World's Top Central Bankers (Bernanke Isn't One)

♠ Posted by Emmanuel in at 9/30/2011 09:00:00 AM
In my never-ending quest to bring you, dear readers, the finest in political-economic commentary on what's out there--and believe me there is much--I've trawled through a multitude of sources. Riffing on others' blog posts is common in the blogosphere, but I like to think mine is...wider-ranging. Some sources that have occasionally yielded interesting finds are financial industry magazines. Prior to Super Lehman Brothers, there seemed to be a veritable proliferation of Euromoney wannabes. But just as that epochal collapse signalled the demise of many purebred investment banks, so did it augur the end of many industry rags. There is a season to all things and it seems these magazines have seen better days.

By some luck, then, I was perusing the latest issue of Global Finance. Alike Euromoney, it's very fond of coming out with "Best of" lists. World's Safest Banks in Asia, World's Best Trade Finance Banks...you get the idea. As it so happens, one of their latest features concerns the "World's Top Central Bankers 2011 ." What are the criteria they use to determine performance? Mostly national macroeconomic criteria, to no real surprise, according to the press blurb:
Global Finance magazine has named the heads of the Central Banks of six countries as the World’s Best Central Bankers over the past year.

The “Central Banker Report Card” feature, published annually by Global Finance since 1994, grades Central Bank Governors of 36 key countries (and the ECB) on an “A” to “F” scale for success in areas such as inflation control, economic growth goals, currency stability and interest rate management. (“A” represents an excellent performance down through “F” for outright failure.)

Subjective criteria also apply. Global Finance Publisher Joseph Giarraputo says: “During one of the toughest years on record, the World’s Central Bankers were tested as never before. Every year, we assess the determination of Central Bankers to stand up to political interference, and their efforts at influencing their governments on such issues as spending and economic openness to foreign investment and financial services.“
Anyway, six of the world's central bankers got the highest marks: Australia's Glenn Stevens, Israel's Stanley Fischer (formerly the IMF's No 2 man), Lebanon's Riad Salameh, Malaysia's Zeti Akhtar Aziz, the Philippines' Amando Tetangco, and Taiwan's Fai-Nang Perng. Given the collectively abysmal performance of industrialized economies, I expected more than three emerging economies to get As, but hey, it's their list. Plus, I am also chuffed that two central bankers in our region of Southeast Asia got the gold.

Let's now turn our attention to America's helicopter dropping man. Unsurprisingly, Ben Bernanke gets the third lowest grade. With more and more joining the lynch mob calling for his immediate execution, let's see how he does in 2012. As a writer of economics textbooks in use in several American universities, I suppose Bernanke is more used to grading than being graded, but he definitely isn't promoting either full employment (with unemployment rates Stateside sticking near the 10% mark) or price stability (which isn't usually spoken of in the same breath as tossing cash from a chopper). Hence his third lowest mark.

This league table certainly suits me, and I think there are fine applications possible here. Alike in European association football where the worst-performing teams are relegated to a lower division, the world economy would benefit if the same practice held in central banking. Really, they should put Bernanke where he can do less harm to the US economy in particular and the world economy in general. Unclogging toilets at the Federal Reserve headquarters in DC should do, or have him instead play Choplifter all day long where he may actually "rescue" little computer people after being such an abject failure at doing the same with real Americans. Homo economicus that he is, I'm sure Bernanke will take one of these alternatives over, well, hanging in Texas.

Make no mistake: many of the world's finest practitioners of the arts of central banking now reside in the Global South.

When Cash & Hate Collide: Frayed US-Pakistan Ties

♠ Posted by Emmanuel in ,, at 9/29/2011 12:14:00 PM
OK, so I had to think of a hackneyed title to describe an even stranger relationship. In general public consciousness--especially that of America--Pakistan emerged on the world stage in the wake of the 9/11 attacks. If not wholly supportive of the Taliban regime in Afghanistan back then, it was at least tolerant of its existence. By throwing wads of cash ("foreign aid") to curry Pakistan's favour, then-leader Pervez Musharraf famously switched allegiances to become a global warrior on terror--though his country's ultimate loyalty has remained in question. Since then, Pakistan has encountered several upheavals--the return of former leader Nawaz Sharif from exile, the killing of Benazir Bhutto and the subsequent election of her controversial husband "Mr Ten Percent" Asif Zardari.

All the while, Pakistan's economy has not exactly been a paradigmatic example of South Asian growth. In the wake of the global financial crisis, it did once more what it's done before in taking out an IMF standby agreement. With the consequences of a full political meltdown in a nuclear power potentially rather severe, the West ponied up quite quickly.

Fast forward to today and we have had interesting developments in this exercise in political economy. On the political side, we've had Pakistan complaining mightily about US excursions into its territory--especially that which eliminated Usama bin Laden. (Nevermind owing the US an explanation as to why he was sheltered in Pakistan's capital for the longest time, but territorial sovereignty does matter.) On the economic side, let's just say that Pakistan has, alike during previous bouts of IMF borrowing, failed to meet IMF conditionalities. This time around, failures to improve revenue collection are the culprit. The Pakistan News Service has the lowdown on this repeat borrower's history of, er, repeatedly borrowing without successfully escaping the need to do so. IMF lending to Pakistan is almost a mini-history of lending fashions at the institution:
Pakistan and the International Monetary Fund (IMF) will end [their] 12th loan programme, tag[ged] unsuccessful after 11 out of total signed loans of 18 in [the] last 53 years history of relations between two sides as Islamabad got [its] first loan programme from the Fund in 1958. The existing Standby Arrangement (SBA) programme will again repeat the old history as it is going to expire on September 30, 2011, on [an] unsuccessful note under which Islamabad failed to draw [the] last two tranches of $3.4 billion.

Pakistan’s history of using IMF resources can be divided into three distinct phases. In the first period—1970 to 1988—Pakistan had four one-year SBAs followed by one three year Extended Fund Facility (EFF). The special characteristics of this phase were (a) with the exception of two, [the] rest of the SBAs were fully disbursed, (b) there was little emphasis on structural reforms (except in EFF), and (c) repeated approach to Fund resources, in between periods of break.

In the second period, 1988 to 1999, Pakistan had both the short term and multiyear arrangements with the IMF. Unlike the first phase, these arrangements emphasized on variety of structural reforms along with demand[s on economic] management policies. Almost all the arrangements went off-track sooner or later on account of policy slippages. As a result, throughout this period Pakistan was continuously under one or [an]other IMF programme.

In the third period, 2000-2004, Pakistan availed one facility of SBA and PRGF [Poverty Reduction and Growth Fund] each. These arrangements were completed successfully as Pakistan met most of the structural performance criteria. With the recovery from macroeconomic crises, Pakistan exited from IMF programme in 2004.
The article then goes on to describe various IMF loan programmes since independence; more recent activity can of course be found on the [extensive] Pakistan pages on the IMF site.

In any event, disagreements over security have worsened with the US in the process of cutting off aid to Pakistan over sundry disagreements about how these monies have been used. Matters have come to a head over American incursions into its territory at the same time Pakistan has been unable to meet aforementioned conditionalities to avail of further disbursements of IMF cash. And don't forget that the less-than-transparent Pakistani intelligence service ISI has been accused by Admiral Mullen, outgoing chairman of the US Joint Chiefs of Staff, of coddling the allegedly terroristic Haqqani network. (Various political parties are now in the process of addressing this serious accusation.)

So the US and Pakistan don't quite get along. But what are the economic costs if Pakistan indeed goes it alone? The Express Tribune has some ideas:
The signals are indeed dire. The powers that be, above and beyond Prime Minister Gilani, had already spoken to break the heart of the business community: Pakistan was ready to take the consequences of its embrace of the Haqqani network and that it was the US that would suffer after losing Pakistan as an ally. As for the break with the IMF — after Finance Minister Abdul Hafeez Sheikh could convince neither the MQM [coalition partners] within the government nor the PML-N in the opposition to implement the RGST (Reformed General Sales Tax) — it threatens the economy with ‘dollarisation’ and rampant inflation already standing at a level higher than any other South Asian economy. What the businessmen wanted was probably not within the grasp of Mr Gilani. They were of the opinion that if the US was to be defied and if the umbrella of the IMF was to be removed, then they could hold up their end of the bargain provided that law and order was restored...

