there is little wonder that such violent anger has pent up.

I used to listen to the rap group Public Enemy for its consistently interesting social message. Unlike much of today's senseless gangsta rap, Public Enemy posed meaningful questions about the situation of an ethic group whose socioeconomic standing left much to be desired. While the group's politics were occasionally reminiscent of Obama's pastor's, its message had far more resonance than any gangsta rapper's. Watching the group's 1990 video "Welcome to the Terrordome" thus reminded me of the ongoing situation in Tibet of rage against being treated so shabbily. Whereas Dubya had heckuva job Brownie as his fake crisis management official, the PRC's apparatchiks have their fake Panchen Lama to calm no one in particular. From Party mouthpiece Xinhua:

The 11th Panchen Lama Gyaincain Norbu condemned on Sunday the lawless riot in Lhasa, saying the sabotage acts run counter to the Buddhism tenets. "The rioters' acts not only harmed the interests of the nation and the people, but also violated the aim of Buddhism," Panchen said. "We resolutely oppose all activities to split the country and undermine ethnic unity. We strongly condemn the crime of a tiny number of people to hurt the lives and properties of the people," he said.

An outburst of violence on Friday, which Tibetan regional government says was engineered by Dalai clique, has claimed the lives of 10 civilians and caused many injuries. "I hope the incident in Lhasa could calm down soon, and peace and stability would return to the people and the Buddhist followers," the religious leader said. Panchen said he resolutely supports the Party and the government efforts to ensure the safety and stability of Lhasa.

Of course, its good pay lip service to those who installed Norbu. Still, those who have grievances with China's rather non-existent human rights regime are most likely using the Beijing Olympics as a high-profile event to raise awareness of their issues. These are endless. From the WSJ:

This level of global publicity and scrutiny could heighten the fallout for China if it acts too forcefully in Lhasa. Beijing already has come under fire on issues ranging from limiting its people's freedom of expression to its treatment of North Korean refugees and its support for the government of Sudan, which is battling rebel groups in Darfur.

Adidas AG, an Olympic sponsor, said in a statement: "We are concerned to see that people have been injured as a result of protest actions. We hope that the situation will calm down very soon and can be settled through peaceful measures." A spokeswoman for General Electric Co., whose NBC network plans to broadcast the Olympics, said the company isn't changing its plans. The Games are "a force for good," said spokeswoman Deirdre Latour.

South Korea's military government faced a similar dilemma in 1987, when pro-democracy demonstrators took to the streets a year before the Seoul Olympics. Fearing the unrest would disrupt the games or persuade the International Olympic Committee to move them, South Korea's political leaders acquiesced to protesters' demands for a new constitution and presidential elections to be held before the Games.

For China, however, failure to restore authority risks emboldening other opponents of its policies. Beijing already is concerned about what it sees as threats from separatist groups of Turkic speaking Uighur Muslims in the northwestern province of Xinjiang.

In particular, China is now chafing at the much-publicized finding of the US-based Human Rights First that the country is by far Sudan's largest arms supplier, especially for small arms. It takes little imagination to figure out what those small arms are being used for. Again from Xinhua come to usual denials:

China denied here Friday a report that accused China of being the largest arms supplier to Sudan, saying its policy on arms sales was "always highly prudent". Foreign Ministry spokesman Qin Gang said in a statement that China always strictly abided by the relevant resolutions made by the Security Council of the United Nations (UN) and never exported weapons to any country or region under the UN arms embargo.

His remarks were in response to a report by Human Rights First, a U.S.-based rights group, that accused China of being the largest weapon supplier to Sudan. The conventional weapons China exported to Sudan were very limited in number. They only accounted for a small proportion of the country's arms imports, Qin said, criticizing the report as "groundless" and "with ulterior motives".

According to its arms sales regulation, China never sold arms to any non-state entity, and it limited the functions and numbers of arms exports to other countries. All exported arms had user certificates and could not be exported to a third country. The UN and the international community has not yet set an arms embargo or regulations on Sudan.

The Wall Street Journal has another interesting article about how local and foreign activists of all stripes who have timed their protests against Beijing to coincide with the Olympics find that officialdom has lost none of its repressive streak. Expect more of the same as protests against China mount in the lead-up the the Olympics:

Threats by China's government against political dissidents and activists aren't new. But for both sides in this confrontation, the Beijing Olympics is significantly raising the stakes.

"Many of the rights activists see the period between now and August as the time when their claims against the system can be heard more clearly than any time before or after," said Jerome Cohen, a law professor at New York University and an expert in Chinese law…

For China, pre-Olympic dissent presents a Catch-22. China seeks to use the Beijing Games to broadcast a positive message to the world about the country's social and economic progress. Each new arrest silences a potential critic who threatens to hijack that message, and sends a warning to other people who might be contemplating a similar move.

But each arrest risks drawing unwanted publicity. "With fewer than six months to go before the Olympics, the Chinese government has everything to gain and nothing to lose by releasing [Hu]," Sophie Richardson, Asia advocacy director at Human Rights Watch, said in a statement…

Chinese officials say Olympic dissent is explicitly allowed. Foreign ministry spokesman Qin Gang said Tuesday that the government will treat citizens "lawfully" during and after the Olympics. The Beijing police haven't answered questions about Mr. Teng's detention.

The International Olympic Committee is under pressure from both sides. Spokeswoman Giselle Davies said the committee is gathering information on reported cases of human-rights violations and will raise any it might find are related to the Games with the Beijing Games organizing committee."That is part of the Olympic Games' ability to shine a light on wider social issues," she said.

USD/CNY: A Chart for China Bashers to Ponder

Those who follow various currency regimes may wonder, what exactly is a "managed float"? Well, wonder no more and inspect the six month chart of the US dollar / Chinese yuan above. As you can see, the Chinese have "managed" to keep about a 60 degree slope in the chart of gradual yuan appreciation. Since the yuan first floated in July of 2005, it has gained about 14.5% in value against the dollar. Indeed, the pace has been quickening as of late with nearly 6% of that appreciation coming since October of 2007. Brad Setser likes to point out that China is still piling on reserves at an incredible clip to disabuse anyone of the notion that it's just letting the currency find its natural level in the market. With inflation running high in the country partly due to its forex shenanigans, it may be time to allow for faster yuan revaluation.

By how much is the yuan still undervalued? A simple application of the PPP approach, the Big Mac Index, suggests this may be over 50%. While we are not likely to see gains of that magnitude, I expect to see gains approaching 20% in the near future as China attempts to deal with both inflation and protectionist pressures from the US and the EU. Maybe, just maybe, the Chinese are making a good faith attempt to increase the yuan's value--but, in a gradual, controlled manner as PRC officialdom is wont to say.

Move Over, White Man: China in Africa and More

The current issue of the Economist has a gaggle of articles about China's global quest for raw materials. All the articles in the survey are worth reading and I list them below. After that is a brief excerpt from the first article. In it, the Economist describes China's successful efforts to win over LDCs that have become wary of the West--colonial history and all that. China's selling point has been that it offers few strings attached in its economic relations as opposed to the litany of Washington Consensus-style demands of Western donors and firms. In other words, "it's a South-South thing." Although it may seem otherwise given the massive coverage of China's involvement in Africa, note that the EU is still by far the largest trading partner of the region. It will be interesting to see if it's just another case of meet the new boss, same as the old boss.

• China's resource hunger
• Making the most of little
• Australia comes to the party
• Congo's comings and goings
• Why China is welcome
• China's intrepid explorers
• Negative externalities
• Doing more with less

Some non-governmental organisations worry that Chinese firms will ignore basic legal, environmental and labour standards in their rush to secure resources, leaving a trail of corruption, pollution and exploitation in their wake. Western companies fret that the Chinese state-owned firms with which they suddenly find themselves competing have an agenda beyond commercial gain. The Chinese government, they say, is willing to pay over the odds for mining or drilling rights to secure access to physical resources. It also intervenes unfairly on its companies' behalf, they claim, by offering big aid packages to countries that welcome Chinese investment. All this, it is feared, will dent the profits of big oil and mining firms, stoke inflation and imperil the West's access to resources that it needs just as much as China does.

Diplomats and pundits, for their part, fear that the West is “losing” Africa and other resource-rich regions. China's sudden prominence, according to this view, will reduce the clout of America, Europe and other rich democracies in the developing world. China will befriend ostracised regimes and encourage them to defy international norms. Corruption, economic mismanagement, repression and instability will proliferate. If this baleful influence spreads too widely, say the critics, the “Washington consensus” of economic liberalism and democracy will find itself in competition with a “Beijing consensus” of state-led development and despotism.

Such fears are not entirely groundless if the recent conduct of some of Congo's neighbours is anything to go by. Angola, to the south, has been receiving so much aid and investment from China that in 2006 it decided it had no need of the International Monetary Fund's billions and all the tiresome requirements for transparency and sound economic management that come with them. Sudan, to the north, has shrugged off Western threats and sanctions over the continuing atrocities in Darfur, thanks in large part to China's readiness to invest in Sudanese oilfields and buy their output. Farther afield, China's eagerness to do business in Myanmar, and its consequent reluctance to chide the tyrannical generals that run the place, helped to prevent a forceful international response to the violent repression of peaceful demonstrations there last year.

California's Tent City of the Foreclosed II

An irate commenter on my original post about the "Tent City of the Foreclosed" going by the name of "clintonstartedit" accused me of bias in entitling my post as such. Actually, I welcome a diversity of opinions; I hardly ever get any pro-Bush voices, so I suppose this is welcome. After all, some Americans had to vote him in. Unfortunately, it seems the Inland Empire Tent City is indeed filling up with more foreclosed people. Bit by bit, one by one--and it's not only happening here. Bush once said about the ownership society, "if you own something, you have a vital stake in the future of our country. The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country." Given the lowest homeowner's equity rates in the postwar period, I guess that means fewer and fewer Americans have a vital stake in the future of the country. But hey, it could be the "tent ownership society." From the BBC:

Forty miles east of Los Angeles, on a patch of waste ground, is the place they call Tent City. Sandwiched between the local airport and the railway line, this really is the wrong side of the tracks. We are on the outskirts of Ontario, a functionally pleasant commuter-city in southern California.

Last summer, local officials established this camp as a temporary base for the city's homeless population, then around two dozen. But word spread and now some 300 people live here. It has an air of scruffy permanence, and indeed, city officials say there are no current plans to close it down. Most residents live in tents, some in mobile homes in various states of disrepair, their possessions crammed in with them or spread out on the ground.

Amenities are basic - no mains electricity, no plumbing, no drainage. Portable showers offer a chance to wash, but there is nowhere to prepare food, apart from makeshift tables in the open air. Dogs and children scratch around in the dusty earth.

What is striking is the range of people here: whites, African-Americans, Hispanics, the old and young including some with babies. And they tell a variety of stories too.

Benson Vivier, a Vietnam veteran, said a leg operation allowed him to walk after years of being in a wheelchair. But as a consequence his disability benefits were cut, and he could not afford his rent Others told tales of family disputes or houses burning down. Some were addicts, some fresh out of prison.

But one man, who did not give his name, said he and his family were living in Tent City because they were victims of America's foreclosure crisis. It came down to "feeding my family or keeping the house", he said, "so I got rid of the house". The property he lost is nearby in Ontario, which, in places, offers a middle-class suburban dream - green lawns, wide pavements, garages big enough for two cars.

Yet it is in an area known as the Inland Empire, where the rate of foreclosure is the third highest in the entire US. No longer able to afford his mortgage payments, this man saw his lender repossess the property, and now someone else lives there. "It's hard for me to see it, when someone else owns it and I am homeless with nothing," he said.

There are thousands like him across California - people whose inability to finance their mortgages has cost them their homes; many thousands more across the US. But in Tent City, at least, he is in a minority - few are here as a direct result of the housing crash.

However, Mike Dunlap, who runs a volunteer group providing supplies to Tent City's dwellers, thinks that could change. "People lose their homes through foreclosure," he says. "They go and live in the hotels, and the homeless people who were in the hotels end up back on the streets."

He fears that, as more people lose their homes in what appears to be a deepening housing market collapse, more former homeowners could end up in places like Tent City.

Collier Restates the Case for Globalization

I have just borrowed Paul Collier's rightly well-regarded book The Bottom Billion. The classic case for globalization is restated on pp. 80-1. As a student of history, I am in complete agreement with the excerpt below. When folks are prevented from trading with each other, conflicts over resources tend to arise. If you cannot trade for something that you need, then it's eminently possible that you will have to fight for it...

Between 1914 and 1945 world trade collapsed because of wars and protectionism. It is often said that globalization is inevitable, but those interwar years cast doubt on this assertion: for those who hate globalization, the retreat of trade, capital flows, and migration during the period 1914-45 should be interesting because they are kind of a natural experiment. Unfortunately, they were a ghastly experiment: the reversal of globalization, though feasible, looks massively undesirable based on the one occasion when we did it.

That's Progress: Cubans Can Now Buy DVD Players

Marxists and globophobes may be saddened by the news that Cuba under its new Maximum Leader Raul Castro will soon allow the purchase of vile imported consumerist filth of all sorts by the proletariat. Setting Cuba down the road to a consumer culture may very well brainwash its pure-minded people into believing that, gee, maybe there are benefits to be gained from a market-based society after all. Oddly enough, this burst of consumerist degeneracy has been funded by energy giveaways care of the arch-Bolivarian himself, Hugo Chavez. After the fall of the Soviet Union, Cuba had to curtail the sale of home appliances to cut down on power usage as the USSR no longer provided Cuba with cheap fuel. Hence, there was a ban in place for quite some time on these devices until Hugo's largess changed things. Viva la consumer revolucion!!! From Reuters:

Communist Cuba has authorized the unrestricted sale of computers and DVD and video players in the first sign that its new president, Raul Castro, is moving to improve Cubans' access to consumer goods.

An internal government memo seen by Reuters on Thursday said the appliances long desired by Cubans can go on sale immediately, although air conditioners will not be available until next year and toasters until 2010 due to limited power supplies.

Only foreigners and companies can buy computers in Cuba at present, while DVD players were seized at the airport until last year, when customs rules were eased. Now Cubans will be able to buy them freely, paying for them in hard currency CUCs, or convertible pesos, worth 24 times more than the Cuban pesos state wages are paid in.

"Based on the improved availability of electricity, the government at the highest level has approved the sale of some equipment which was prohibited," the memo said. It also listed television sets, which were already on sale, electric pressure cookers and rice cookers, electric bicycles, car alarms and microwave ovens.

Raul Castro, 76, has led Cuba since July 2006 when his older brother Fidel Castro provisionally handed over power after intestinal surgery from which he has not fully recovered. The younger Castro was formally named president on February 24, becoming Cuba's first new leader in almost half a century, and he promised to ease some of the restrictions on daily life. "The country's priority will be to meet the basic needs of the population, both material and spiritual," he said as he replaced Fidel Castro, a staunch critic of capitalist consumer society.

Last year, under Raul Castro's provisional government, customs regulations were eased to allow Cubans to bring in some electronic equipment and car parts.

The new memo circulated within the state-run retail system said Cubans will have access to a second group of products in 2009, including air conditioners, which are much in demand to help endure the hot summer days in the tropical country. If Cuba's electricity supplies permit, additional appliances to be sold freely in 2010 include toasters and electric ovens, the memo said.

Cubans were delighted with the prospect of being able to buy items such as microwave ovens and air conditioners that were previously only available as stolen goods on the black market. Shop attendants in central Havana had not heard about the measure but said there was great demand for the items. "That's great. I hope this is the necessary start along a new path," said second-hand clothes vendor Maritza Hernandez, eager to see further reforms to Cuba's command economy.

The sale of many electric appliances was banned in the 1990s when the collapse of the Soviet Union deprived Cuba of billions of dollars in subsidies and oil supplies, resulting in an energy crunch and daily blackouts of as long as 18 hours. Cuba put an end to power cuts in 2006 by importing hundreds of electricity generators run on fuel supplied by Venezuela, its main foreign ally.

Raul Castro has encouraged debate of Cuba's economic woes and has received a torrent of complaints focusing mainly on poor wages and limited access to consumer goods that are priced in hard currency.

In December, he said Cuba had too many restrictions and last month, formally assuming leadership, he vowed "in the next few weeks we shall start removing the most simple of them." Many Cubans expect the state to soon allow them to buy cellular telephones. While they will now be able to buy computers, access to the Internet remains controlled by the government.

Crash and Burn: EU Overtakes US in GDP Terms

The American Dream has been foreclosed. Wall Street biggies on the verge of collapse, massive budget and trade deficits, a personal savings rate less than zero, a currency becoming more worthless with each passing day...the list goes on and on. Now, you can correctly say that this comparison is not a fair one--the EU is an economic union and not a country by any stretch of the imagination--but the consequences of this loss of American prestige is unmistakable. As the US dollar plumbs new depths on a nearly daily basis, the result is that the valuation of EU output has overtaken that of the US. This is certainly not the time for playing John Denver songs.

Can the US fight back and come out stronger? That is the question. As "dark matter" author Ricardo Hausmann suggested, perhaps it's time the US stopped behaving like the whiner of first resort and got its act together. Consume less, produce more things that the rest of the world wants...there are so many ways to right things Stateside. But the will to do so will have to come from within. At the moment, that is hard to find. From Reuters:

The U.S. economy lost the title of "world's biggest" to the euro zone this week as the value of the dollar slumped in currency markets.

Taking the gross domestic product of both economies in 2007, the combined GDP of the 15 countries which use the euro overtook that of the United States when the European currency surged to a record high of more than $1.56 per euro.

"The curious outcome of breaching this latest milestone is that the size of the euro zone's annual output has now exceeded that of the U.S.," the economics department of Goldman Sachs, the Wall Street investment bank, said in a note to clients.

Taking official estimates of 2007 GDP -- $13,843,800 billion for the United States and 8,847,889.1 billion euros for the euro zone -- the economy of the latter passed the United States once converted into dollars, shortly after the euro topped $1.56.

The dollar sank to $1.5688 per euro late in European trading hours on Friday, at which rate the euro zone's 2007 GDP equates to $13,880,568.4 billion.

The 2007 GDP estimates are as published by the U.S. Commerce Department's Bureau of Economic Analysis and provided to Reuters on request for the euro zone by Eurostat, the European Union's statistics office.

IMF's Lipsky: Reeducating a Wall St. Cheerleader

If you were to construct a stereotypical pro-market, pro-financial innovation individual circa early 2007, you would not have done any better than selecting John Lipsky. Formerly a vice-chairman at JP Morgan, he is currently the managing director at the IMF. By tradition, the Europeans usually get to pick the IMF head while the US gets to pick the second in command, the managing director. At Davos 2007, the ever-so-market-friendly Lipsky had this sort of "don't worry be happy" attitude prevalent before most Wall Street banks fell on hard times and the music stopped. Try not to laugh; this Financial Times article is dated 30 January 2007:

Lower energy prices and a more stable US housing market have diminished risks in the global economy to the point that the world now has the "luxury" of worrying about mispriced financial markets.

John Lipsky, the new first deputy managing director of the International Monetary Fund, told the Financial Times that financial market risks - including general high asset prices, an explosion of structured finance or unwise trading in the yen - were problems "less pressing than those we worried about a few months ago". "Now, we have the luxury of worrying about these other issues," he said.

Mr Lipsky, former vice- chairman of JP Morgan investment bank and a long-standing optimist on financial markets, is now the most senior US official at the IMF. He is radically reshaping the fund's thinking on financial market issues, something that has been quite a culture shock for the more cautious IMF staff. For example, he expressed far less concern about financial market risk than the consensus at the World Economic Forum at Davos last week...

As we all know this rose-tinted Wall Street view of things did not hold up, unfortunately. By 27 September 2007, Lipsky was a little more cautious about the benefits of all this financial "innovation" and the rest of it:

A few months ago, I would have said that one of most striking features of financial globalization has been the broadening reach of financial institutions and markets, creating an ability to disperse risk much more widely than previously. The process of globalized risk transfer is being facilitated by securitization and by the use of complex derivative transactions. As is well understood, the key benefit of modern risk transfer instruments is that they allow investors to bear only the financial risks they wish to.

While I still believe this to be one of the most relevant facets of financial globalization, the events of the past few months have demonstrated that the process of risk dispersion contains some inherent potential problems...

Whoa, you mean that there are problems with securitized assets and the like? At least for Lipsky, that was a breakthrough admission. Now, you all may be very surprised to know that Lipsky has turned into a Roubini wannabe of sizable proportions. He is now telling various IMF member countries to batten down the hatches and prepare for the worst:

"By now, there is little doubt that risks of further escalation of this crisis are rising and decisive policy action will be required to put the global financial system and global economy on a firmer footing," said John Lipsky, First Deputy Managing Director of International Monetary Fund (IMF).

"The first priority must be to reverse the spreading strains in global financial markets, and to restore the normal functioning of the financial system in advanced economies," he stated in an address at the Peterson Institute for International Economics in Washington, DC.

"The actions taken yesterday [March 11]," Lipsky added, "by several central banks are helpful, as they reflect a recognition of this critical need to assure market liquidity…"

Though advanced economies are taking steps in the right direction, integration of financial markets globally implies more rapid and potent spillovers to other economies, Lipsky warned. Policy actions worldwide, so far, "may not prove to be adequate" to deal with the "low probability but high impact events" that may materialize and undermine global financial stability. "Policymakers as a matter of course need to `think the unthinkable,' and to consider how they would plan to react if contingencies arise. The need to prepare systematically for potential risks has been demonstrated amply during the past few months."

Lipsky pointed to the potential for a "global financial decelerator" that could amplify the impact of financial turmoil on the real economy.

"A downward credit spiral, driven by rising defaults or margin calls that forces asset sales even as the value of collateral deteriorates could produce new rounds of deleveraging and asset price deflation," he explained.

Further crisis escalation? So there is a crisis now, eh? A global financial decelerator and a downward credit spiral too! Are you sure this is Lipsky? Pretty soon he'll be quoting from Bill Fleckenstein and Stephen Roach. Am I slow or is it just that Lipsky was behind the curve? While the change from "don't worry be happy" to predictor of doom is certainly drastic, it does seem gratifying to know that even these cocooned Wall Street types can default to reality sometimes, and it does bite--hard.

A Vast Conspiracy to Defame China + Its Olympics?

I like fanciful stories myself, but they are usually accompanied by the names of "JRR Tolkien," "Stephen King" or someone like those guys. However, given the rising amount of criticism that China is attracting over the so-called "Genocide Olympics" according to Mia Farrow, Spielberg resigning his post as artistic director of Beijing 2008, and George Clooney pressuring Omega/Swatch over China's human rights record, Chinese officials are now touting a vast China bashing conspiracy.

Also, it's an annual ritual, this: the US State Department decries China's human rights record, then China cites Guantanamo Bay, Abu Ghraib, etc. All's fair in love and war. From Reuters:

China said the United States is unfit to present itself as a "defender of human rights" and a senior official accused Western critics of conspiring to use the Beijing Olympic Games to subvert Communist Party rule.

The U.S. State Department's latest report on human rights across the globe, issued this week, did not name China among the world's very worst offenders but said its record remained "poor".

But with Beijing due to host the Olympic Games starting August 8, focusing intense international attention on China's often harsh restrictions on dissidents, religious groups and disgruntled citizens, officials hit back on Thursday with sarcasm and their own accusations.

"We humbly suggest that the U.S. desist from posing as a 'defender of human rights' and pay more attention to the United States' own human rights record," Chinese Foreign Ministry spokesman Qin Gang said in a statement issued by the official Xinhua news agency.

Tough sparring between Washington and Beijing over human rights have long been a part of the diplomatic landscape, but China's latest angry words suggest deepening official impatience with international protests and criticisms focused on the Games. In the ruling Communist Party's newspaper, the former head of the State Council Information Office -- the public relations arm of the central government -- said he smelt conspiracy.

"Some anti-China forces in the West see the Beijing Olympic Games as a great opportunity to force China into a political transformation, and blackening the Olympics and China has become their habitual method," Zhao Qizheng, now vice chairman of a foreign policy advisory committee, wrote in the overseas edition of the People's Daily.

China's controls on religion and news reporting, its problems with food safety and role in Sudan's Darfur region "have been vastly exaggerated by the foreign media", Zhao wrote in the front-page commentary.

Chinese officials had been too passive in the face of criticism, leaving the country's critics to dominate news coverage, he said, urging a public diplomacy offensive. On Thursday, China also issued its own assessment of human rights in the United States, which it said "shows the United States itself has grave violations of human rights". Spokesman Qin said his government issued the report to "teach the United States an extra lesson".

The report issued by China's State Council Information Office focused on U.S. poverty and racial divisions and called the Washington-led invasion of Iraq in 2003 the "biggest human rights tragedy" and said 660,000 people have died there as a result, nearly all of them civilians.

"This will allow all to ask just what qualifications the United States has to point fingers at other countries," Qin said of the Chinese report, which among sources cites Human Rights Watch, a New York-based organization often critical of Chinese policy. The widely cited observer group Iraq Body Count puts the civilian death toll at 89,300 since 2003 in its latest report.

Are Hedge Funds Boosting Chinese Reserves?

Our favorite official publication, the China Daily, now has another tack in explaining the reason for the country's rising holdings of foreign exchange, especially those godforsaken dollars (in which we do not trust). Estimates place February's reserve rise at an astonishing $61.6B. I must say that the new antagonist isn't new: those vile foreign investors and their speculative funds. Trying to work around capital controls, they're out to make a profit from the rising yuan as the hapless dollar plunges to new depths on a nearly daily basis:

Foreign investments and international hedge funds, some of which are speculative hot money, are now elbowing into the China market. They're lured by the Chinese people's emerging consumption power, and expectations of the Chinese yuan appreciating higher. The Ministry of Commerce said on Wednesday that China drew $18.13 billion in overseas investments in January and February, shooting 75.2 percent year-on-year.

Chinese Commerce Minister Chen Deming, who was promoted to the post late last year, said at a news conference in Beijing that the reason for the big increase of overseas capital in the first two months was due to the big increase in large-scale investing projects and a stronger yuan.