The pacification of Karachi is a long way off and may be overtaken by other crises triggered by the tiff Pakistan has picked with the US, to provide temporary emotional relief to the country’s intensely anti-American population. What the Gilani government is doing will not serve to bolster the confidence of the business community in Karachi. The army chief has not denied that the Haqqani Network is alive and well in Pakistan but has claimed that a lot of other countries in addition to Pakistan were maintaining contact with a militia of Taliban that controls 13 of Afghanistan’s 34 provinces. And Mr Gilani has delivered the most telling blow by saying: “America can’t do without us; it should stop sending out wrong messages.”
The end result may just be capital flight as the already-thinned business community in Pakistan flees:
No prizes, therefore, for predicting that the businessmen of Karachi will soon start saving their money and assets from being devalued by fleeing to other markets in the neighbourhood. It would be fair to say that the next few months or more will be uncertain to say the least, and that the consequences of a permanent break with the Americans could be severe on Pakistan’s economy.
To be honest, Pakistan's security services are at least as duplicitous as Westerners who've deservedly earned Pakistan's ire through the years. The ISI is as much of an obstacle to Pakistani development as foreign intervention. Unspeakable as it may be to many Pakistanis, could the alternative to coddling Americans actually be worse? There is much talk that a chastened Pakistan will soon be currying US favour once more given few alternatives and a moribund economy. Most of its "record" $18B reserve holdings f'rinstance are attributed to foreign donors the country is currently keen on ridding itself of.

Pakistan has been the mother country of many great minds; it does sadden me how it has been unable to sort things out at home so it can move forward alike its neighbours in India. Despite also having highly contentious and often violent politics, the latter has somehow managed to improve its situation in a way Pakistan has yet to find.
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As an aside, those all-purpose saviours the Chinese are being mooted for picking up the slack in lending to Pakistan.

Explaining Fainting Factory Workers in Cambodia

♠ Posted by Emmanuel in ,, at 9/28/2011 09:41:00 AM
It is a regrettable fact that, since the onset of the Industrial Revolution, we have yet to fully understand the consequences of young women entering the labour force in large numbers all at once. Certainly, the social consequences of this movement have for a long time provided fodder for contemporary writings about the onset of modernity. For instance, recall William Blake's search for the New Jerusalem when confronted with the "dark Satanic mills" of England during his time. All the same, economists like Paul Krugman tend to explain away the existence of sweatshops in a predictable way: What is the alternative to dull, hazardous and low-paying work in sweatshops but unemployment (or even duller, more hazardous and lower-paying work)?*

Today we are encountering this timeworn phenomena in Cambodia. Those working in Cambodia garments factories have recently begun swooning in droves with few apparent medical symptoms causing them to do so:
Last week a team of experts from the U.N.'s International Labour Organization (ILO) gathered in Phnom Penh to seek an answer to the first question. In the past three months, at least 1,200 workers at seven garment and shoe factories have reported feeling dizzy, nauseated, exhausted or short of breath, and hundreds have been briefly hospitalized. No definitive explanation has yet been given for these so-called mass faintings. One baffled reporter described them as "unique to Cambodia."
There are many explanation out there. While the abovementioned ILO searches for inadequate workplace conditions, industrial psychologists have latched on to mass hysteria as an explanation for why apparently healthy workers suddenly succumb en masse to fainting fits alike teenyboppers at a Justin Bieber concert:
All these are examples of mass hysteria, a bizarre yet surprisingly common phenomenon that is increasingly recognized as a significant health and social problem. For centuries it has crossed cultures and religions, taking on different forms to keep pace with popular obsessions and fears...

[Y]oung women are particularly vulnerable — and in Cambodia they make up most of the garment industry's 350,000-strong workforce. Conditions for workers have improved over the years, says the ILO, but few would envy their lot. Women leave their villages to toil in suburban factories for long hours and low pay, often making products for famous Western brands such as Puma and H&M. They live in grim communal shacks, eating sparingly so that they can send as much money as possible back to their homes.(Read about the burden of good intentions in manufacturing.)

"Stress, boredom, concern about their children and other factors among young females could trigger psychogenic fainting or other illnesses," says Ruth Engs, a professor of applied health sciences at Indiana University who investigated an outbreak of mass hysteria at a Midwestern university in 1995 after false reports of a toxic leak caused dozens of people to fall ill. "Poor ventilation, few breaks, stress from piecework production and other workplace conditions would all be contributing factors."
While these things have been going on for some time since Cambodia's turn to export-led development, media attention has only now latched on to this phenomena:
There have been dozens of similar episodes in Cambodian factories since the garment industry began rapidly expanding in the late 1990s. The recent incidents involved groups of up to 80 workers at a time, but the women didn't actually faint. "They don't lose consciousness," says Tuomo Poutiainen, chief technical adviser for Better Factories Cambodia, an ILO program seeking to improve factory working conditions. "They become powerless and lie down, and that's repeated by some co-workers."

After medical checks and rest, the women returned to work, with no apparent ill effects. "The good thing is none of the workers has a serious medical condition," Poutiainen says. "But it's also troubling because employers and managers can't get to the root cause." He admits that "some kind of mass-hysteria element" might be involved, but adds that the ILO wants first to eliminate other factors. Its investigative team includes experts in health and safety, industrial hygiene and nutrition — but not in behavioral psychology.
As it was with the beginning of light manufacturing in 18th century, so it remains a problem in 21st century Southeast Asia. Why is it that we know so little about how to definitively address these issues after all this time? While being in praise of sweatshops as a step on the road to development may have its virtues, there is certainly no reason for it to be such a fraught stage of progression given that so many other countries have already gone through similar processes of women entering the workforce. And such challenges, dear friends, are part of the reason why the social sciences remain far more inexact than the hard sciences.

* BTW: Is it just me or does Krugman's "conscience of a liberal" extend less to those unlike him?

The IMF, (Hypocritical) Dispensers of Bad Advice

♠ Posted by Emmanuel in ,,, at 9/27/2011 11:14:00 AM
Just so you know, I've regularly been receiving (print!) newsletters from the Bretton Woods Project whose most famous campaign was "Fifty Years is Enough" concerning the aforementioned IMF and World Bank outlasting their usefulness. Though I sometimes think BWP can be a little overcritical and tends to overestimate the influence these institutions exert, perhaps it's rather timely to consider whether dismantling the IMF in particular is overdue.

I needn't go over my longstanding objections concerning the misappropriation of emergency funds meant for balance of payments crises going towards bailouts of troubled European peripheral states not primarily suffering from such problems. Moreover, think of how various regions of the world are coming up with their own bailout funds expressly designed to make IMF borrowing superfluous to a certain extent: Europe has its European Financial Stability Facility (EFSF). Asia has its Chiang Mai Initiative Multilateralization (CMIM). Meanwhile, Latin American countries have mooted a Banco del Sur. It is not inconceivable that every key global region will soon have its own rainy day fund. You also have to consider the mounds of reserves individual developing countries have accumulated since the Asian financial crisis.

For this post, though, let's focus on one of the most annoying things the IMF does which is peddle rather poor, hypocritical advice. Alike with questions of succession tilted towards Europeans and what it means for emergency lending, the IMF being headquartered in DC also has deleterious consequences. For, it has continually been the case that the IMF has prescribed austerity...except for "special cases" (like its host country). From a recent Lagarde speech I am pained to hear this refrain once more:
For the advanced economies, there is no question that fiscal sustainability must be restored through credible consolidation plans. But we also know that consolidating too quickly will hurt the recovery and worsen job prospects. So the challenge is to find the pace of adjustment that is neither too fast, nor too slow.

The precise path of fiscal consolidation will differ by country. Those that are facing considerable market pressure, or could face it in the absence of upfront adjustment, must press ahead with fiscal consolidation now. But in others, there is scope for a slower pace of consolidation, combined with policies to support growth [my emphasis]. The key is to clarify a credible medium-term strategy to first stabilize, and then lower debt ratios. Within this strategy, fiscal measures that reliably deliver savings tomorrow will help create space for supporting growth today—by permitting a slower pace of consolidation.
Lagarde repeats this common story that near-term stimulus--for those who markets haven't punished--can accompany medium-term consolidation for the best of both worlds. Bah humbug. Take the case of the IMF's darling America. To be perfectly accurate, once federal expenditures increase, they tend not to decrease. Nominally, the last time US federal outlays went down year-on-year was 1965--nearly 46 years ago. This fiction that federal spending is like a tap whose floodgates can unleash a torrent and then be made to drip soon thereafter is highly unlikely. There's no saying that it can't be done, but the weight of history is certainly against doing so.

Another qualifier here is the judiciousness of embarking on expansionary policies while not currently "facing considerable market pressure." Sure, such a situation may hold for now, but for how long? This point is not a churlish one from my point of view. Consider the market for Euro-denominated sovereign debt in the aftermath of the implosion of Lehman Brothers. Well into 2009, spreads of troubled PIIGS economies' bonds over their German equivalents were nugatory. If they had followed the Lagarde prescription, they'd have borrowed freely alike in years past at this point. Which they of course did and suffered from in the months to come. The idea is that markets are flighty, and we cannot really know if and when they will take flight. I for one certainly didn't expect such a harsh reaction to the likes of Greece et al. or I would be a very wealthy man by now instead of a mere blogger.

Who's to say when a similar fate will not befall America? I say stick on the safe side and just stop drinking that Kool-Aid. With IMF "advice" like this, who the heck needs to watch CNBC to delude oneself to no end? To paraphrase John Bolton, if the IMF was done away with overnight, I don't think there will be many lamenting its disappearance since, well, sixty-five odd years are probably enough.

QE3 'Treason': Tales of Print & Hang Bernanke

♠ Posted by Emmanuel in at 9/24/2011 07:52:00 PM
Hangman, hangman, hold it a little while
I think I see my friends coming, riding a many mile
Friends, you get some silver? Did you get a little gold?
What did you bring me, my dear friends?
Keep me from the Gallows Pole

Call me shallow--I don't mind--but I was rather amused by Texas Governor and Republican presidential candidate Rick Perry's idea of charging Federal Reserve Chairman Ben Bernanke with treason should he further realize his well-known money-printing advocacy. To many dollar holders, it probably isn't an issue whether this contemptible character who's debased the currency and hence their wealth should be executed. Rather, the real question is if he should be hanged, gassed, electrocuted or shot (nevermind that it's unclear who he's committed treason for). Don't mess with Texas--and while Perry's attention-grabbing stunt is probably just the stuff of electioneering as we approach 2012, I certainly wouldn't mind if the Dallas Fed calls for an "extraordinary meeting" of FRB governors in the very near future! (Adding insult to fatal injury, Bernanke won't even get a special last meal in Texas anymore.)

The reason I mention this (pseudo-)morbid stuff is because, hyperbolic rhetoric aside, it seems such dialogue has nonetheless had an impact on US central banking. As the arch-neoliberal state in the not-so-distant past, the US was long among the most vocal advocates of the concept of central bank independence. The latter is arguably among the most widespread and influential applications of rat choice / rent seeking theories. That is, shielding decision-making in the monetary arena as much as possible from public pressure should lead to more "rational" and less "political" choices. Suffice to say, central bank independence has long been part of the neoliberal fashion. Despite being a target for disdain among left-leaning academics (read: most UK political scientists) over accountability concerns, this matter is largely settled among the more insular community of orthodox economists. With the world's largest economy, academia, and IFIs (alike the World Bank and IMF) all peddling central bank independence, it has become expected--especially in OECD countries.

Nevertheless, it is remarkable that with all indications pointing to the US economy doing another of its dalliances with death by reaching stall speed, the only Fed action Bernanke could propose is "Operation Twist" or attempting to lower yields for (long-dated) Treasury bonds which affect rates for much private sector borrowing alike mortgages by selling an offsetting amount of (short-dated) Treasury bills. In theory, the Fed balance sheet should thus stay the same size. As our old sparring partner Andrew Leonard usefully points out, it was not only Perry but his congressional colleagues who've warned against the Fed taking "extraordinary measures" or QE3 in other words as Bernanke's helicopter elevates to a whole new altitude.

While I am from the school of thought that highly interventionist policies have done more harm than good, that's beside the point here, really. There are certainly many competing opinions out there. On the proponent's side, there's the belief that previous interventions haven't worked since they weren't large enough. On the sceptic's side, there's the familiar refrain that it's a solvency and not a liquidity problem bedevelling America. (F'rinstance, mortgage rates already are at all-time lows so there's little point in lowering them further when folks can't make the 20% downpayments or feel confident enough in their employment situations to meet future instalments.)

However, one thing all concerned will probably agree with is that a comparatively mere $400 billion worth of paper shuffling won't revive the US economy. And there, my friends, lies the rub. Given true central bank independence, Bernanke has written that an anything goes, throw it against the wall and see if it sticks approach is his preference. Strenuous Republican complaints against doing so have constrained his options. Though he may not be tried for treason, he is certainly doing some Bayesian updating given Obama's worsening approval ratings of thinking about what may become of him should a Republican win in 2012. Central bankers are certainly not immune to messianic complexes, and I'd venture that Bernanke would like to remain regardless of the election outcome to try and redeem himself from an unhappy ending as Fed chair.

Saving his own behind aside, perhaps Bernanke himself is having doubts about the cost/benefit ratios involved in orgiastic money printing. One certainly hopes, but I do get the impression that he's just biding his time. Old habits die hard, and it may take more than a warning from congressional Republicans not to indulge in his favourite tricks. Show him the noose, perhaps? Let's just say for now that even in the former heartland of neoliberalism, even hellbent combatants in international currency war are not *fully* central bank independent.

In international relations scholarship, there has been an academic fashion with "neo-mediaevalism" or the diminution of state actors compared to non-state ones such as NGOs, virtual groups, terrorist organizations, and what else have you. We might be on the cusp of taking this idea one step further: Recalling Henry VIII's orgies of senseless violence towards all and sundry while having bouts of illness-induced rage, who's to say that we are not returning to a less ostensibly rule-based, more volatile world where (Perry-esque?) chieftains can call for the head of the money man?

Once more with feeling from Led Zeppelin:

I couldn't get no silver, I couldn't get no gold
You know that we're too damn poor to keep you from the Gallows Pole

Margin: Explaining USD/CNY Strength in Foul Times

♠ Posted by Emmanuel in ,, at 9/23/2011 09:28:00 AM
So various markets around the world are showing signs of recurring stress akin to that experienced at the onset of global financial crisis in 2008/09. Then, as now, the dollar is experiencing (some) appreciation. What is behind this seemingly inexplicable phenomenon of the terminally sick man of North America's currency performing (ever-so-slightly) better?

An explanation that works for me is that of bets being placed on higher growth areas of the world being unwound because of trouble at home. That is, shoring up liquidity is not such a bad idea when you predict that bad times will roll. And so it is that we observe a sell-off of sorts in the yuan offshore market of Hong Kong. As most of you know, the Hong Kong Monetary Authority (HKMA) has been at the forefront of China's effort to internationalize the RMB. What is particularly interesting this time around now that we have an active offshore market is that the Hong Kong yuan is trading at some discount to that of the mainland (which is not as readily obtainable and is thus less subject to speculative trading). From MarketBeat:
It’s a sign of global market stress that Chinese yuan traded in Hong Kong is now at a record discount compared to yuan traded on the mainland. The reason is global investors are liquidating positions in every type of speculative bet, including yuan, no matter how good the underlying fundamentals may be. Investors need U.S. dollars to pay back margin loans and make up for losses elsewhere in their portfolios.

The yuan in Hong Kong, known to currency wonks as CNH, traded Friday as wide as a 2.5% discount to the onshore variety, known as CNY. It’s come back to about 1.5%. Those moves don’t sound like a lot, but it’s a record spread in the short history of China’s experiment in currency liberalization. And it’s probably troubling to companies that use Hong Kong yuan forwards markets to hedge the currency risk of investments they’ve made on the mainland [since Hong Kong-traded yuan is not tracking the performance of its mainland counterpart].
Why discard superior yuan holdings to dubiously dabble in dastardly dollar detritus? The simple explanation is that falls in the market value of dollar-denominated holdings--let's take the typical example of equities--results in "margin calls" or requests by brokerage firms that more cash be added upfront instead of relying on "margin loans" to acquire or hold assets via leverage. It's the same old story: credit flows less freely in periods of high market stress (such as now), making creditors require more liquid assets such as US dollars.