Chen's ministry, which oversees foreign trade and domestic consumption, said that during the first two months, investments from the European Union countries rose a whopping 109 percent, while investments from the United States increased 44 percent.

Wild expectations abroad that the yuan will continue to rise in value against major world currencies has led to money coming to China.

"When you bring US dollars to invest in China, you need to change it into the yuan. Naturally you would like your funds to enter China at an earlier date. Because, if you are late, the same amount of dollars will turn out to be less yuan bills," Chen told reporters.

China's foreign exchange administration, under the auspices of the People's Bank of China, the central bank, said in its latest report that the country's total foreign exchange reserve has reached nearly $1.59 trillion by the end of January, the world's largest.

China's currency, also called the renminbi, has been constantly rising in value. The People's Bank of China, set the medium parity trading price at 7.0970 against one US dollar on Thursday, a new record high. The yuan has gained 3 percent against the dollar in value since the beginning of 2008.

Venezuelans Still [Heart] the [Crummy] US Dollar

I am no fan of the US dollar and I think that anyone gullible enough to hold it deserves to suffer from endless Bernanke helicopter drops that nonetheless do little to prop up the sagging US economy and only worsen its long-term health. Unfortunately, one of the bozos who've been stuck with this rather useless currency is, well, me. I have been trying to get rid of my remaining greenbacks since late last year but the dollar decline has continued unabated--there have been no real opportunities to "buy on dips." With American monetary and fiscal policy looser than Spitzer's hos, how could it be otherwise? I've even created a top 10 list of what the dollar is still useful for, which isn't much.

If you're a dollar holder like me, you may be glad to know that there are folks who are even more depraved than us. The International Herald Tribune has a story about how bad things are down in Venezuela. It's so frickin' awful that inflation there is even worse and people are desperate for dollars. It appears the Bolivarian Revolution is putting hapless Venezuelans on the road to a Zimbabwe-style 100,000% inflation rate. To evade currency controls, they've all sorts of ways to get their hands on greenbacks. If anything can make you feel better than the dollar holding loser that you of course are, maybe this story will, at least for a while...

Stroll down Columbustraat. Enter the smoke-filled lobby of the San Marco Hotel Casino. Proceed up one flight of stairs to the front desk. Dial room 106. Bring a credit card issued in Venezuela. In a desperate quest to get their hands on American dollars [I am laffing so hard], Venezuelans are flocking to this island in the Netherlands Antilles to take part in this elaborate backroom scheme and dozens of others like it to get around currency controls imposed by the government of President Hugo Chávez.

"These Venezuelans come here to get their dollars, and we're happy to help them out," said Ronald Veenstra, 36, owner of a bar across from the San Marco Hotel, the Supreme Real, while mixing a mojito. "I've never poured more drinks for any one group in my entire life." For Venezuelans, the Curaçao option for obtaining dollars emerged last year when the value of Venezuela's currency, the bolivar, fell sharply against the dollar as fears intensified over Chávez's economic policies, including the nationalization of oil and telephone companies.

Faced with the highest inflation rate in Latin America, at 24 percent, and the dwindling value of the bolivar, Venezuela became an economic oddity in an age of ascendant currencies as varied as the Brazilian real and Peruvian sol: a place where the dollar is still sought after. That's where Curaçao comes in.

"Venezuela has always been a natural market for Curaçao," said Johannes Henriques, 63, a manager at the Saint Michiel Bay Inn, reminiscing about past oil booms when flush Venezuelans would fill Willemstad's boutiques and hotels. "Now the Venezuelans come to do their card thing, and it's an opportunity for them to get to know us again." The "card thing" is an intricate scheme involving local merchants, Socialist bureaucrats, Venezuelan travelers and middlemen.

Trying to slow capital flight, Venezuela limits its citizens to $5,000 in annual credit card purchases abroad. That is 10,750 bolivars, at the official exchange rate of 2.15 to the dollar. But at the prevailing black-market rate of 4.5 to the dollar, the amount more than doubles to 22,500 bolivars.

Seizing on that gap, some Venezuelans began coming to Curaçao's casinos last year and using their credit cards to buy chips. They then played a few hands and cashed in the chips for dollars, which circulate here along with guilders. But the casinos soon prohibited them from buying chips with their cards, because so few of the people were actually using the chips to gamble.

Middlemen then moved in, organizing trips for Venezuelans and charging a 20 percent commission for cash advances at the office of a merchant, like the travel agency in Room 106 of the San Marco Hotel. The middleman and merchant divide the $1,000 commission, leaving the Venezuelan with $4,000 in cash.

With a wink and a nod from local banks that process the transactions, the middlemen dummy up receipts, often for expensive electronic items, offering the travelers an alibi in case they are audited by back in Venezuela by bureaucrats loyal to Chávez.

The Venezuelans get dollars to hold as a hedge against economic uncertainty, while the merchants get a hefty commission for swiping a credit card. (Multinationals like Mastercard and Visa also collect commissions on each currency transaction.)

And in an illustration of where some of Venezuela's oil wealth is going, some middlemen on this palm-fringed island have accumulated fortunes since the scheme began. "I made $300,000 in December alone," said Roberto, 31, a middleman who asked to be identified only by his first name. He puts up some of the Venezuelans in his own home to save them money on hotels and food.

Rosan Jansen, a researcher at the Curaçao Tourist Board, said Venezuelan visitors roughly tripled in 2007 to 60,000 from a year earlier as airlines added flights from Caracas and smaller Venezuelan cities like Maracaibo, Valencia and Las Piedras. With flights booked months in advance, that number could rise to 100,000 this year.

"I'm doing this to have some savings when I'm older," said Yesenia Castro, 53, a Venezuelan office worker who came here in March in search of dollars for the second time in less than a year. "One never knows what life may bring."

Once the flights arrive, employees of the middlemen swarm the lobby of the airport trying to steer the Venezuelans to their bosses. With increasing competition, commissions on these deals have dropped in recent weeks to around 15 percent from 20 percent, travelers say.

Meanwhile, officials back in Caracas have been trying to put an end to the scheme after Venezuelan credit card purchases abroad surged 312 percent in 2007 to $5.1 billion. They made it illegal for newspapers to publish the black market currency rate and renamed the currency the bolivar fuerte, or strong bolivar.

They have conducted audits of thousands of travelers in recent months while requiring others to stay abroad seven days to access their quota of credit card dollars. But the new rules have simply bred ever more creative schemes to circumvent them. For instance, many travelers buy tickets for week-long stays but change their itineraries upon arrival.

Some middlemen simply foot the bill for modest one- or two-day trips, effectively duping Venezuelans out of their quotas while plying them with liquor at beaches here, where the hushed tones of Dutch tourists trying to focus on their paperbacks are drowned out by groups of partying Venezuelans.

Little soul-searching about exploiting Venezuela's vagaries seems to have emerged in Curaçao, which has been finding ways to grow prosperous off its neighbor to the south since the early 20th century when Royal Dutch Shell built a refinery here to process Venezuelan crude oil.

So many shops in central Willemstad have signs saying "We Welcome Venezuelan Cards" that it is a surprise to find one that does not. The explanation, when it comes, is simple. "We don't do it," said Manish Chandhani, 25, a salesman in Baba's, an electronics store. "My boss does not like to earn easy money."

Clooney Prods Swatch/Omega on China/Darfur

I have to run, but do note that celebrity activist George Clooney, an endorser of the upscale Omega brand of watches, has called on the firm's parent company Swatch to reconsider its Beijing Olympic advertising in light of the ongoing Sudan crisis. See if you buy Omega's replies to Clooney in this matter. From the Beeb:

Clooney - who is a critic of China's role in the Darfur crisis in Sudan - advertises Omega Watches, one of the worldwide partners for Beijing 2008.

"I have talked with Omega (about China) for over a year and will continue to talk to Omega," Clooney told BBC Sport.

"I have and will go to the places I and China do business and ask for help…"

In a statement issued to BBC Sport, Clooney added: "Last year I took Olympic athletes Joey Cheek and Tegla Loroupe to Beijing to meet with the heads of the Chinese Government.

"I have and will continue to ask China to use its considerable leverage with the Government of Sudan."

Omega Watches is one of 12 "worldwide Olympic partners" for Beijing and has been the official timekeeper for every Olympics since 1932.

The company lists Clooney - an award-winning actor, director, producer and screenwriter - as an "ambassador" for its brand on its official website.

Nick Hayek, the chief executive of the Swatch Group which owns Omega, told BBC Sport: "We have indeed discussed this issue with Mr Clooney.

"We have full respect for his strong engagement in the fight for the good cause and share his opinion, especially concerning Darfur, and we are proud to work with a person who has such high ethical views.

"It is our policy not to get involved in politics because it would not serve the cause of the sport which is one most noble human endeavours for creating understanding and peace all over the world.

"This was also the reason that we were present in Moscow during the 1980 Olympics despite the boycott by the western world, and we provided our services to the athletes during the 1984 Olympic Games in Los Angeles when the Communist bloc boycotted the Games.

"Our role with our 300 on-site timekeepers was always clear of politics. We are partners of the athletes and the IOC, not of Governments."

When asked whether Omega would speak out on China's association with the Sudanese Government, Hayek said: "Of course, it is a continuous process but we do it the Swiss way of 'little strokes fell great oaks'.

"We make our point directly to our high-level contacts and not by jumping in at every headline."

Hayek also confirmed that Omega will continue to monitor the situation in Darfur and China's involvement.

Political Economy of Cheesy Chinese Advertising

I caught wind of this story elsewhere earlier, but now the Wall Street Journal has provided more color to it. The clip above is of a low-budget advertisement that seems to have annoyed an awful lot of Chinese. What it does is repeat the name of each animal in the Chinese zodiac thrice followed by the name of the wool-selling Olympic sponsor until all twelve animals are mentioned. Before its further opening up to the world, a lot of advertising in the PRC was of this ilk. As you will read below, it's the "caveman" approach: the objective is to club your brand into the consumers' consciousness. However, modern Chinese consumers have found this particular throwback nauseating given the proliferation of Westernized ads with "high" production values. (I find it charming in a juvenile sort of way, actually.)

Now, "face" is a very important concept in Chinese and other Asian societies. What this ad seems to have done is remind consumers of the olden days when the country was not regarded as a major economic player and el cheapo ads ruled the airwaves. Many are now calling for boycotts of the company, but not for the typical reasons of corporate social responsibility (CSR) offenses--unless you consider annoying television audiences a CSR offense. It may seem odd that a low-budget ad is thought of as an affront to national pride, but that it's done:

The TV commercial everyone has been talking about lately in China is the one that has tested everyone's nerves. Heng Yuan Xiang Group, a top Chinese wool producer, wanted to celebrate its sponsorship of this summer's Beijing Olympics; it shares sponsor status with the likes of United Parcel Service Inc. and Anheuser-Busch Cos.'s Budweiser brand. So the wool company began running a 60-second ad in February, during the celebration of Lunar New Year, China's biggest holiday.

In the bare-bones ad, a squeaky girl's voice chirps out a triplicate list of each of the 12 animals in the Chinese zodiac, interspersed with repetitions of the company's slogan by an adult voice. Cartoon zodiac animals hop across the screen over a plain, white background with the company's logo. As in: "Rat rat rat! Heng Yuan Xiang, official sponsor of the Olympic Games! Ox ox ox! Heng Yuan Xiang, official sponsor of the Olympic Games! Tiger tiger tiger!..."

When they first saw the ad, some people thought their TV sets were broken. Viewers savaged the commercial in print media and online, some calling it intolerable or singling it out as the worst spot they had ever seen. It has spawned Internet parodies, including one with a goat at a news conference apologizing "to everyone -- to the animals in the commercial, the customers, their families and every single person in this country." Other marketers complained that consumers were changing the channel when the spot came on, ad executives say. The spot ran repeatedly on Chinese TV from Feb. 6 to Feb. 12. On Feb. 17, Heng Yuan Xiang called a press conference to explain that it had stopped running the commercial.

The firm didn't respond to requests for comment. State-controlled news service Xinhua quoted Ding Xiuwei, whom it identified as a media consultant with the company, as saying the ad was meant "to make people laugh." But the backlash suggests that increasingly sophisticated Chinese consumers are rejecting low-budget, low-quality marketing.

State-run Chinese TV has long been home to bad, and often repetitive, ads. Heng Yuan Xiang, in fact, pioneered a spartan style of commercials in the 1990s that milked 15-second time slots for maximum impact. For a decade, its five-second refrain, "Heng Yuan Xiang, Sheep Sheep Sheep," voiced over the same company logo, was rebroadcast three times in rapid succession. The ads -- all made in-house -- made Heng Yuan Xiang an icon.

When Richard Tan, chief executive of Havas SA's Euro RSCG agency in greater China, first came to the market 11 years ago, almost all local advertisers had adopted what he calls the "caveman approach" -- beating consumers over the head with the same message.

"This approach has gradually faded, and more Chinese advertisers are increasingly sophisticated with their advertising," Mr. Tan says. Heng Yuan Xiang is "still living in a 'lost world' with this approach," he adds. The ad's refrain of phrases such as 'Pig pig pig! Heng Yuan Xiang, official sponsor of the Olympic Games!' wore out viewers' patience.