It's not that reasonable people prefer US dollars, but that the currency remains the most widely accepted one for "topping up" trading accounts hit by margin calls.

Joe Nye, Unreal Ideas About PRC Hegemony Guy

♠ Posted by Emmanuel in ,, at 9/21/2011 02:30:00 PM
It is easy to find fancy pants academics who, living in ivory towers most of their lives, are rather disconnected from reality. While this distance may in some cases provide for unique thinking, in other cases it simply breeds ridiculous assertions that any person with common sense can easily dismiss out of hand. In the above chart we have recent Gallup poll results indicating that a majority of Americans already believe that China has surpassed theirs as the world's leading economic power. To be strictly factually correct, perception lags reality--the United States remains the world's largest economy. Still, it would help if we had a realistic benchmark for determining when the PRC does overtake the US such as the yardstick of nominal GDP which I prefer as a fair measure.

A favourite Exhibit A here of wishy-washy thinking about the subject matter has (unfortunately) been IPE stalwart Joseph S. Nye, Jr. who does not seem to share the common sense most of his countrymen have. Sometime ago, he was the recipient of the not-so-coveted Carl Spackler Award for economic analysis--a prize given by yours truly for exceptionally bad political-economic commentary that strains credulity. It has since come to my attention, though, that he has problems far greater than those dealing with global economic imbalances to encompass definitions of hegemony. American elites are famously fond of setting standards for themselves they don't apply to others, and today's hypocrisy concerns the question of economic preponderance.

With China's economy growing at nearly ten percent per annum year in and year out while that of the US struggles to even reach the "new normal" range of 1-2% in the post-global financial crisis era, it doesn't take a maths whiz to figure out that China will overtake the US in most of our lifetimes if present trends continue. So what's a USA#1 cheerleader like Nye to do with the seemingly inevitable diminution of American prestige? Well, he now says China will not have surpassed the US unless the latter is overtaken in per capita income terms:
Since per capita income provides a measure of the sophistication of an economy, aggregate economic size will not necessarily mean that China will economically surpass the United States in 2027.
Shifting the goalposts is nothing new as far as USA#1 cheerleaders are concerned. After denying its possibility for the longest time--sure, they said that about Japan in the 80s too (a lazy, lousy excuse I should smash soon)--Nye now plies this per capita income definition.

The faults here are obvious: First, if per capita income were a key basis for economic performance, then we should tremble in fear before the likes of Luxembourg, Lichtenstein, and the other countries that rank ahead of the United States on this measure by a fairly significant margin. Why is it that these erstwhile economic powerhouses don't sit at the G-8, G-20 or are otherwise members of the UN Security Council? Because aside from Joe Nye and a handful of similarly misguided others, per capita income is not commonly used as a correlate of economic might--and for very good reasons.

Second, being a high per capita income nation is by no means an obvious measure of
economic sophistication. Luxembourg is a European mini-state known for...not much of anything in particular while Lichtenstein is a tax haven under pressure from the EU to stop its traditional line of business of sheltering wealth from taxation. Qatar and the UAE are states with small populations, sizeable energy reserves, and lots of migrant workers to do the grunt work. Though the reasons for their high per capita income are many, countries ranked highly on this measure are not necessarily regarded as being on the leading edge of economic sophistication.

Third, and this point should fatally undermine the realism of Nye's wildly unrealistic assertion, is the level of nominal GDP that China should achieve to overcome the United States as the world's most powerful economy. The current US GDP per capita is around the $47,000 mark. For the sake of argument, let's assume that US per capita income remains steady to whenever China overtakes the US as the world's largest economy in nominal terms. What size would China's economy have to be? Also assuming that China's population remains steady, the smallest possible figure I come up with for China to overcome the US by Nye's criteria is $47,000 x 1.3 trillion which gives us $61.1 trillion. To put matters in perspective, the size of the entire world economy at present doesn't even to amount to that much.

Bottom line: I'd like to have some of what Joe Nye is smoking! For serious IPE analysis, though, I think the rest of us are better of ignoring this redefinition of hegemony along per capita income terms. File this one under Nye's works of fiction.

Drill Baby Drill: Gas, Guns, Greeks & Turks in Cyprus

♠ Posted by Emmanuel in ,,, at 9/20/2011 01:54:00 PM
Territorial disputes are usually magnified when energy or mining resources are at stake. In Asia, we have endless international rows over (supposedly) energy-rich islands in the South China Sea. Despite no major finds having been exploited to date, there is always the potential which keeps neighbours at loggerheads as each signals "keep off" to other interested parties.

Now, consider the even more convoluted story of Cyprus. Turkey invaded the island in 1974 when Greece's then-military leaders mounted a coup on the disputed island. To make a very long story short, this attempt did nothing but flare up military tensions between Turkey and Greece, which respectively supported Northern Turkish Cypriot and Southern Greek Cypriot factions on the island. Even now after (mainly the Greek portion of) Cyprus' accession to the EU, tensions remain--an island still divided.

It seems that old conflicts die hard as traditional divides between North and South flare up once more, this time over energy drilling by the Greek Cypriot government. In part, I attribute this turn towards exploration to the EU cracking down more on tax havens. (It is widely touted as such on the Internet by various hawkers.) Cyprus having been a longtime offshore centre for such activities, it is doubly vulnerable to edicts from Brussels to crack down on tax havens issued at the behest of revenue-strapped European states since it is now part of the EU, after all. However, drilling particularly irks the Turks since it is a clear assertion of territorial sovereignty to exploit resources when (EU-mediated) "reunification" talks are in progress. Certainly, the Turks are getting bellicose once more in threatening to send warships to Cyprus if this tomfoolery continues and we party like it's 1974...
Turkey said it was ready to send warships to escort research vessels that would explore for oil and gas off the coast of Northern Cyprus, responding to what it said was a provocation by the island's Greek Cypriot south.

Monday's saber-rattling came as Texas-based Noble Engineering Inc. began exploratory drilling farther south between Cyprus and Israel late Sunday, despite Turkish warnings to halt the project, the semiofficial Cyprus News Agency reported. Noble was operating under license from the Republic of Cyprus, the island's internationally recognized government in the Greek Cypriot south.

The developments raised the stakes in a dispute over drilling rights around the divided island. Turkish leaders say the Republic of Cyprus shouldn't drill for oil and gas on the continental shelf that it delineated with Israel in an agreement last year. Any drilling or maritime agreements, Ankara says, should wait until the island—divided since 1974, when Turkey invaded Cyprus in response to a Greek-backed coup—is reunified, so both the Greek and Turkish populations can benefit.

Turkish Energy Minister Taner Yildiz on Monday described the Cypriot exploration project as "a political provocation aimed at consolidating the Greek Cypriot administration's status," and so short-circuiting reunification talks for the island, Turkey's state Anadolu news agency reported.
Are you kidding? This conflict has been one of the longest lasting territorial disputes extant, with little signs of a "unified" Cyprus coming into being. Consider how diplomatic (non-)recognition is in place, for instance:
Mr. Yildiz also reiterated a Turkish warning that it would make its own agreement with the de facto government of Northern Cyprus to delineate the continental shelf north of the island, if Noble Engineering were to proceed with its drilling plans. Ankara would then authorize the Turkish Petroleum Corp. to send research vessels to begin exploration in the Turkish and Turkish-Cypriot waters, he said. "The research will be carried out together with a [navy] escort," Anadolu reported Mr. Yildiz as saying.

The Republic of Cyprus is a European Union member state, but isn't recognized by Turkey. By contrast, Turkey is the only country to recognize the administration of the government of the island's ethnic-Turkish North. The two sides are divided by a United Nations-monitored green line...

A spokeswoman for the European Union's foreign-affairs service said Monday in Brussels that the EU urged "Turkey to refrain from any kind of threat or sources or friction or action" that could damage relations in the neighborhood or border settlement talks.
Why is Turkey so gung-ho on the matter? Speculation is that it sees itself as an energy provider to the EU--something that would be compromised if a (nominal) EU nation does so itself:
"The main reason Turkey is reacting so strongly is that it wants to be the gateway for any new gas to come to EU markets," the executive said. A major Greek Cypriot find would undermine that goal, he said, as Cyprus would then export gas to the EU via Greece.