The arrival of foreign ad agencies in the 1990s, together with the rapid expansion of the nation's middle class, altered Chinese consumers' expectations…These days, production values on many Chinese ads can be on par with those in the U.S. or Europe. China's ad market, valued at more than $60 billion annually based on rate-card figures compiled by Nielsen Co., is expected to overtake Japan's soon as the world's second-largest in spending terms after the U.S. Domestic Chinese brands now are held to high standards. So the recent Heng Yuan Xiang stunt sent a message that the company hadn't grown, ad executives say.

"The expectation is that the company would have produced something better if their fortunes had been good," says Jeremy Sy, planning director for Omnicom Group's TBWA in China. "The fact that the ad is not much better than the first ad suggests that, unlike almost every other company in China, Heng Yuan Xiang hasn't actually improved." TBWA works for Games partner Adidas AG.

Moreover, the popularity of the Web in China is putting consumers in control. The ad has been posted online and viewed about one million times on Chinese video-sharing sites. "Friends, let's join together to resist Heng Yuan Xiang!!! In pursuit of profit they have done a great moral travesty, and monopolized our airtime!!!" wrote one blogger on popular online forum Tianya after watching the ad. "I hereby solemnly swear: in the one life I have, I will never purchase anything by Heng Yuan Xiang."

Heng Yuan Xiang has said the backlash is buzz. "Overnight, Heng Yuan Xiang's 'twelve animals ad' has become a household discussion topic across the country," the company said in a statement Feb. 21. "With its pithy message, the 'twelve animals ad' rings in the public's ear and has again become an advertising sensation."

Says Euro RSCG's Mr. Tan: "I've seen very few cases where consumers were annoyed into brand loyalty."

Are Markit ABX & CMBX Indices Overly Pessimistic?

Staples of our friendly housing bust sites are Markit's charts of "cliff-diving" ABX (home mortgage) and CMBX (commercial motrgage) indexes. Markit data is used to price credit default swaps--the cost of obtaining insurance against the default of these securities, and mark-to-market--to allow holders of these assets to value them properly against prevailing market prices. Certainly, the charts for ABX and CMBX reflect spectacular pessimism about the value of these securities. However, the Economist now has an interesting story on why Markit data may be inaccurate
while there are rather more out there.First, Markit data is based on a limited sample of extant securities: 20 each for ABX and CMBX. Second, speculation involving these indices may be introducing downwardly biased distortions.

These are plausible reasons, and there is some evidence that these securities are being undervalued. It is noteworthy that some of the biggest FIs feeling the wrath of Markit are its owners, like Merrill Lynch and Citigroup. While these FIs may have reason to say that these indices are too negative, accountants of these FIs are keen on using available data to avoid charges of client favoritism. We'll see what happens...

The indices' relentless fall (see chart) has added to pressure on banks, such as Merrill Lynch and Citigroup, with big mortgage-related holdings. Citi's shares slid to a nine-year low this week on talk of a further, $18 billion write-down. Banks that mark assets far from where the indices trade incur the ire of their auditors.

The indices are undoubtedly useful, but some people think banks are putting too much emphasis on them. They capture only a narrow slice of the market: the ABX references 20 securities, for instance. And they are prone to distortion (mostly downwards) by heavy speculation. “They are not liquid enough to take the weight of short-selling heaped on them,” says one fund manager, who adds that the ABX “will probably be remembered as one of the most crowded hedge-fund trades in history.” One version of the CMBX implies losses more than 30 times greater than those suffered to date, a multiple that strikes some people as implausible. Dick Bove, a veteran bank-watcher with Punk Ziegel, recently denounced Markit's indices as “fallacious”. He expects to see write-ups as their flaws become apparent.

Intriguingly, Markit agrees with the sceptics, up to a point. The firm is working on a report that will highlight the limitations of the ABX and champion other inputs, such as new issuance and recent trades in similar securities, that can help value credit instruments, “Two years ago we had to tout [the ABX's] virtues. Now people consider it to be more relevant than it should be. They are panicking, over-reacting,” says Ben Logan, Markit's head of structured finance. He hears frequent complaints from banks on both sides of the Atlantic saying that their auditors want to see entire portfolios marked to Markit indices.

Yet the accountants want to avoid any impression that they are going soft on clients. They fear that would open them to the sort of criticism—and legal action—that engulfed them after the dotcom crash. They are already under fire for allowing eager profit-booking in mortgage securitisations. Sticking with a widely used index is safer than waving through valuations based on banks' own models. “It's cover-your-ass stuff,” says Mr Logan. He hopes that Markit's research will persuade the bean-counters to take a broader view. Some regulators also urge them to lighten up, especially in their treatment of structured products. Relying on a single data point is “lunacy”, says a senior Wall Street banker. “But these are crazy times.”

Markit's self-criticism may seem odd, but bear in mind that it is majority owned by a group of 16 banks, including such walking wounded as Citi and UBS. By and large, their internal models paint a less depressing picture than the ABX and CMBX do. If the auditors can also be persuaded that the indices are unduly pessimistic, the banks may be able to get away with smaller write-downs. If ever there was a time for banks to pick holes in one of their own products, this may be it.

Will Japan Intervene if the Yen Falls Below 100?

Many doubted "Mr. Yen," Eisuke Sakakibara, when he said earlier this year that the Japanese currency unit would appreciate more quickly in lockstep with the Chinese yuan. The logic is simple: if the Chinese allow the yuan to revalue at a slightly faster clip, then Japan can allow its own currency to become stronger as well since competitive parity of exchange rates would more or less be maintained. This from Bloomberg:

The Chinese yuan may rise more than 10 percent this year against the dollar, allowing Japanese policy makers to accept further gains in the yen, said Eisuke Sakakibara, Japan's former top currency official.

China's currency has strengthened 1.4 percent this year, on course for the biggest monthly advance since the end of a dollar peg in July 2005, as the government seeks to curb inflation. The Group of Seven industrialized nations have called on China, Japan's biggest trading partner, to stop keeping the yuan artificially weak to support exports...

A rising yuan would make Chinese goods more expensive in global markets, bolstering the competitiveness of Japanese exporters. The yen may advance as much as 12 percent to 95 per dollar by summer as the U.S. economy slows and the Bank of Japan refrains from intervention to slow the rally, he said.

Sakakibara was dubbed "Mr. Yen'' because of his ability to influence the foreign-exchange market during his 1997-1999 tenure at the finance ministry. He correctly forecast in an interview in October that the dollar would plunge against the yen because of the risk of a U.S. slump.

Sakakibara-san also said there was pressure from the US against Bank of Japan intervention. Ah, good old-fashioned political economy:

Sakakibara said today that Japan's central bank is unlikely to intervene to slow the yen's advance because the U.S. government is opposed to interfering with currency markets.

Using a technical analysis, though, Daily FX says Bank of Japan intervention is possible if the yen breaks the JPY100 level. The chart above indicates the levels at which the Japanese came in to prop up the US dollar--at about JPY100. Of the major industrial economies, Japan is alleged to be the most likely to intervene. As always, FX traders will place their bets and see what happens:

Of the G-10 countries, Japanese policymakers are the most likely to get their hands dirty and intervene in the currency markets when the Japanese yen’s price movements are too volatile and extreme for their liking. However, the Bank of Japan and Ministry of Finance have been a bit more lenient in recent years, as the last official intervention was conducted in March 2004. Nevertheless, policymakers have plenty of reason to be concerned about the Japanese yen’s most recent surge, as the USDJPY pair has recently tumbled to am 8-year low of 101.40. The strength of the currency is hurting the profit margins of major Japanese corporations, as the most recent Tankan survey showed that most Japanese corporations forecast the value of USDJPY in 2008 to be around 113.00. With the pair now rapidly approaching the 100 level, those hedges are deep in the red. Furthermore, Japanese Economy Minister Hiroko Ota noted that the approximate break-even point for companies is at the 106.60 level, and firms like Toyota, Yamaha Motor Co., and Nippon Steel have all reported disappointing earnings as a result. Unsurprisingly, the shares of exporters have taken a hit and are a major reason why the Nikkei Stock Average has plummeted declined 6 percent over the past five days, the biggest loss since the week ended August 17.

Given the virtual standstill in economic activity, the growing squeeze on Japan’s export sector, and the sharp drop in the Nikkei, it is not unreasonable to wonder if the Bank of Japan may consider intervening in the currency market to help prop up USD/JPY above the 100 level – a point not seen since December 1995 – in order to assure that the country’s exporters are not crippled by uncompetitive exchange rates.

While the effectiveness of currency intervention as a policy tool has been an ongoing debate within the financial markets and academia for years, there is little argument that at least in the short term, it can be brutally effective. Amongst the G-3 central banks, the Bank of Japan is by far the most active practitioner of this policy. Furthermore, the Bank of Japan prefers to optimize the effectiveness of its intervention by fading speculative extremes, meaning that the currency pair can rise by hundreds of points within minutes. However, the most recent COT data shows that yen positioning is not extreme quite yet, suggesting the currency may have more room to gain. Either way, FX traders who are short USD/JPY need to be increasingly careful and stringent with their stops as the currency approaches 100.

Migration Showdown at the US-Mexican Border

Reuters has fascinating news about the ongoing battle between US border control and the increasingly ingenious means would-be immigrants of good and ill intentions are using to traverse the US-Mexican border. As Eddie Money sang, "Gimme some water / 'cause I shot a man on the Mexican border"! What follows is a brief excerpt, though the whole article is well worth reading. Using ramps to launch cars over the wall "Dukes of Hazzard"-style and other hijinks feature large in their strategies. As they say, necessity is the mother of invention:

When U.S. authorities raised a tall curtain of steel through this tiny Arizona border town to prevent people crossing illegally from Mexico, the smugglers on the south side were ready. Using blowtorches and welding gear they burned a rectangular gate in the barrier large enough to drive a truck through, then they sealed it with a padlock to use it at their leisure, border police say.

As the U.S. government pushes ahead with an unprecedented security buildup along the porous Mexico border in this presidential election year, profit-hungry Mexican drug and human smugglers the length of the line are raising their game. Border police are encountering ingenious and often simply brazen attempts to foil security at both the ports of entry and empty spaces along the nearly 2,000 mile (3,200-km) border by human and drug smuggling organizations…

Ongoing measures to erect 670 miles of new fence on the border are credited with helping to cut arrests to some 870,000 last year from 1.1 million. Nevertheless, smugglers are trying and, in many cases succeeding, in breaching every kind of barrier thrown in their paths.

Sturdy steel posts have been sunk in the ground in many areas to stop vehicles crossing north, although drug traffickers have responded by building elaborate vehicle ramps to drive cars over the top, border police say. "It's like the old show 'The Dukes of Hazzard,' cars flying through the air," said James Jacques, a supervisory Border Patrol in San Diego, Calif.

Illegal border crossers are also routinely beating pedestrian barriers using ladders tailor-made in clandestine Mexican workshops, border police say, while others have used screwdrivers to try to clamber over new 14-foot tall, steel-mesh barriers designed to deny handholds.

Of course, smuggling drugs to satiate American demand remains very lucrative:

In recent years, Mexico has developed into a principal route in the international drugs trade. US authorities believe about 80 per cent of the cocaine consumed in the US comes through Mexico.

Several cartels, including the Arrellano Félix group, have become rich in the process. According to US official estimates, the gangs earn as much as $13.8bn a year through drugs smuggling.

The Audacity of Pope: Eco-Damage is a Sin

Levicitus 25:23-24 states "The land is mine and you are but aliens and my tenants. Throughout the country that you hold as a possession, you must provide for the redemption of the land." In the Holy Book, there are numerous other references to the concept we now understand as "environmental stewardship." Something that makes me proud to be a Catholic--with a name like "Emmanuel" no one is going to mistake me for an Aum Shinrikyo acolyte--is the very progressive and pragmatic stance the Holy See has taken to environmental matters. It will famously install solar cells on the roof of the Vatican in an attempt to lessen its dependence on fossil fuels. And now, Reuters reports that the #2 man at the Vatican is keen on classifying ecological offenses as sins. Yes, 80s fans, being an enviro-degenerate, it's a sin.

Elsewhere in the article, Girotti discusses confession. I think both go hand in hand: "Forgive me father for I have sinned. During the month of January, my carbon footprint was reprehensible, further endangering people living in flood-prone regions of His earth like Bangladesh..." Really, it is no surprise to me that folks like (the rather earthly) Tony Blair would like to miss out on the benefits of the religion. Believe it or not, Catholicism is a very forward looking faith:

[Archbishop Gianfranco] Girotti, in an interview headlined "New Forms of Social Sin," also listed "ecological" offences as modern evils.

In recent months, Pope Benedict has made several strong appeals for the protection of the environment, saying issues such as climate change had become gravely important for the entire human race.

It has installed photovoltaic cells on buildings to produce electricity and hosted a scientific conference to discuss the ramifications of global warming and climate change, widely blamed on human use of fossil fuels.

Serf's Up: Class Warfare in "Socialist" China

Our resourceful friend the China Economist found a very interesting research op-ed from Arvind Subramanian of the Peterson Institute of Economics on the ever-dwindling share of returns to Chinese labor. Here is the key excerpt:

A silent revolution has been taking place in China. Somehow, without anyone noticing, the capitalists have upended the People's Republic. Over the past few years, they have effected a significant redistribution of income away from workers. This might well be the mother of all redistributions.

Normally, in most countries, the distribution of income between labor and capital changes not at all or very slowly. For example, in the United States, the share of the economic pie going to workers has been, with some small exceptions, roughly stable in the postwar period. In China itself, this share was roughly stable for over 25 years since the Chinese economy took an outward turn in 1978.

But recently there have been tectonic shifts. Between 2002 and 2005, according to Berkeley economists, Chong-En Bai, Chang-Tai Hsieh, and Yingyi Qian, the share of the economic output going to workers decreased by about 8 percentage points, from about 50 percent of GDP to 42 percent of GDP. Which means that China—yes, the People's Republic—now has perhaps the lowest labor share of any major country in the world.

Why is this happening? It sure doesn't seem like the socialism I read about in the frickin' Communist Manifesto. Isn't the operative concept "from each according to his ability, to each according to his need? TIME provides an oft-repeated piece of anecdotal evidence: Local governments keen on accumulating revenue frequently have teamed up with land developers in kicking poor farmers of their land without compensation. The picture here is of an involuntarily razed house to make room for some developer's tourist trap. "Property rights" remains a bourgeois affectation in China. Land grabbers and their accomplices have taken away property from poor farmers as easily as taking candy from a baby. Sad but true. Will changes promulgated by the Communist Party to curb such abuses work? As long as the incentives for land grabbing remain more attractive than the punishments for doing so, don't count on it:

Such violent confrontations are increasingly common in China, where decades of frantic growth have generated an equally frantic desire to cash in by developers, often aided or partnered by corrupt local government officials. But the Zhuhai case is different in one critical respect: after their claims were twice denied by the courts, the villagers issued a proclamation rejecting the land seizures as illegal and asserting their rights over ancestral plots for them and succeeding generations — rights they said they were prepared to "defend to the death."

China's farmers can work their land through 30-year, renewable leases, but they cannot buy or sell it (all land belongs to the state). Regulations do exist governing expropriation, but they are often not followed. Many farmers are increasingly angry with this — particularly when they believe that the land their families have tilled, often for generations, has been taken away without regard for the law. The declaration by the Zhuhai villagers is the latest in a series of such actions that now involve tens of thousands of farmers all over China. While it is too early to describe this as an organized national movement, there's little doubt that such manifestos — which often use similar vocabulary and phrasing — are part of a new effort by activists and farmers to focus the government's attention on the country's 700 million peasants and the restricted claim they have on the land they work. "This is just the beginning," says a Beijing-based rural-rights activist who says he is one of the main organizers behind the drive to give farmers full legal ownership of their land. "You'll see [many] declarations like these coming out before the Olympics."

Yu Jianrong, a director of the Institute of Rural Development at Beijing's most prestigious think tank, the Chinese Academy of Social Sciences, or CASS, acknowledges that the recent assertions of rights over land by peasants are potentially transformational. "They're not widespread now but they could become symbolic ... of peasants ceasing to depend on the law and instead depending on 'natural law.'" Journalist and author Chen Guidi is more blunt: "If word of these declarations starts to spread to peasants around the countryside, it could become uncontrollable." Chen, with his wife Wu Chuntao, is the author of Will the Boat Sink the Water? — a widely praised investigation into conditions in rural China.

BTW, the book Will the Boat Sink the Water? looks like a very interesting read for those of you interested in China's growing polarization. I will try and take it out from the library soon. Some "worker's paradise," that China.

Yo Blair: The Next Ivy League Flat Earther?

You may be aware that former UK Prime Minister Tony Blair has become my co-religionist. Late last year, his longstanding interest in the Catholic faith became official when he became one with the popery. It's a great religion; I can't complain much about it myself. Anyway, while visiting the ever-so-informative Bloomberg site, I came across this tidbit:

Today, Yale University announced that Blair will teach a course in the next academic year that will ``examine issues of faith and globalization,'' the university, located in New Haven, Connecticut, said in a statement.

I'd like to hear Blair reconcile his faith with supporting the Iraq invasion on dubious grounds. Turning to the Yale site, we get this:

Yale University is pleased to announce the appointment of Prime Minister Tony Blair as the Howland Distinguished Fellow for the next academic year.

Mr. Blair will lead a seminar at Yale and participate in a number of events around the campus. The course in which he will participate with Yale faculty will examine issues of faith and globalization. His efforts at Yale relate to the work of the Tony Blair Faith Foundation that he will be launching later this year.

The Deans of the Yale School of Management and Divinity are working with Mr. Blair on finalizing details of the program.

The Howland Distinguished Fellowship was created in 1915 to recognize a “citizen of any country in recognition of some achievement of marked distinction in the field of literature or fine arts or the science of government.” Among those who have been Howland Distinguished Fellows in the last century are the composer Ralph Vaughan Williams, journalist Sir Alistair Cooke and stateswoman Indira Gandhi.

It's become something of a fad with elite schools to feature celebrity lecturers to show the trustafarians and their folks that they're getting value for their money. My favorite case in point is of that famous flat-earth society member Thomas Friedman teaching globalization at Harvard. To me, it's a sad reflection of how celebrity trumps real knowledge creation. Although they are far removed from pop consciousness, serious academics like Edward Leamer of UCLA and Pankaj Ghemawat (also at Harvard) easily dispel the globaloney peddled by the likes of Thomas Friedman. As long as the protectionists and xenophobes I blog about day in and day out don't give it a rest, you can rest assured that, yes, the world is lumpy. Capital, goods, and people do not move around the globe with the freedom imagined by Friedman and others who believe in the hyperglobalization thesis.

I am interested in what sort of thing Blair will teach. If he talks about how to resolve contemporary faith with the challenges of globalization, then I'd be interested in what he has to say. OTOH, if he recycles Thomas Friedman's thoughts, I think we'd all be better off without. It can go both ways as this Globalist piece penned by him suggests. What will it be, Tony?

In the late 20th century, the world had changed, the aspirations of the people had changed, we had to change. The world is on the move again — the change in the early 21st century even greater than that of the late 20th century.

The challenge we face is not in our values. It is how we put them into practice in a world fast forwarding to the future at unprecedented speed.

We believe in solidarity. We believe in social justice, in opportunity not for a privileged few, but for all — whatever their start in life. We believe in tolerance and respect, in strong communities standing by and standing up for the weak, the sick and the helpless.

Values don’t change, but times do. And now, as before, our values have to be applied anew in changing times.

Easterly Gets Medieval on Bill Gates (Again)

The folks over at Bloomberg sent me a note about this podcast sometime ago by William Easterly taking on another famous William, Bill Gates. Easterly takes umbrage to the notion of "creative capitalism" that Gates spoke about at the recently held World Economic Forum. This is not the first run-in between these protagonists, as they clashed at a previous Davos panel. Ultimately, I believe that Easterly tends to exaggerate the differences in his and Gates's thinking. Gates is not merely suggesting a more elaborate form of charity, but rather a way of harnessing the innovative potential of capitalism to solve some of the world's pressing poverty problems. Anyway, listen and decide for yourselves: You can stream the clip here using the nifty SnapShots widget, and what follows is the blurb about the podcast:

Last Friday on Bloomberg Radio®, "Bloomberg on the Economy," host Tom Keene spoke for an hour with William Easterly, professor of economics at New York University, about his assessment of Microsoft Corp. Chairman Bill Gates's poverty-fighting strategy and Gate's "blind spot" in helping the poor. Professor Easterly discussed the achievements and challenges of global aid programs and U.S. donations under President Bush.

Di Plane Pt. 2: Keating Five, McCain, and EADS

While I am not really a supporter of John McCain, I do believe that he is being unfairly singled out over Boeing's unexpected defeat to Northrop-Grumman and EADS in supplying the US Air Force's next-generation air tanker. The latter combo won the deal fair and square. Now, McCain was instrumental in sinking an earlier deal with Boeing over the procurement scandal I posted about before, paving the way for EADS to win the deal in a rematch half a decade later. The Associated Press has an article describing how American politicians and workers supportive of Boeing's bid are keen on exacting a political price on McCain's presidential bid:

Angry Boeing supporters are vowing revenge against Republican presidential candidate John McCain over Chicago-based Boeing's loss of a $35 billion Air Force tanker contract to the parent company of European plane maker Airbus. There are other targets for their ire -- the Air Force, the defense secretary and even the entire Bush administration .

But Boeing supporters in Congress are directing their wrath at McCain, the Arizona senator and nominee in waiting, for scuttling an earlier deal that would have let Boeing build the next generation of Air Force refueling tankers. Boeing now will miss out on a deal that it says would have supported 44,000 new and existing jobs at the company and suppliers in 40 states.

"I hope the voters of this state remember what John McCain has done to them and their jobs," said Rep. Norm Dicks, D-Wash., whose state would have been home to the tanker program and gained about 9,000 jobs.

"Having made sure that Iraq gets new schools, roads, bridges and dams that we deny America, now we are making sure that France gets the jobs that Americans used to have," said Rep. Rahm Emanuel, D-Ill. "We are sending the jobs overseas, all because John McCain demanded it…"

McCain said he is keeping an open mind on the contract, but in the past he has boasted about his role in blocking an earlier version of the tanker deal that gave the contract to Boeing…McCain has run ads touting his role in fighting "pork" such as the tanker project and cited the deal in a recent GOP debate. "I saved the taxpayers $6 billion in a bogus tanker deal," he said.

House Speaker Nancy Pelosi, D-Calif., echoing the thoughts of many congressional Democrats, sees McCain's role in a less positive light. She said the earlier tanker deal was "on course for Boeing" before McCain started railing against it. "I mean, the thought was that it would be a domestic supplier for it," Pelosi told reporters. "Senator McCain intervened, and now we have a situation where the contract may be -- this work may be outsourced."

Even Boeing's Republican supporters are critical of McCain. "John McCain will be the nominee and I will support him, but if John McCain believes that Airbus or EADS is the company for our Air Force tanker program he's flat-out wrong -- and I'll tell him that to his face," said Rep. Dave Reichert, R-Wash.

Rep. Todd Tiahrt, a Kansas Republican whose district includes a Boeing plant that could have gained hundreds of new jobs from the tanker program, said McCain's role in killing the earlier deal is likely to become an election issue. Both of the leading Democratic candidates for president, Barack Obama and Hillary Clinton, have criticized the Air Force decision. "I think we absolutely will hear more about it," Tiahrt said. "We'll hear it mostly from the Democrats and they have every right to be concerned."

McCain called such criticism off base. "In all due respect to the Washington delegation, they vigorously defended the process before -- which turned out to be corrupt -- which would have cost the taxpayers more than $6 billion and ended up with people in federal prison," he said. "I'm the one that fought against that ... for years and brought down a corrupt contract."

Keith Ashdown, with the watchdog group Taxpayers for Common Sense, said Boeing executives who broke the law were to blame for the demise of the tanker contract -- not McCain. "This was theirs from day one," he said. "This idea that any lawmaker is to blame is a joke."

Still, Todd Donovan, a political science professor at Western Washington University, said McCain's opposition to Boeing could hurt him with voters in Washington and other states affected by the tanker program. Boeing would have performed much of the work in Everett, Wash., and Wichita, Kan., and used Pratt & Whitney engines built in Connecticut. Significant work also was slated for Texas. "If he can be painted as somehow being associated with job losses ... it could hurt him on the margins," Donovan said.

McCain's role in the tanker deal did not bother Alabama politicians, including Republican Gov. Bob Riley, who endorsed McCain three days after the Air Force contract was announced. The EADS-Northrop tanker, based on the Airbus A330, will be built in Mobile, Ala., where it will produce 2,000 new jobs, and support 25,000 jobs at suppliers nationwide.

Why has McCain become keen on pursuing cases of government corruption, you ask? The largest stain on his record remains being one of the "Keating Five" politicians who aided Charles Keating and his Lincoln Savings & Loan Association in avoiding federal scrutiny for a while after receiving substantial campaign contributions from Keating. It of course ended with about $2.6B being shouldered by American taxpayers. The Arizona Republic jogs our memory:

In the picture, taken in the Bahamas, McCain is seated on a bandstand while wearing an outrageous straw party hat. Next to him on the dais sits Charles Keating III, son of developer Charles H Keating Jr. McCain calls the Keating scandal "my asterisk." Over the years, his opponents have failed to turn it into a period.

It all started in March 1987. Charles H Keating Jr., the flamboyant developer and anti-porn crusader, needed help. The government was poised to seize Lincoln Savings and Loan, a freewheeling subsidiary of Keating's American Continental Corp. As federal auditors examined Lincoln, Keating was not content to wait and hope for the best. He had spread a lot of money around Washington, and it was time to call in his chits...

McCain already knew Keating well. His ties to the home builder dated to 1981, when the two men met at a Navy League dinner where McCain spoke. After the speech, Keating walked up to McCain and told him that he, too, was a Navy flier and that he greatly respected McCain's war record. He met McCain's wife and family. The two men became friends.

Charlie Keating always took care of his friends, especially those in politics. McCain was no exception. In 1982, during McCain's first run for the House, Keating held a fund-raiser for him, collecting more than $11,000 from 40 employees of American Continental Corp. McCain would spend more than $550,000 to win the primary and the general election.