Selcuk Unal, spokesman for Turkey's foreign ministry, dismissed that claim as "childish," saying Turkey was already an energy hub. "The question here is why now? Why are the Cypriots hurrying to start drilling now? They could have done it years ago. The reason is that it coincides with a crucial moment in reunification negotiations, which is why we find that this is all a provocation," he said.

Turkey has sought to force the pace in Cyprus's reunification talks lately, threatening to freeze relations with the EU if reunification hasn't been agreed upon by the time Cyprus takes over the bloc's rotating presidency in the second half of 2012. Mr. Yildiz repeated that warning on Monday.
As it was before it ever shall be...very complicated. Turkey certainly would benefit from exporting more energy to the EU. At the same time, it goes berserk on the diplomatic front sometimes when the Cyprus issue is brought up--a Greek satellite state of sorts in current form. Plus, don't forget that Turkey is still in the (very, very early) process of EU accession talks despite France and Germany not wanting it in the EU. Now drill and you have an even bigger headache to spoil already tense Turkey/EU relations.

No wonder that there are scholars who've devoted their lives' work to the Cyprus issue alike my dear old department chairperson at Birmingham, Thomas Diez. With so much interesting stuff going on, there's certainly more than enough material to last a lifetime!

Why the US Shouldn't 'Abandon' Taiwan

♠ Posted by Emmanuel in , at 9/18/2011 12:52:00 PM
Let us revisit one of our favourite themes--the existence of Taiwan as a quasi-republic and its meaning for the international relations of Asia [1, 2, 3] There's an interesting article by Nancy Bernkopf Tucker and Bonnie Glaser in the CSIS publication The Washington Quarterly that's been gaining attention. The authors argue that the United States' role in Taiwan should remain fairly substantial. This opinion, of course, goes against the fashionable assertion that the East Asia-Pacific is increasingly becoming a Chinese lake. Their argument is that instead of China being pleased with the US accommodating PRC demands that it not sell arms and provide other means of military support to Taiwan, diluting ties would be taken as a sign of American weakness.

Such a stance is of course set against the reality of sizeable programmed cuts to US military expenditures over the next few years. The WSJ for instance recently highlighted the increasingly geriatric nature of US equipment--especially that being used in the Pacific theatre. In other words, while the authors vocally suggest that the US should be willing to stay the course with Taiwan, its ability to do so is in serious question due to budget constraints. It's not cheap to maintain a full-scale military presence in the Asia-Pacific. Nor does antiquated gear that keeps breaking down necessarily present a formidable arsenal of democracy for maintaining regional interests, but that's just me. They write:
Would abandoning or reducing support for Taiwan secure smoother U.S.—China relations? Those in China and the United States who call for a change in Taiwan policy insist there would be significant benefits. The decision by Richard Nixon and Henry Kissinger to trade Taiwan for normalization with Beijing facilitated a momentous improvement in U.S.—China relations, setting a powerful precedent. To choose China over Taiwan once again, it is asserted, could help Washington resolve differences with China over maritime rights, nuclear proliferation, cyber security, and the uses of space. This line of thinking argues that even issues not directly connected with Taiwan policy could be easier to reconcile if what China deems a core interest were satisfied.

Beyond breaking the U.S.—Taiwan bond, Beijing has denied any desire to push the United States out of Asia. It has reaffirmed Deng Xiaoping’s injunction to ‘‘hide its light and bide its time, while getting something accomplished’’ (taoguang yanghui, yousuo zuowei). It has repeatedly put development and peace first. However, China’s superior economic performance during the recession, surging global trade and investments, and developing military might led Beijing during 2010 to implement a series of assertive initiatives which caused widespread anxiety in its neighborhood and internationally. As China’s power grows, its allegiance to Deng’s maxim becomes more dated and stale.
Don't give in is their ultimate message:
A decision to jettison Taiwan, or even cut back significantly on U.S. support, would prove to an increasingly confident China that Washington has become weak, vacillating, and unreliable. The 2009 U.S.—China Joint Statement reflected Beijing’s estimate that Washington could be intimidated or misled, as it juxtaposed a reference to Taiwan as a Chinese core interest with concurrence that ‘‘the two sides agreed that respecting each other’s core interests is extremely important to ensure steady progress in U.S—China relations.’’ Analysts who argue that Washington can safely appease Beijing because ‘‘territorial concessions are not always bound to fail’’ are, without evidence, assuming improbably modest Chinese objectives (emphasis added)...

Accommodating China’s demands on Taiwan, moreover, would not necessarily cause Beijing to be more pliable on other matters of importance to the United States. Beijing’s positions on issues such as Korea and Iran are shaped by China’s national interests and are not taken as favors toWashington. Beijing’s determination to preserve stability in its close neighbor and ally North Korea would continue to prevent China from increasing pressure on Pyongyang to give up nuclear weapons. Resolving China’s Taiwan problem would also not mean greater cooperation in preventing Iran from going nuclear given Beijing’s almost universal opposition to muscular sanctions, its growing energy needs, and desire to promote Chinese influence in the Middle East.
There's also the intriguing observation that recent arms sales by the US to Taiwan are not a significant determining factor in PRC-Taiwan relations since they appear to be as good as they have been in recent times:
Indeed, in the past two years, the United States has sold almost $13 billion in weapons to Taiwan, and cross-Strait relations are in the best shape in decades. In the absence of U.S. backing, Taipei would likely be too insecure and Taiwan’s leaders too vulnerable politically to negotiate with China. Arms sales, therefore, facilitate cross-Strait compromise and should not be anathema to Beijing. The United States should also accelerate dialogue with Taipei to promote increased U.S.—Taiwan trade, reduce Taiwan’s growing isolation from regional and global trading blocks, and prevent yet more dependence on China. Refusing to talk about a broad range of economic issues through the only available dispute settlement mechanism, the Trade and Investment Framework Agreement (TIFA), because of minor, if politically thorny, problems like U.S. beef exports to Taiwan is a mistake. And progress should be made on commonplace but important requests from Taipei to join the U.S. visa waiver program and conclude a bilateral extradition agreement.
I would of course like to point out that the existence of a China-Taiwan preferential trade agreement does not necessarily imply that high politics are sorted. While the existence of TIFA bodes well especially considering the 20th century histories of the PRC/ROC, high and low politics may not be so well-integrated in the PRC scheme of things. Recall how the ASEAN-China FTA has not necessarily resulted in a lasting resolution of the South China Sea issue despite the PRC becoming ASEAN's largest trading partner in the meantime.

European Vanquished: Bra Wars, Italy & PRC Cash

♠ Posted by Emmanuel in ,,, at 9/16/2011 12:40:00 PM
Veni, vidi, vici - I came, saw, and conquered (Julius Caesar)

We've gotten used to variations on the use of the term PIGS to denote troubled Eurozone economies Portugal, Italy (others substitute Ireland), Greece, and Spain. Further, we've gotten used to the notion of China being bandied about as the saviour of any of them during their time of need--though substantial PRC help has not materialized thus far. However, there is a more substantial link between how these economies got into trouble in the first place which does involve China. Better yet, we have previously covered it in much detail on this blog.

I talk about the phasing out of the infamous Multifibre Agreement (MFA) in 2005 when the system of textile quotas imposed on developing countries were removed [1, 2]. It was a short, short time ago in a continent not far away. One of the hardest-hit sectors as the euro was being rolled out in EMU countries was that of light, semi-skilled manufacturing which the Chinese have of course made their own. The removal of MFA quotas initially inundated the EU with Chinese textiles, resulting in the infamous bra wars of 2005. While the EU was able to implement safeguard measures to staunch the "inundation" of Chinese apparel, these were one-time measures that could not be invoked repeatedly. Let us revisit some of the controversy from those days:
The Foreign Trade Association (FTA), which represents many of the chainstores common on the high-streets of Europe's towns and cities, argues that retailers have simply taken advantage of the situation offered by the liberalisation of trade in January.

Stuart Newman, the FTA's legal adviser, said: "The reason why we have a backlog is that the quota levels were set too low [in the Shanghai agreement of temporary safeguards]. Retailers haven't put all their eggs in the Chinese basket, they are still sourcing from other countries. But they have realised that here is a big country that produces high quality goods at competitive prices. It is only logical to place orders with it.