In 1983, as McCain contemplated his House re-election, Keating hosted a $1,000-a-plate dinner for him, even though McCain had no serious competition. When McCain pushed for the Senate in 1986, Keating was there with more than $50,000. By 1987, McCain had received about $112,000 in political contributions from Keating and his associates...

Despite the reprieve, Keating's businesses continued to spiral downward, taking the five senators with him. Together, the five had accepted more than $300,000 in contributions from Keating, and their critics added a new term to the American lexicon: "The Keating Five."

The Keating Five became synonymous for the kind of political influence that money can buy. As the S&L failure deepened, the sheer magnitude of the losses hit the press. Billions of dollars had been squandered. The five senators were linked as the gang who shilled for an S&L bandit...

Among the Keating Five, McCain took the most direct contributions from Keating. But the investigation found that he was the least culpable, along with Glenn. McCain attended the meetings but did nothing afterward to stop Lincoln's death spiral. Lincoln was the most expensive failure in the national S&L scandal. Taxpayers lost more than $2 billion on the bailout.

Ever since then, McCain has been keen on avoiding the corruption rap, hence his subsequent efforts against the Boeing tanker deal. Ultimately, McCain will have to live with the reputation of being one of the Keating Five for the rest of his political career. What is lost in the current complaints being lodged against him is any concept of "procedural fairness." I know, Airbus, whose parent company is EADS, is currently duking it out with Boeing at the WTO as the US and EU accuse each other of subsidizing aircraft production.

Still, the pertinent facts of the case to me remain that (1) Boeing tried to seal the deal by offering employment to an Air Force procurement officer. Cheaters never win, and it seems fair to me that even if Boeing had the upper hand on EADS way back when that it would be disallowed from the competition for such tomfoolery. As an aside, it's funny that I was able to pull up a Boeing press release concerning Druyun "joining" Boeing prior to her incarceration over the botched tanker deal. (2) Why is it that the current critics of McCain speak little of the merits of the Boeing design against the EADS one? If the latter is clearly a superior design as the USAF states, then there will be little ground for Boeing to lodge a complaint. As I said, it is unlikely for Boeing to dispute its loss since it probably wants to put this dreadful saga behind it. Maybe Boeing should just concentrate on keeping its nose clean and offering more compelling designs in the future. McCain should be commended, not pilloried, for calling a spade a spade. Once bitten, twice shy.

UPDATE: Well this is surprising--to me at least. Boeing now intends to contest this deal. Here are the press release and a writeup from the Wall Street Journal:

Boeing said it will file a formal protest on Tuesday asking the Government Accountability Office to review the Air Force's decision to give the contract to Northrop and European Aeronautic Defence & Space Co.

"Our team has taken a very close look at the tanker decision and found serious flaws in the process that we believe warrant appeal," said Boeing Chairman and Chief Executive Jim McNerney in a statement. "This is an extraordinary step rarely taken by our company and one we take very seriously."

An Air Force spokeswoman said ahead of Boeing's announcement that the process was "fair and transparent." She declined to discuss details.

Boeing said it spend three days reviewing the Air Force's decision following a briefing it received from military officials Friday. Boeing said a "rigorous analysis" led it to conclude that a protest was necessary. "Based on what we have seen, we continue to believe that we submitted the most capable, lowest-risk, lowest- most probable life cycle cost airplane as measured against the Air Force's request for proposal," Mr. McNerney said.

The company said it would provide additional details on Tuesday. However, it hinted at some of its concerns in a statement earlier Monday. The Air Force last month passed over Boeing's bid, a big blow because analysts thought Boeing a shoo-in for the 179 jets at stake in the deal...

The Northrop team will take an Airbus A330 -- which is larger than the 767 jet that Boeing bid -- and convert it into a military-grade airplane capable of supplying 37,000 gallons of fuel in midair. Replacing current tankers that are more than 40 years old is a top Air Force priority. The planes are used to refuel fighters, bombers and transport planes around the world.

Citing its Friday debriefing, Boeing said it believes it fared well under the five main criteria the Air Force used to evaluate bids. For example, Boeing said it received a top rating for its aircraft's "mission capability," the No. 1 factor, and said it scored very similarly in other areas to the Northrop offering. The company said subjective assessments and changes to an important analytical model contributed to the loss.

"We have serious concerns over inconsistency in requirements, cost factors and treatment of our commercial data," said Mark McGraw, the head of Boeing's tanker effort, in a statement.

In particular, Boeing said the Air Force had sought detailed cost information Boeing couldn't provide, though it said it gave the military data that exceeded what a commercial customer might receive. Boeing said it couldn't provide the information on the basis the Air Force sought because its plane had already been designed. It said the Northrop-EADS plane is still in the design process, allowing the consortium to present the information in terms the Air Force sought.

Boeing also said the Air Force made changes in its model that allowed a bigger plane to stay in the competition.

In a statement, Los Angeles-based Northrop said its offering won because of its cost, past performance on other contracts, the airplane's capabilities beyond refueling and how the plane fared using a complex model assessing the plane's performance on military missions. The debrief was "rigorous and deliberative," Northrop said. Air Force officials walked Northrop executives through their proposal on Monday.

Companies can file a protest with the GAO, Congress's investigative arm, which then takes up to 100 days to review the objections and issue a ruling on them. The GAO's findings can be followed by the government and have resulted in re-bids, as in the case of a more than $10 billion Air Force search and rescue helicopter contract that has been twice protested by Lockheed Martin Corp. and United Technologies Corp., parent of Sikorsky, after Boeing won it in November 2006. A winner is expected this fall.

Protests of contracts for big weapon systems like planes and helicopters have become more common in recent years because there are fewer and fewer to compete for.

Di Plane Pt. 1: Boeing 787's Outsourcing Problems

[UPDATE: It just occurred to me that those who haven't wasted their youth watching reruns of Fantasy Island may be unfamiliar with the "di plane" reference. If so, please see this video clip about 0:20 in when the diminutive Tattoo yelps, "di plane! di plane!"] It's time to eat some humble pie now, although IPE Zone readers can probably forgive me for being wrong this time. (I still think I get things right more than often enough to warrant some consideration ;-) Anyway, many in the business press were successful in convincing yours truly that outsourcing substantial parts of the upcoming Boeing 787 was a marvy idea. I thought it was a classic make-or-buy, transaction cost economics problem that would be favorably be resolved in favor of farming out a lot of R&D and production to both American and international suppliers. Well, it's probably the right time to reconsider things. Here is a passage from an earlier post:

Boeing says it can't supply a full list of subcontractors that are working on the project, but industry analysts estimate that their numbers are greater than the 900-plus that contributed to the 777, which began construction in 1990. Boeing spokesperson Loretta Gunter confirms that the processes used to construct the two planes are markedly different. "We have fewer first-tier subcontractors on the 787 than we did on the 777 because each is providing bigger components," she says. "Likewise, many of them are contracting out bigger jobs to their subs."

Boeing's new manufacturing template has captured the imagination of the aerospace industry. Recently officials from Airbus told analysts that the company will up its outsourcing to become more competitive. "For any company that wants to be successful in aerospace manufacturing, Boeing's new strategy is the way forward," says Aboulafia. "Which is ultimately good news for small business."

I was really sold (duped? braiwashed?) on the concept of "lean" manufacturing--lower inventory costs and associated overhead should result from having different suppliers deliver the necessary parts just-in-time. Well, the problem here is that Boeing's flotilla of subcontractors seems to be rather slow in working up to speed on the design of the subcontracted parts. Consequently, the rollout of the 787 will likely be delayed for a third time. It's likely that delays have been caused by the less-than-stellar quality of the work contracted out as before. Is there a lesson here? Maybe it's trust the subcontractor, but verify the realism of designated time frames. From the Financial Times:

Boeing could announce a third delay for its 787 Dreamliner when it issues an update on the project at the end of March...

“We are working towards a schedule that we had outlined in January,” said Boeing. However, it left open the possibility that the company might report further delays when it gives the update. “The assessment could change that schedule,” it said.

Goldman Sachs, meanwhile, said it expected the first deliveries of the 250-300 seat jet to be pushed back to the third quarter of 2009, from Boeing’s current target of “early 2009”.

“[Boeing] continues to underestimate the amount of work required on the 787,” said analyst Richard Safran. “We think Boeing will notify suppliers of new production targets shortly, motivated by the need to keep delivery commitments to airlines.”

The 787 is Boeing’s most successful new aircraft, with 857 orders in place, worth about $140bn. New orders have continued to flow in spite of the programme being delayed, first in October and again in January.

A further delay would be both embarrassing for the company and irksome to Boeing’s customers, who are starting to grumble about pressing for compensation from the aircraft maker.

After Boeing announced the airliner’s second delay in January, Qantas, the Australian flag-carrier, said it would seek damages. International Lease Finance, the world’s leading aircraft leasing group, said last month it was also looking for compensation from Boeing.

The Subprime Wisdom of Megadeth

You must be thinking, "this guy has really lost it," but no. The eminently respectable Menzie Chinn of Econbrowser raised the comparison between the current subprime contagion and the savings and loan fiasco of the early nineties. Way back during my college years, I remember listening to a cassette tape (remember those?) of the great thrash metal band Megadeth. Fronted by someone who was kicked out of Metallica for taking too many controlled substances, Dave Mustaine, Megadeth nonetheless made several memorable tunes on its commercial breakthrough Countdown to Extinction. I still have the tape somewhere although it's probably worn out from the number of times I played it on the car stereo.

Anyway, the song whose video I excerpt above refers to regular folks getting foreclosed in the US of A in the wake of the S&L crisis. The clip dates to 1992, I believe. The visual motif in "Foreclosure of a Dream" is of everyday people being kicked out of their houses who end up sitting on couches they removed from their former residences. It works for me as the video is very well made: the farmer and his wife at the start of the video, for instance, are a clever visual pun on Grant Wood's American Gothic. An especially poignant picture is of the African-American mother and child sitting outside of the White House. It is widely noted that minorities have taken a disproportionate share of subprime loans, so perhaps Megadeth was prescient of Bush's "ownership society."

UPDATE 1: Fellow traveler Andrew Leonard at Salon has mentioned this post. Of course Megadeth could not have foreseen the subprime mess way back in 1992. However, the parallels are striking and I've decided to further illustrate how the lyrics of the song fit with what is going on today. Consider that McCain was part of the Keating Five Lincoln Savings & Loan Association scandal then, and he is running for the Oval Office now. Meanwhile, the S&L crisis blew up with George Bush at the helm, now it's W's turn.

UPDATE 2: At the song's start, there's a spoken into that goes "Charges of fund misappropriation are leading to top-ranking officials...sources say that a major restructuring of the department could be in order." Well, just out is news that Housing and Urban Development (HUD) Secretary Alphonso Jackson is stepping down over--you guessed it--fund misappropriation. The only question left is whether Jackson will be tossed in the clank. Really, does anyone needs more evidence that this band was prescient? Megadeth rules!

The lyrics are quite pertinent for today's situation as well: More borrowed money, more borrowed time, indeed. Until all is lost, personal Holocaust, foreclosure of a dream...

Rise so high, yet so far to fall [US homeowner's equity falls to postwar low]
A plan of dignity and balance for all [Bush's "ownership society"]
Political breakthrough, euphoria's high
More borrowed money, more borrowed time [the $168B economic stimulus package]
Backed in a corner, caught up in the race
Means to an end ended in disgrace [CEOs of Wall Street Banks testify on salaries]
Perspective is lost in the spirit of the chase

Foreclosure of a dream
Those visions never seen [foreclosure rates have hit a record high in the States]
Until all is lost
Personal Holocaust
Foreclosure of a dream

Barren lands that once filled a need
Are worthless now, dead without a deed
Slipping away from an iron grip
Nature's scales are forced to tip
The heartland cries, loss of all pride
To leave ain't believing, so try and be tried
Insufficient funds, insanity, and suicide

Now with new hope some will be proud [the Orwellian "Hope Now Alliance"]
This is no hoax, no one pushed out
Receive a reprieve and be a pioneer [Fed wants lenders to forgive some mortgages]
Breaking new ground on a new frontier
New ideas will surely get by
No deed or dividend, some may ask "Why?"
You'll find the solution, the answer's in the sky

EADS: We are the Franco-German National Champion

The world is weird. Being on the receiving end of American politicians' protectionist ire over the awarding of a $35B US Air Force contract to it instead of Airbus, EADS is itself contemplating measures to ensure that it doesn't come under the thrall of foreigners. State investors from the UAE and Russia have taken 3.1% and 5.0% stakes, respectively, in EADS. The fear of EADS is that US politicians may further become wary of relying on a supplier with substantial ownership by perhaps less-than-friendly authoritarian regimes. To avert this possibility, EADS is now contemplating ways of making itself less vulnerable to takeover by other interests. The following article is from the Financial Times; I have previously posted on the controversy over awarding a large US defense contract to a foreign bidder and the FT has more on recent political rhetoric [1, 2].

France and Germany are finalising changes to EADS’ corporate by-laws to prevent foreign investors building significant stakes in – or even taking over – Europe’s flagship aerospace and defence company.

The move comes at a sensitive time for the Franco-German group, which late last week secured a breathtaking entry into the US defence market with a $35bn contract for its Airbus tanker-aircraft.

Some US politicians have said giving the contract to a foreign company could have dire security implications – a frenzy that could mount if EADS’ Russian or Middle Eastern shareholders were to increase their holdings.

Dubai International Capital, a sovereign wealth fund, bought 3.1 per cent last summer and VEB, a state-controlled Russian bank, took a 5 per cent stake in December.

But the French government, French media group Lagardère, and German carmaker Daimler, which together control 45 per cent of EADS, are planning to restrict any investor deemed predatory from owning more than 15 per cent.

That level – a working number that might change – is integral to two models the Franco-German core shareholders are working on to see whether EADS can be given additional protection against a foreign takeover.

This follows last summer’s agreement between Nicolas Sarkozy, the French president, and Angela Merkel, the German chancellor, to consider issuing “golden shares” to Paris and Berlin to take pressure off the core trio to uphold their stakes.

New takeover defences could herald adjustments to the shareholders’ pact, which enshrines German and French stakes at 22.5 per cent a piece. Lagardère has been seen as a probable seller of its 7.5 per cent stake.

People close to the talks said the first option would see the May 26 shareholders’ meeting change EADS’ articles of association to give Paris and Berlin a golden share each, enabling them to block stakes above 15 per cent.

The golden shareholders would justify their privilege as vital to national security and thus hope to evade sanction from the European Union’s high court, which has forced numerous EU countries to repeal similar measures.

The second, and less controversial, option would give Netherlands-registered EADS a poison pill-style defence that has been adopted – if never used – by other Dutch companies, such as Philips, the electronics giant.

The annual meeting would empower EADS’ board to issue new stock to an allied special-purpose foundation to dilute the stake of any predatory shareholder.

People familiar with German thinking said Berlin and Daimler favoured option one and were waiting for Paris and Lagardère to formulate a joint position. People close to the talks in France said Paris largely agreed with Berlin.

IFIs Pt. 3: More SWF Bashing, IMF Style

Posts on sovereign wealth funds have become something of a stock-in-trade at the IPE Zone. European sovereign wealth fund bashing [1, 2, 3] and American sovereign wealth bashing have been featured here. The granddaddy of all SWF bashers, though, remains the IMF. The United States has been looking to the IMF to stamp its will on SWFs. This involves the usual paeans to the benefits of transparency and disclosure (see the first EU link for more on the regular Western demands on SWFs). Currently, the IMF is preparing guidelines for best SWF practices which these institutions will likely not follow as the IMF has no leverage on them in the form of existing loans. After all, cash-laden SWFs are signs of LDC prosperity in themselves as these countries have avoided becoming reliant on IMF borrowing. There are some wacky plans afoot to use the WTO in SWF-bashing as well (more on this later), though this is not likely come to pass.

In what follows, I will excerpt some of the more interesting parts of an interim IMF feature on SWFs while we await, with bated breath, the surely incredulous IMF code of best SWF practices. The first hints at the IMF's actions in response to the rise of the SWFs, while the second concerns the varieties of SWFs out there:

What the IMF is doing

Recognizing the growing importance of SWFs and the role of the IMF in monitoring the health of its member countries' economies and the global financial system, the IMF's ministerial guidance body—the International Monetary and Financial Committee (IMFC)—called on the Fund last October to engage in a dialogue with countries to arrive at a voluntary set of best practices in the management of SWFs. In response, the IMF's work on these funds has progressed on a number of fronts:

• Deepening analysis. In order to enhance the understanding of SWFs, the IMF is organizing a survey of SWFs to help identify their investment objectives and risk management practices; as well as institutional frameworks, such as governance structures and accountability arrangements.

• Facilitating communication. The IMF organized the Roundtable of Sovereign Asset and Reserve Managers in November 2007, which included a preliminary discussion with key SWFs. The Roundtable was attended by high-level delegates from central banks, ministries of finance, and SWFs from 28 countries. It helped advance the discussion on policy, institutional, and operational issues facing SWFs, and learn from their experience and views. It was agreed at the Roundtable to continue the dialogue with SWFs.

• Following-up on dialogue. The IMF is following up with further contacts with SWFs as part of a collaborative process to come up with an agreed view on best practices. "We've been engaged in an initial dialogue with sovereign wealth funds to help identify their current practices on issues such as governance and accountability structures, with a view to helping reach a consensus on best practices," said Adnan Mazarei, of the IMF's Policy Development and Review Department, who is closely involved in the discussions.

• Coordinating with other international institutions. The IMF is coordinating its work on SWFs with the Paris-based Organization for Economic Cooperation and Development (OECD) and is also liaising closely with the European Commission, the World Bank, and others. The OECD is taking the lead on issues related to investment policies and regulations in recipient countries.

• Outlining key issues. The IMF's Executive Board will discuss a paper in late March that sets out the Fund's work program regarding SWFs.

• Working toward delivery. In the Board paper, the IMF staff seeks the agreement of the Executive Directors to proceed with preparing a set of best practices for managing SWFs. If the Board agrees, the IMF will collaborate with SWFs and other stakeholders in developing a statement of best practices. The aim is to present a draft to its Executive Board by the IMF's Annual Meetings in October.

Types of SWFs

SWFs have been created by governments for several reasons. According to IMF analysis, five types of SWFs can be broadly distinguished based on their main objective (see the IMF's October 2007 Global Financial Stability Report):

• stabilization funds, where the primary objective is to insulate the budget and the economy against commodity (usually oil) price swings;

• savings funds for future generations, which aim to convert nonrenewable assets into a more diversified portfolio of assets;

• reserve investment corporations, whose assets are often still counted as reserve assets, and are established to increase the return on reserves;

• development funds, which typically help fund socioeconomic projects or promote industrial polices that might raise a country's potential output growth; and

• contingent pension reserve funds, which provide (from sources other than individual pension contributions) for contingent unspecified pension liabilities on the government's balance sheet.

IFIs Pt. 2: World Bank on LDCs, Rising Food Prices

I am certain that you are all aware of rising food prices every time you visit the local grocery store. The impact of elevated prices has been harsh to several developing countries, especially those that need to import substantial amounts of foodstuffs. The World Bank offers this summary citing the usual culprits: diversion of crops to biofuels, the economic ascent of China and India, etc. (See this earlier post as well on other causes.) The dynamic of rising food prices is largely novel in the developing world's context. While there are elements of "cost push" inflation such as higher costs for transporting agricultural products, it is largely driven by "demand pull" inflation from fast-growing developing nations. Neo-Malthusianism, indeed. Also, it is a development truism that as folks get wealthier, their food consumption increases markedly.

In Mexico City, mass protests about the cost of tortillas. In West Bengal, disputes over food-rationing. In Senegal, Mauritania, and other parts of Africa, riots over grain prices. And in Yemen, children march in public to call attention to child hunger. This chain of events is in stark contrast to the falling food prices that consumers have come to expect over the past several decades.

On February 13, the FAO announced that 36 countries are in crisis as a result of higher food prices and will require external assistance. In many of these countries, food insecurity has been worsened by conflict, floods, or extreme weather.

Last month, in Davos and in Addis Ababa, World Bank President Robert Zoellick called for action to tackle hunger and malnutrition in a world of rising food prices. "Hunger and malnutrition are the forgotten Millennium Development Goal. It has gotten less attention, but increased food prices and their threat – not only to people but also to political stability – have made it a matter of urgency to draw the attention it needs,” he said.

While headline news about high food prices is a relatively recent phenomenon, the broader upswing in commodity prices began in 2001. Large structural shifts in the global economy—including growing demand in China and India—have been steadily reflected in commodity price increases, especially of metals and energy.

Food prices have increased in response to many factors: higher energy and fertilizer prices; increased demand for biofuels, especially in the U.S. and the European Union; and droughts in Australia and other countries. World grain stocks are at record lows and next year’s prices depend on the success of the next harvest in the northern hemisphere.

Wheat prices (US$) have increased by 200 percent, and overall food prices (US$) have risen by 75 percent since the turn of the century. Adjusting for exchange rates and domestic inflation reduces the price increases faced by developing countries—but these increases are still severe for millions of poor consumers.

“The increases in grain prices are not caused by short-term supply disruptions, as is the normal case, and it will likely take several years for supplies to increase to rebuild stocks and allow prices to fall,” said Don Mitchell, Lead Economist in the World Bank's Development Prospects Group...

The root causes of the phenomenon of rising food price—high energy and fertilizer prices, the demand for food crops in biofuel production, and low food stocks—are likely to prevail in the medium term.

Energy and fertilizer prices are projected to stay high. Already, fertilizer prices have increased 150 percent in the past five years. This is very significant, because the cost of fertilizer is 25 to 30 percent of the overall cost of grain production in the U.S. (which supplies 40 percent of world grain exports).

The demand for biofuels will also probably rise. A quarter of the U.S. maize crop (11 percent of the global crop) went into biofuel production this year, and the U.S. supplies more than 60 percent of world maize exports. Notably, the U.S.—one of more than 20 countries to require biofuels use—has just doubled its biofuels mandate by 2015.

“The biofuels surge makes things worse by adding high demand on top of already high prices and low stocks,” said Mitchell, “Ethanol and biodiesel produced in the U.S. and EU don’t appear to be delivering on “green” promises either, making them very controversial.”

In addition, surplus production capacity is scarce. The E.U.’s “set aside” lands, originally intended to keep surpluses low, have already been brought into production. And U.S. Conservation Reserve lands would give low yields, even supposing legislation to move them into production was in the works.

IFIs Pt. 1: 60th Anniversary of the GATT/WTO

[NOTE: This is the first of a three-part series I am posting today on the world's most (in)famous international financial institutions (IFIs): the World Trade Organization, International Monetary Fund, and World Bank.]

It may be a sign of the times just how much the non-completion of the Doha Development Round has sunk the WTO from general consciousness, but this anniversary went largely unnoticed--even by me! Well, here is my attempt to make amends. The WTO is every bit as loathed as the World Bank and IMF by alter-globalization activists; there even is a "50 Years in Enough" movement that aims to get those Washington, DC-based institutions disbanded. In contrast, nary a comment went by as the sixtieth anniversary of the GATT/WTO came and went last year, even from the "globalization is the work of Satan" crowd. Unheralded despite the anniversary by both its friends and foes, the WTO has gone into purgatory.

Anyway, on 4 December 2007, the WTO released its World Trade Report 2007 cataloging the changes in world trade since the turn of the 20th century. It's all an interesting read, from protectionism helping lead to the outbreak of the Second World War to the struggle of LDCs to gain voice in the WTO. Here is the blurb:

On 1 January 2008, the multilateral trading system will celebrate its 60th anniversary. This year's World Trade Report celebrates this landmark anniversary with an in-depth look at the GATT and its successor the World Trade Organization — their origins, achievements, the challenges they have faced, and what the future holds. The story is one of remarkable change and adaptation, of a system that has contributed significantly to post-war prosperity, but which has not delivered all it could and which still faces formidable challenges.

“The global trading system has been a source of prosperity, stability and predictability for six decades. It has underpinned an unprecedented period of economic growth and has provided an environment in which many countries have been able to raise development levels and reduce poverty,” said Director-General Pascal Lamy. “But the GATT and the WTO have not done all they could, particularly for developing countries. “In the coming months we have the chance to deliver more for our member governments and the citizens they represent. By striking an ambitious and development-oriented agreement in the Doha round we can greatly strengthen a system which has done much to make the world a better place.”

The report looks at the circumstances in which the GATT was born and goes on to explain why governments believe it is in their interests to cooperate on trade matters. This is followed by a discussion of how the GATT/WTO as an institution can foster greater international cooperation. Finally, the Report reviews what the multilateral trading system has achieved in six decades and what remains to be done.

All in all, the comprehensive report (WARNING: this is a 436-page download) is a good read if you are interested in economic history, trade, and world politics. Interestingly enough, the WTO report also looks at trade from International Relations (IR) perspectives in addition to economic and legal ones. IR being my discipline, it's interesting to see what they had to say (see pp. 64-79). While I do not always agree with the WTO's characterizations, it does present a novel application of IR theories. Have a gander at this chart below and see what you make of it. On the y-axis are various explanations for the WTO's existence (as well as other IFIs), while on the x-axis are the various levels of analysis deemed important. Being at an English university, I am of course partial to the English School approach, but more on that later...

Hard Times Pt. 2: EU Wages Jihad on Tax Havens

As I said earlier, it's a sure sign that times are getting harder when governments begin cracking down on tax cheats. European governments right now are mulling much tougher measures on the three European tax havens that they have deemed uncooperative: Liechtenstein, Monaco, and Andorra (see that earlier post for the details). The heavy artillery is being deployed in a push to ensure that taxes will be paid by elites using various loopholes to escape their obligations. From the Independent comes the immodestly titled "Europe vs. the Super-Rich" [oy vey! How cool papa Marx would be proud of our fearless scribes...]

The European Union will declare war today on Liechtenstein, Monaco, Andorra and Switzerland. Weary of losing billions of tax euros, the EU's 27-strong high command of economics and finance ministers, Ecofin, is meeting in Brussels to agree a strategy aimed at bringing the continent's tax havens under control.