Global Growth, a free-trade group based in London, has named [then EU Trade Commissioner Peter] Mandelson 'Protectionist of the Month' over his handling of the affair. It says that when Mandelson joined the Commission last year, he promised a new era of 'free and fair trade' but that moves to restrict the EU's 450 million people to have access to only 105 million pairs of Chinese trousers jar with that agenda.

Although Mandelson has insisted that the Commission cannot shoulder all the blame for the 'Bra Wars', Europe's clothes-makers see things differently. "The management problem [of the Shanghai agreement] is in the hands of the Commission," said Francesco Marchi from the European Apparel and Textile Organisation (Euratex). "There were 40 days of unmanaged trade and I don't see why the industry should have to pay for this."
The fissures then remain akin to those we have now, with PIGS economies in direct export competition with China calling for protection, while more competitive economies not directly in the Chinese line of fire wishing that cheaper Chinese goods be let in, pronto:
Mandelson is hoping that he will be able to break the impasse that has arisen over this issue within weeks. But the deep divisions between EU national governments could limit his room for manoeuvre. Countries with large clothing industries like France, Spain and Italy want him to resist pressure to dilute the Shanghai agreement. On the other side Sweden, Finland, Denmark and the Netherlands are warning of job losses in the retail sector unless items ordered from China for the Christmas shopping season are released.
You cannot fight fate, and the high street retailers such as H&M, Marks and Spencer, Topshop etc. rapidly took advantage of sourcing cheaper garments from the likes of China and other Asian producers instead of from PIGS countries when the MFA lapsed. Again, today's EU fissures remain largely as they were before--recall Greece recently cutting a side deal with Finland, for instance.

To a certain extent, then, PIGS countries are those which were vanquished--veni, vidi, vici--by China shortly after the MFA went off the boil in 2005. This was roughly the same time when the euro began to appreciate as Greenspan kept ultra-low 1% rates Stateside compared to higher policy rates maintained in the EMU. Given the Bundesbank roots of the ECB, its fundamental bias remains towards appreciation to combat inflation. Unable to do the old tricks of devaluation plus inflation to smoothen things out--adding another zero to the USD/ITL as I used to say--PIGS now find themselves where they are.

Therefore, any of these pleas from PIGS for Chinese aid in buying up their sovereign issues is admission of how they got into this situation in the first place--by being uncompetitive with China in industries they probably should have given up long ago in search of greener pastures. Some co-opted the Chinese steamroller; others didn't and paid the price. Caesar would understand what is happening even if the arena of contest is world trade rather than the battlefield.

Facebook Friend Rogue Trader Who Lost UBS $2B

♠ Posted by Emmanuel in , at 9/15/2011 01:11:00 PM
I've had a gallery of rogues in my consciousness these past few days. First you have the impending release of a salacious biography of Sarah Palin which appears to add unnecessarily tawdry flourishes to the life of a self-promoting American who the rest of the world would prefer to "refudiate" for good.

More recently, though, I've been reacquainted with the ever-growing collection of rogue traders causing financial mayhem. The list of young men betting with house money who've subjected their financial institutions to enormous losses keeps growing: Nick Leeson (Barings), Yasuo Hamanaka (Sumitomo), Jerome Kerviel (SocGen), and so on. I think of it as a white collar affliction: Isolated from the manly world of mano-a-mano combat for survival against other young males during the distant past, this species of office slave channels aggression in ways available to them. Risky trading? Natch.

But hey, I guess this is as good an opportunity as any to befriend Kweku Adoboli, alleged rogue trader du jour who allegedly lost UBS a cool $2 billion trading exchange-traded funds (ETFs), on Facebook. Right now our man Kweku's Facebook page has the same Google PageRank as yours truly, but expect his to shoot into the stratosphere real soon. Maybe he should instead have fans--remember Kerviel being made into an alter-globalization hero by some nutters who commended his activities for promoting the downfall of modern finance. The International Business Times even contemplates "Facebook Friend Risk" for the likes of Adoboli--from erstwhile friends being harangued for further information on him by media to personal information unwittingly being disclosed to a curious public.

Meanwhile, whomever they ultimately catch for the current deed at UBS, they should indeed do a character study of males prone to financial shenanigans. (Remember Iceland.) For all the supposed improvements in risk management implemented in the wake of earlier rogue trading scandals, some apparently are still able to slip under the radar. If Joe McGinniss had better things to do other than write another Palin biography--next to the worst-worn subject extant--this would be it.

UPDATE: It looks like Kweku Adoboli's Facebook page has been zapped. It still makes sense to do a character profile of rogue traders, though.

PRC Sets Out Its Conditions for 'Bailing Out' EU

♠ Posted by Emmanuel in ,,, at 9/14/2011 01:16:00 PM
This post is a quick follow-up on an earlier one I made concerning the rather incredulous suggestion that PRC sovereign wealth fund the China Investment Corporation (CIC) was seriously thinking about buying Italian debt. I thought it was a fairly frivolous thing to entertain such an idea, and the latest news doesn't do much to reduce my perception of how things stand.

Ever since China joined the World Trade Organization on 11 November 2011--the PRC will soon commemorate its tenth year of membership--it has sought designation as a "market economy." In its accession, China was made to accept a 15-year period during which it would be considered a "non-market economy" (NME) Why does this distinction matter? On a technical level, China's NME status has made it more vulnerable to anti-dumping cases filed against it by the United States and the European Union. The China US Trade blog has a straightforward explanation of its mechanics, but briefly it works like this: Since China is not considered as a "market economy," anti-dumping cases brought against it invoke the use of surrogate countries (i.e., those which are already considered market economies at a similar stage of development) in defining the domestic cost of production. This process disadvantages China since the arrived-at costs are often deliberately those which are among the highest possible, artificially increasing the margin of dumping. It is an egregious "kick China" practice that will be phased on in 2016. However, China has been quite annoyed in the meantime with being considered an NME and has always sought designation as a market economy in PTAs involving it--such as that with ASEAN.

In terms of prestige, it is of course damning that the world's second largest economy is not even considered as having a functional market. That hurts. It's another contradiction with modern China: While Party leaders still pay regular lip service to following Marxist-Leninist thought (however that is possible nowadays), they too are in a hurry to be recognized as having that most capitalist of accoutrements, the market mechanism. Go figure.

This slight detour completes my explanation of China's wish to immediately do away with NME status. Once again underlining its importance, it is significant that the first thing which came to mind among the PRC leadership in helping out troubled EU economies is precisely this among many other things China could ask for such as going easy on its hoarding of rare earth metals. From the Financial Times:
Wen Jiabao, Chinese premier, has called on debt-laden European countries to put their “own houses in order” before asking China for a bail-out, in a sign of Beijing’s reluctance to be cast as a saviour for the global economy.

Speaking at the opening on Wednesday of the World Economic Forum in Dalian, China, Mr Wen also publicly linked Chinese investments for the first time with long-standing political demands, indicating a possible hardening of China’s position towards crisis-hit Europe...

He said Europe needed to take “bold steps” in order to receive Chinese help and the first of those steps was a decision to formally grant China full “market economy” status. This is a technical definition that has long been a key demand from Beijing and would allow Chinese companies to avoid or at least mitigate many costly and time-consuming trade disputes.

European officials say China does not meet the criteria of a market economy and stiff opposition from some member states makes it very unlikely the European Union will grant China this status soon.
Incredulity aside, I think the EU will baulk at this demand since being able to file anti-dumping cases that stick is one of the few areas where the EU is still able to whack China with regularity. Will the EU easily relent on the privilege of whacking the PRC on anti-dumping grounds and lose the ability to appease politically important manufacturing interests five years early? Again, the answer is probably "no." Still, it does illustrate how trade matters tie into the credit crisis in interesting ways.

UPDATE: Also see Fareed Zakaria on this very topic.

Troubled West Failed to Heed Asian Crisis Lessons

♠ Posted by Emmanuel in , at 9/14/2011 08:08:00 AM
American author Robert Fulghum catapulted himself into global fame in the Eighties via All I Really Need to Know I Learned in Kindergarten. This book illustrated core principles that he argued held in all walks of life that grown-ups often tried to rationalize away to avoid. Rummaging through the web for course material, I came across an Asian-financial crisis era work from 1998 (I figuratively blow dust off its virtual cover--fffffff) by IIE stalwart Morris Goldstein. As we are now being bombarded by news of crises arrived and impending in Western Europe and North America, let us pause and reflect on how the important lessons from the Asian financial crisis that Goldstein identified are applicable to the present time. In Fulghum-esque terms, All I Really Need to Know About Modern Financial Crises I Learned in 1997-1998.

I do not need to rehearse the boilerplate excuses: Us rich countries set the rules and you follow them; we issue reserve currencies; we have an exorbitant privilege; we are leaders and not followers of globalization and so forth. Well, not quite. Reviewing the concluding part of Goldstein's scribblings, you get a distinct sense of deja vu. That is, had the rich countries taken heed of the general antecedents--not merely symptoms--of modern financial crises, perhaps they wouldn't be in such a wretched state. For your convenience, here are Goldstein's concluding top 10 list of lessons learned and some commentary:

1. Leaving reform of the financial sector and of the prudential/supervisory framework too late in the economic development process is a bad idea--even when the country's macroeconomic-policy record and growth performance place it in the first division of emerging economies. When the financial markets finally discover the true (sorry) state of balance sheets in the financial sector, the cost (in terms of both reduced growth and the fiscal costs of recapitalizing the banking system) can be enormous.

So true. By developed country standards, US economic growth post 9/11 was quite healthy by OECD standards--but look at the rottenness it propagated and masked in bank's balance sheets, clogged as they were by assets of dubious quality. And I certainly am not convinced that dumping these assets onto that of the central bank (the Fed) is much of an improvement.

2. The composition of foreign borrowing deserves as much attention as the overall debt burden...The original saving obtained from shortening the maturity and denominating external debt in foreign currency is likely to be swamped by the ultimate price paid if rollover and currency risk ignite a successful speculative attack.

This proviso is an interesting one when it comes to Europe and is perhaps less applicable. Still, is the euro *really* the currency of troubled PIGS countries? The ECB keeps open a facility by which sovereign issues from troubled countries can be exchanged for euros, allowing them breathing room. However, private borrowers who took advantage of, say, French and German banks setting up shop in Eastern/Southern Europe certainly are not untroubled by these financial institutions from abroad being subjected to questions about mounting bad loans. When in doubt, they will tighten screws on international borrowers who originally took out debt on significantly more favourable (pre-crisis) terms.

3. Rapid expansion of bank and nonbank credit (far in excess of the growth of the real economy), cum high concentration of credit to the real estate and equity markets, is almost always a harbinger of trouble, in developing and industrial countries alike. The risk is multiplied when lenders don't do careful analysis of creditworthiness (taking property as collateral instead) and when high loan-to-valuation rations and low bank capital don't provide much of a cushion when the credit cycle turns south.

This part accurately describes rapid financialization unaccompanied by economic growth in the real economy of most of the PIGS countries--Goldstein did point out the LDCs alone weren't a class by themselves here, unfortunately for the West. The basic workings of the "ownership society" subprime fiasco are also accurately described but made worse in the absence of meaningful collateral.

4. Large current-account deficits that are used to finance investment may render economies less vulnerable to speculative attacks than those used almost exclusively to finance a boom in consumption...

Well put. A boom in consumption funded by sizeable current account deficits did occur in both troubled Europe and the US. The latter, of course, has done little to close its external gap. I would naturally argue that failing to do so has led the US to stumbling from crisis (in 2008/09) to crisis (stagnant to declining growth since then likely giving way to another outright recession in the near future). It goes to the crux of the "deficits don't matter"/"exorbitant privilege" arguments debates. If you follow this line of reasoning, they are rather poor excuses that contribute to the continuation of suboptimal economic outcomes. Exhibit A: modern America.

5. Efforts to promote financial and capital account liberalization without first strengthening the prudential framework--such as the ill-fated Bangkok International Banking Facility in Thailand--are a recipe for disaster.

To be fair to troubled European countries, some of the responsibility EU bureaucrats were supposed to take up with their better institutional capacity in this respect simply wasn't. As international banks set up shop, the foibles of excessive credit growth in these economies was not made into an issue until the fortitude of EU integration was put to the test. Distinguishing the creditworthiness of Portugal in itself as opposed to being in the EMU came later in the game, allowing much to be swept under the carpet for the longest time as EU watchdogs fell asleep at the switch.

6. Long-standing weaknesses in the economy that lenders seemingly ignored for long periods of time can take on a different character in the midst of crises elsewhere in the region. Once the process of contagion begins, it takes bold and determined defensive and reform measures to stem the tide in individual countries--especially if a lack of transparency and disclosure make it difficult for investors to differentiate weak from strong firms.

In a nutshell, this phenomenon is happening with French banks now being affected over Greece. What is the true state of their balance sheets now? It is certainly not easy for external observers to ascertain under the fog of crisis, and there is definitely a pronounced feedback effect. Witness the major moves these banks are making to shore up matters.

7. Overshooting of exchange rates and equity prices can be much larger than we though in an atmosphere of political instability, uncertainty about reform, and wide-ranging contagion.

Remember the Dow Jones Industrial Average falling below 7000 in 2009? What's to stop it and other indices making similar swoons soon?

8. It's much tougher to battle your way out of a crisis when the region's largest economy is struggling with its own macroeconomic, financial, and exchange rate problems (Japan) than when (as in Mexico's case) that regional hub (the United States) is in good overall shape.

Fascinating: Japan was well into the doldrums when the Asian financial crisis hit. But now us Asians have a new sheriff in East Asia which is comparatively free from such problems heading into a new global slowdown in China. (It replaced Japan as the world's second largest economy and hence our region's largest in 2010.) Meanwhile in Europe, Germany has come to a virtual standstill and this situation may have significant knock-on effects for the rest. Let's see how this turns out, but I think the logic illustrated here is reasonable.

9. The distinction that was drawn after the Mexican peso crisis between sovereign debt and private debt has turned out to be not nearly so neat and tidy. When much of the banking system becomes insolvent, debt that starts out it the private sector doesn't stay there long...

In the end, the home country has little choice but to intervene when things go awry in its domestic financial system, thus burdening the public with private woes in addition to whatever else existed before. Witness Ireland guaranteeing private lenders when the state did not fully realize the obligations involved in doing so. Or, think again of the US government being saddled with housing-related assets of extremely dubious quality while trying to relieve pressure from troubled banks. (The funny thing is that Uncle Sam is now seeking damages as it were when it deliberately set itself up to be duped.)

10. There's nothing like a major crisis to focus people's minds on why it is important to improve the international financial architecture...

My general intuition is that the international financial architecture is shaped by financial flows. That is, the likes of Basel III are reactive, not proactive measures which do not necessarily get to the heart of the matter: wayward patterns of capital movement have deeper underlying causes than what can be addressed by simply arguing for [more, better] regulation. Why do some people save too much while others spend too much? As G20 talks have demonstrated, we have not even gotten past the process of apportioning blame between surplus and deficit countries, let alone developed a pan-global way of mitigating such imbalances.
---------------------------------

They say that those who don't learn from history are doomed to repeat it. From my standpoint, Asia learned from its crisis, but the West didn't [1, 2] due in no small part to its arrogance. Had the abovementioned warning signs deduced from the Asian crisis been heeded, would the West be in such bad shape? (Dig TIME's somewhat hyperbolic recent cover and all.) While this question is not one I have to directly contend with, it certainly does affect the course of the global political economy.

EU Crisis: Did WSJ Help Slander BNP Paribas?

♠ Posted by Emmanuel in , at 9/13/2011 11:16:00 AM
I don't want to start any blasphemous rumours...but damned if it isn't another Murdoch media controversy on hand. Hot on the heels of the UK phone hacking scandal by the News of the World, we now move to a purportedly more respectable publication in the News Corporation stable, the Wall Street Journal. To wit, Nicolas Lecaussin of France's Institute for Economic and Fiscal Research today penned an op-ed in the WSJ concerning the trouble with French banks. Simply put, they have lent too much to troubled Southern European economies including Greece. (France is said to be the largest lender to Greece followed closely by Germany.) More disturbingly, Lecaussin singles out BNP Paribas as having trouble obtaining dollars--the world's vehicle currency--at the very top of his now-infamous scribblings:
'We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore," a bank executive for BNP Paribas, who declines to be named, told me last week. "Since we don't have access to dollars anymore, we're creating a market in euros. This is a first. . . . We hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore."
This (so far unsupported) assertion helped accelerate a two-day slide in French bank stocks--especially for the aforementioned BNP Paribas (proud sponsors of the French Open as sports fans know):
BNP Paribas SA plunged as much as 12 percent in Paris trading amid concern U.S. money market funds may be shutting off funding to French banks because of their European sovereign debt holdings. “French banks have been strongly hit by funding concerns, sovereign exposure and nationalization fears,” said Herve Samour-Cachian, senior equity fund manager at Natixis (KN) Asset Management in Paris.