Their weapon of choice will be a strengthened version of the EU's 2005 savings tax directive, which has proved pathetically easy for armies of accountants, lawyers and specialist tax planners to outflank.

Urged on by Peer Steinbruck, the German Finance Minister, the new directive will seek to close the loopholes. Mr Steinbruck says tax evasion costs Germany about €30bn (£23bn) a year in lost revenue; the UK loses a similar sum; the EU may lose €100bn (£77bn) in all.

The stakes are high. But tax experts remain sceptical about the prospects for this new offensive. Mike Warburton, senior tax partner at Grant Thornton accountants, commented yesterday that, while he and his firm condemned tax evasion, which is illegal, "tax avoidance is the second oldest profession in the world, and just as difficult to control. The tax havens will survive. There are stacks of money out there. If they close down the ones in Europe, the money will move to Dubai and Singapore".

Such defeatism has not infected European governments and they are expanding their armouries. Berlin, in particular, has turned aggressive. The BND, the German intelligence service paid about €4m to a former employee of LGT, Liechtenstein's biggest bank, for a list of some 900 German tax avoiders, the most high profile being Klaus Zumwinkel, chief executive of Deutsche Post, who resigned after he was rumbled.

HM Revenue and Customs has paid for information relating to about 100 people who could collectively owe the UK as much as £100m. Reports over the weekend suggested that the Chancellor, Alistair Darling, was targeting Monaco with an almost personal zeal, threatening a levy on funds transferred there if the recalcitrant principality fails to capitulate. Other nations, from Ireland to the Czech Republic, are also intensifying their attempts to crack down on tax losses, chasing paper trails and threatening the banks to catch up with fraud.

By its nature, the extent of tax avoidance, evasion and plain fraud is what Donald Rumsfeld might term an "unknown known". Everyone knows the money is out there in mind-numbing quantities; it is tricky, however, to be definitive about how much, and where...

Globally, estimates of the total funds parked by individuals in offshore havens vary from $7trn (£3.5trn) to $12trn (£6trn). Depending on assumptions about returns and tax rates, such sizeable funds could yield around $250bn (£125bn) for legitimate public spending...

Now the blacklist is down to three; Monaco. Liechtenstein and Andorra. The US, normally in favour of "tax competition" and home to its own mini tax haven of Delaware, has also seen a shift in mood since 9/11. Barack Obama has co-sponsored a "Tax Haven Abuse Act" in Congress, a sure sign of changing times.

"What are they going to do – send the tanks in?" asked one tax expert yesterday responding to the EU's plans. The answer to that, hopefully, is no; but official sanctions, levies and a general will to make life difficult for tax havens is defiantly there. Hostilities have begun.

The Independent also offers profiles of some of the more renowned (infamous?) tax havens and the celebrities they (tax) shelter. It makes for a pretty good travelogue, actually. Take Andorra, for example. I'd love to meet Montserrat Caballe in person...

ANDORRA

The Haven
One of the world’s smallest independent nations, with a highly secretive tax system. Highest average life expectancy in the world (83 years)

What does it offer?
No income tax, Capital Gains Tax, sales tax or death duties and an import tax of around 2 to 5 per cent. It maintains absolute discretion with foreign tax authorities. The taxes levied on businesses do not affect expatriates.

Who wins?
The Spanish soprano Montserrat Caballé, the former tennis player Arantxa Sánchez-Vicario and the French motorcycling champion Cyril Despres.

Lastly, Willem Buiter of the Financial Times actually comes down on the side of pursuing governments despite being a non-dom himself, oddly enough. Willem Buiter is a closet populist; who would have guessed:

A determined crackdown on all tax havens could start by an OECD-wide agreement that the failure by any country to mandate the prompt and efficient provision to any foreign tax authority of comprehensive information on assets held and income earned in that country by residents under the jurisdiction of that foreign tax authority would be treated the way money laundering and financing of terrorism is treated today. A sequence of graduated sanctions against non-compliant countries would then be implemented. In the case of Liechtenstein and Switzerland, exclusion from the Schengen agreement would be a neat and elegant sanction. I wonder whether it is possible under EU law to suspend the membership of Luxembourg and Austria in Schengen until they terminate the bank secrecy laws, rules and regulations that undermine the fiscal sustainability of the other EU Member States.

Tax havens, by allowing foreign tax dodgers to hide behind their cloaks of confidentiality and secrecy, are engaged in economic warfare against the countries whose tax bases they help undermine. It is time to stop them. It is of course, not just rich industrial countries with big bloated welfare states that have an interest in stamping out tax evasion by cracking down on tax havens and abuses of bank secrecy. Developing countries have had their meagre resources looted effortlessly by kleptocratic rulers, thanks to the services provided by tax havens. Emerging markets like India would no doubt actively support action to put the tax havens out of business.

In the UK, the Chancellor has been fortunate that his decision to tackle the non-dom issue was followed closely by Germany’s decision to have a swipe at one of the world’s most notorious tax havens. It is time to follow through on this bit of good fortune by deepening and broadening international efforts to combat tax evasion and tax avoidance. It’s time to put paid to the notion that you can be too rich to pay taxes.

Hard Times Pt. 1: Secondhand Stores' Success in US

Are all retailers doing less well now in the USA? No, says CNN/Money in its glumly titled section "Recession Watch 2008." Apparently, stores which sell secondhand children's goods--clothes, toys, and furniture--have been doing better than in recent times and things may get even better yet for them as the US economy slides further down the gutter:

Unlike most retailers who are blaming the economy for their poor sales, one store chain is boldly declaring that an economic downturn can actually be a boon for its business. Taylor Bond, CEO of Children's Orchard, sounds excited about the next 10 months and beyond. The privately held chain, based in Michigan, sells used name-brand children's clothes, toys and furniture at more than 86 franchised locations nationwide.

Last year, the company took in $20 million in sales, up 5% from the previous year. "Our sales are already up 5% so far this year," he said. Bond said the very nature of its business puts the company in a prime position to take advantage of what he calls "a perfect storm that's coming."

"Recycling has become more acceptable today among consumers because of the 'green' trend," Bond said. "A shaky economy is making us attractive to everyone across the income spectrum. We have people pulling up to our stores in Mercedes as well as in trucks."

To his point, the National Association of Resale and Thrift Stores (NARTS), which represents more than 2,500 stores, expects the multi-billion dollar resale market to grow at a robust 5% pace, or more, this year. That compares to a much slower 3.5% projected overall growth for annual retail sales in 2008. "Our industry benefits every time the economy is tight and gas prices and heating bills are high," said Adele Meyer, the association's executive director. "People have to look for alternative ways to shop,"

Bond said Children's Orchard stores sell "gently used" clothing from such kids brands as GAPKIDS, Gymboree, Fubu Kids, Tommy Hilfiger Kids and Ralph Lauren at 40% to 80% less than the actual price. So a $50 Gymboree dress costs as little as $7, and a $500 Peg Perego stroller can be picked up for $125 at a Children's Orchard store.

Hong Kong + Macau + Shenzhen = "CHIFTA"?

Chinese authorities now appear keen on upping the ante on Chinese pride by combining the special administrative regions of Hong Kong and Macau with Guangdong on the mainland. It would make for a formidable combination, indeed. 2 out of 5 of the world's biggest container ports would be included--Hong Kong and Shenzhen--as would two of Asia's largest stock markets in those same towns. As yet, there are still barriers to the movement of people, goods, and capital between these places, but that may soon be history. The wall will likely fall.

It will be fascinating to see if the Chinese can create a metro area to rival New York, Tokyo, and other megalopolises. While there is no such thing as CHIFTA, the Mainland and Macau Closer Partnership Agreement and the Mainland and Hong Kong Closer Partnership Agreement are for real in reducing those barriers mentioned above. Both point in the direction of greater integration of the Pearl River Delta. To bind them all in sickness and health, for richer and poorer is the projected Hong Kong - Zhuhai - Macau bridge. While Americans vie to out-Tancredo each other in retreating from the world stage, the Chinese are seizing the day. What more can I say? Welcome to the Asian century. From the China Daily:

A large-scale investigation is under way to consider the establishment of an economic cooperation zone encompassing Guangdong, Hong Kong and Macao. On Sunday, Hong Kong newspaper Wen Wei Po said the zone will be the biggest metropolis in the country, based on integration and cooperation on trade, culture and other social activities between the three regions.

The investigation, which was launched in January, is being led by Wang Yang, Party secretary of Guangdong province, the newspaper said. In addition, 23 provincial government departments and research institutes are involved in looking at nine key areas, including the zone's impact on the country and the benefits to Guangdong, Hong Kong and Macao. Both Hong Kong and Macao attach great importance to the study and will give it their full cooperation, the report said.

Zheng Tianxiang, a professor at the Hong Kong and Macao research institute of Sun Yat-sen University, told China Daily: "To build up the cooperation zone, mayors, governors and the SARs' chief executives must hold regular meetings. The regions should cooperate in all regards to remove administrative obstacles," he said.

If the central government approves the development of the zone, Guangdong will be given greater powers over social and financial administration, the newspaper report said. The zone is expected to eliminate barriers to the flow of capital and personnel across the three regions, it said.

Wang Yang said: "The goal is to combine the three regions into a world-class, integrated economic zone that can rival New York, Tokyo and other super metropolises."

Bhagwati: Obama Less Protectionist than Clinton

Man, this has been a very busy day and it still ain't over. The IPE Zone is dedicated to the world of IPE, but today seems to be dominated by the topic of trade. The Financial Times has an op-ed just out by free-trade stalwart Jagdish "In Defense of Globalization" Bhagwati on why Obamanite protectionism is a lesser evil than Clintonite protectionism. (Note that Professor Bhagwati is a registered Democrat, strange as it may seem to some of you.) It's really up in the air as to who is more protectionist based on their rhetoric--we'll have to wait and see if and when one of these two get elected--but my hunch is the opposite of Bhagwati's: Clinton is less skeptical about trade. But, it's always good to read a counter-opinion. To the FT, then:

While Barack Obama and Hillary Clinton are locked in combat for the Democratic party’s presidential nomination, commentary on the front-running Mr Obama’s policy agenda, especially on trade, has become faintly ludicrous.

On the one hand, David Wessel declared in the Wall Street Journal recently, as others have, that the two had no disagreements on trade policy. On the other hand, Mrs Clinton has assaulted Mr Obama for having no policy agenda at all, a charge that John McCain, the Republican frontrunner, has eagerly embraced. Both views are wrong. Mr Obama has specifics and they differ in important respects from those offered by Mrs Clinton.

The Russian proverb goes that, if you are looking for a good son-in-law, you would not ask whether he drank but only how he behaved when he was drunk. Similarly, no Democratic candidate during the primaries can be anything but a protectionist. The only question is: of the two, which is likely to be friendlier as president to the cause of multilateral free trade? Careful scrutiny suggests that the odds are in favour of Mr Obama.

To be sure, all Democratic candidates must face the reality that their party has gravitated towards protectionism, overt and covert, in the past decade. The number of Democrats voting for trade deals has steadily declined. The North American Free Trade Agreement was a turning point that deeply divided the party and then a succession of bilateral free trade agreements, many paltry, has steadily eroded the political capital of free-trade Democrats as they were forced repeatedly to go in to bat for trade in sceptical constituencies. The Democrats have also had to face the problem that the antiwar groups that have helped lift the party’s fortunes also overlap often with anti-globalisation and hence anti-trade groups, so the party tends to be propelled into an anti-trade position willy-nilly [love that guilt by association].

This time, however, it is the labour unions that have come to dominate the scene. The past congressional elections saw their rise to disproportionate power, with nearly all newly elected Democrats indebted to union support that is doubly potent since it offers both labour (to ring bells and make house calls) and capital (to run advertisements). Besides, with the protectionist influence of John Edwards a factor, Mr Obama and Mrs Clinton were pushed into denigration of freer trade. The close race for working-class votes, the latest in Ohio, has meant that the witless fear of trade as the source of distress had to be indulged [but how do you really feel, Dr. Bhagwati?]

Yet at least five reasons make Mr Obama a less disturbing prospect.

First, Mrs Clinton, in an infamous interview with the Financial Times, responded to a question on support for the Doha round with the need for a pause, whereas Mr Obama has not done so. Second, whereas Mr Obama’s economist is Austan Goolsbee, a brilliant Massachusetts Institute of Technology PhD at Chicago Business School and a valuable source of free-trade advice over almost a decade, Mrs Clinton’s campaign boasts of no professional economist of high repute. Instead, her trade advisers are reputed to be largely from the pro-union, anti-globalisation Economic Policy Institute and the AFL-CIO union federation.

Third, Mr Obama’s main union support comes from the Service Employees International Union and the Teamsters, neither of which is protectionist: the SEIU’s membership is in the non-traded sector and, except on the issue of Mexican trucks coming into the US, Teamsters do well as trade expands. By contrast, Mrs Clinton’s support comes heavily from the AFL-CIO, which holds strong anti-trade views. This matters because the IOUs you sign during campaigns provide a straitjacket that can restrict your policy options.

Fourth, while Mr Obama’s anti-Nafta rhetoric is disturbingly protectionist, as is Mrs Clinton’s, remember that this is also strategic. If both are anti-Nafta in the campaign now