BNP Paribas, France’s largest bank, fell as low as 23.05 euros, the lowest since March 9, 2009. The stock was down 1.77 euros, or 6.8 percent, to 24.35 euros by 11:57 a.m. Societe Generale SA fell 2.5 percent to 15.19 euros, while Credit Agricole SA slid 0.5 percent to 4.80 euros.

The three banks dropped more than 10 percent yesterday [12 September] on a possible ratings cut by Moody’s Investors Service because of their holdings in Greece. French lenders top the list of Greek [international] creditors with $56.7 billion in overall exposure to private and public debt, according to a June report by the Basel, Switzerland-based Bank for International Settlements.
Hammered by massive equity losses for two consecutive days, BNP Paribas is coming out fighting in denying this rumour:
BNP Paribas SA on Tuesday denied it is facing a dollar-liquidity problem, as reported in an opinion column in The Wall Street Journal. BNP Paribas said it is fully able to obtain U.S. dollar funding in the "normal course of business," either directly or through swaps...

BNP Paribas said its has abundant euro short-term funding and has a net dollar short-term funding with maturity shorter than a year worth €60 billion. The bank has €135 billion in "unencumbered assets after haircuts" that are eligible to central banks. The bank also said it is using foreign-exchange swaps to more than offset the recent reduction and "shortening" of funding from U.S. money market funds.
While you certainly cannot make a definitive statement on the matter, I am of the belief that Lecaussin was scaremongering, plain and simple. It is a very strong accusation that one of the pillars of French finance can no longer obtain dollars. Although folks are usually entitled to write what they want in op-ed pieces, I do think the WSJ should have looked more into the matter before allowing this one to be published--especially if it is blatantly incorrect. French banks may be in no small amount of trouble, but media-manufactured crises are unwelcome.

Murdoch(s), you may now have landed yourself in trouble on both sides of the Atlantic.

UPDATE: The timely appearance of BNP Paribas CEO Frederic Oudea on Bloomberg appears to have allayed fears about it being unable to find dollar funding via foreign exchange swaps. Scaremongering aside, why would any major international bank be unable to avail of dollars with interest rates so low and the US government not exactly hoarding the stuff? Its stock is now actually up today having been down more than ten percent earlier:
BNP Paribas, which plunged as much as 12 percent, was 1.8 percent higher by 3:26 p.m. Societe Generale, which slid as much 8.1 percent, jumped after Chief Executive Officer Frederic Oudea said in an interview with Bloomberg Television in New York that the bank’s exposure to European sovereign debt was “manageable” and that it could do without access to U.S. money-market funds.

“For our bank, the exposure to sovereign debt is low, absolutely manageable,” Oudea said. “We have plenty of buffers of liquidity and we are adjusting to the reduction in the money- market fund exposure.”

The 'Real' IMF? China to Buy Italian Sovereigns

♠ Posted by Emmanuel in ,, at 9/13/2011 10:47:00 AM
Rumours, gossip, innuendo in your window and out your window; such is the defining characteristic of modern debt crises. I suppose that when the US actually had money in its Treasury in the postwar period, it too elicited the expectation from others that it would bail out wayward countries. Now that the US has become the most wayward country in world history, the international community looks to China to fulfil the lender of last resort function in the community of nations.

To be honest, I am not convinced that China has recently bought oodles of Greek and Portuguese debt in quantities that materially improve their financial situations according to various rumours. But nevermind little ol' me for the latest news is that (surprise!) China is going to buy lots of Italian sovereign debt. However, to not bore us to death this time, there is a twist...that admittedly makes no sense to me. You see, Italian officials are supposed to be courting the Chinese Investment Corporation (CIC) to buy its sovereign debt. This makes next to no sense since sovereign wealth funds are usually designed to enhance yields on holdings by purchasing (1) higher-yielding, (2) private sector assets for (3) diversification. Buying Italian sovereigns may marginally meet the first requirement, but distinctly fails on (2) and (3).

Ah well, what does common sense have to do with rumours? On to the story:
Italy's Finance Ministry has held talks with China's sovereign-wealth fund and other Chinese officials in a bid to persuade Beijing to buy large amounts of Italian bonds, a person familiar with the matter said, as Rome searches for ways to meet its financing needs and pull the peninsula out of the euro-zone debt crisis...

Finance Minister Giulio Tremonti met with a delegation of Chinese officials last week—including Lou Jiwei, chairman of the China Investment Corp sovereign fund, or CIC—to discuss possible bond purchases by the fund, the person said. The talks were also attended by China's ambassador to Italy Ding Wei, officials from Beijing's State Administration of Foreign Exchage, or SAFE, and officials from the Cassa Depositi e Prestiti, an investment vehicle controlled by Rome, the person said.

So far, it is unclear whether the talks will lead to any big bond purchases by Beijing, according to the person. In 2010, the arrival of Chinese delegations in Greece and other debt-ridden European economies stoked investor hopes that Beijing would ride to the rescue. The highly touted Chinese investments, however, never materialized [my emphasis].
Why do people lap up these fanciful financial stories? I generally like to keep factual reporting separate from science fiction--though more than a few journalists have severe issues distinguishing between the two.

And no, don't count on China to *save* Italy.

German FinMin to Greece: Default If You Must

♠ Posted by Emmanuel in ,, at 9/11/2011 03:20:00 PM
Here's another fine illustration of parliamentary coalitions being rocky marriages of convenience--especially during difficult times. Angela Merkel's Christian Democratic Union (CDU) is, occasional rhetoric to the contrary, ultimately loyal to the idea of European Monetary Union which earlier generations of its politicians helped bring to life. For the likes of, say, Helmut Kohl, the common currency was arguably not the goal but an instrument for promoting "ever closer union" among European states. On the other hand, the more market-oriented Free Democrat Party is (surprise!) keener--in rhetoric at least--on letting market forces do their thing with Greece. To the likes of the FDP, saving the tangible and psychic benefits Germany has obtained via the euro's introduction--superior access to Western European markets together with no small amount of pride in its existence--are more important than appeasing "wayward" neighbours. Hence, decreasingly close union is not unthinkable.

Almost on cue, German Minister of Economics and Technology Philipp Roesler has just opined that Greek default should be on the table in Die Welt. Alike his similarly youthful predecessor twice removed Karl-Theodor zu Guttenberg who famously resigned from the cabinet after allegations surfaced that his PhD thesis was plagiarized, Roesler has an interesting background. You see, he is a native of (South) Vietnam adopted by German parents after the fall of Saigon. Alike Pope Benedict XVI, he too is a German Roman Catholic. Naturally, I am interested in what an erstwhile Southeast Asian Catholic has to say...
An orderly bankruptcy of Greece is no longer a taboo, German Economy Minister and leader of Chancellor Angela Merkel's junior coalition partner, the Free Democrats (FDP), said on Sunday in an article for a newspaper.

"To stabilise the euro, there can no longer be any taboos. That includes, if necessary, an orderly bankruptcy of Greece if the necessary instruments are available," Philipp Roesler wrote in an article for Die Welt daily. He also demanded automatic sanctions to be imposed on heavily indebted countries which failed to comply with their obligations.

"If there are breaches of the rules, there must be tough requirements ... and if there are continued breaches, a withdrawal of voting rights for a time in the EU Council of Ministers should not be a taboo."
The Stability and Growth Pact+ allusions are commonplace by now, but it's going to be interesting to watch how Merkel and other CDU bigwigs react if its coalition partners' more gung-ho attitude gains momentum even within the coalition itself. Opinion polls in Germany certainly show considerable bailout fatigue. Unlike the CDU, let's just say the younger FDP folks have less to lose from burning bridges to the rest of Europe, less burdened as it is by a pre-Maastricht vision of building bridges in this manner. The weight of history is certainly a sizeable burden to have on your shoulders.