Maybe the Washington Consensus Wasn't So Bad

♠ Posted by Emmanuel in at 9/30/2008 06:39:00 PM
The mere mention of the "Washington Consensus" is all you need to get anti-globalization types foaming at the mouth over American imperialism, corporate globalization, and other sorts of unmentionables. Even I am no fan of the standard recipe of liberalization, deregulation, and privatization. Especially after Joseph Stiglitz released his polemic Globalization and Its Discontents, the term has been associated with quite negative connotations. Indeed, some have even mooted the existence of a more LDC-friendly "Beijing Consensus." If I can make money off it, I'll even write an "IPE Zone Consensus" for you (quote your price and send me an e-mail ;-)

Seriously, though, the Financial Times has a very fine article revisiting this familiar Asian financial crisis-era terrain, from Suharto signing another bailout package for Indonesia to America's perceived dominance at key multilateral economic institutions like the IMF. The article cleverly contrasts "market-friendly" prescriptions made then by Americans (and also the laissez-faire Brits) compared to now, when these very same countries are following a new recipe of, er, de-liberalization (e.g., short-sale bans), re-regulation (new housing overseers galore), and nationalization (Northern Rock, AIG). Why, maybe it's the [sigh] "Paulson Consensus."

Is it hypocrisy that rich countries don't administer the same medicine they gave to destitute LDCs a decade ago, preferring an easier route not involving belt-tightening and other unpalatable measures? I have my own opinion, though you can probably answer this for yourselves. Nevertheless, this loosey-goosey bailout festival is making me think that, yes, the Washington Consensus had some virtues--although this may not have been communicated very well at all. Here is the FT revisiting it in a side feature, though I highly encourage you to read the entire article:

The package of reforms that runs from opening up trade to liberalising capital flows is typically labelled the “Washington Consensus”. But as the originator of the phrase wearily points out, this is something of a caricature.

John Williamson of the Peterson Institute for International Economics in Washington invented the expression in 1989 to describe the standard set of 10 policy prescriptions for Latin American countries that emanated from the International Monetary Fund, the World Bank and the US Treasury. But the deregulation of financial markets and the free flow of capital, widely blamed for making developing countries vulnerable to financial crisis, were not on the list.

Mr Williamson says most of the to-do items are relatively uncontroversial and have been implemented even by centre-left governments such as that of Luiz Inácio Lula da Silva in Brazil: competitive exchange rates, fiscal discipline, property rights and shifting spending from general subsidies towards investment in infrastructure, education and health. “There is a lot more consensus around issues like trade liberalisation than there is about following a particular model of rapid financial deregulation,” he says. “The expression ‘Washington consensus’ got a bad press.”

Lula is a "Washington Consensus" follower? Perhaps not in the ideological sense, but his reforms do have elements to its that are eerily familiar. Among other things, trade before capital liberalization. Heck, maybe Bush 'n' Brown should re-read their John Williamson before issuing more "get out of jail [nearly for] free" cards.

Not Even Jah the Maker Will Save America Now

♠ Posted by Emmanuel in at 9/29/2008 08:35:00 PM
I was confident that the $700 billion giveaway package wouldn't pass in the US House. Hence, I was surprised to see the Dow Jones Industrial Average momentarily fall by 700+ points. Except for the cheerleaders at CNBC, did anyone really expect this hackneyed piece of legislation to pass? The folks over at MarketWatch have put a headline in what I reckon is 70-point font to not-so-subtly underline the market tumult. (Click on the image to appreciate just how large it is.) What font size is this according to this Bob Marley and the Wailers fan? "Not Even Jah the Maker Will Save America Now"-size font. Expecting the debt-addled US government to save American financial markets from its current morass is rather delusional.

Some additional thoughts:

(1) Consider that a ban on short selling stocks was in place on the biggest single day decline in the DJIA. I guess these bans don't really work when sentiment is so bad. (The current ban expires on Thursday.)

(2) Some good news overlooked in all this mayhem is that the US savings rate is actually rising. For three consecutive months, personal savings as a percentage of disposable personal income have been at or above 1%--not much, but hey, it's a start given that they have rarely been at or above the 1% level for three years.

What Would Jesus Do About the MDGs?

♠ Posted by Emmanuel in , at 9/29/2008 06:43:00 PM
My fellow Catholics should be apprised that our church is closely following the financial markets. Why? Is the Holy See a day trader? Probably not. Like Jeffrey Sachs, the Vatican's permanent advisor to the UN notes the irony behind rich Western countries finding oodles of money to bail out their financial systems yet not finding more modest amounts to help meet the Millennium Development Goals. My stock retort, of course, would be that were the US to send more aid, it would only borrow more from LDCs like Asian exporters and Mideast oilers to send to Africa. In effect, the US wouldn't really be "aiding" Africa (it is quite hard up), but merely acting as an intermediary.

Setting aside the question of the efficacy of the MDGs (which I personally harbor doubts about), the Vatican does raise an important question of what the obligations of wealthy Westerners are to their less fortunate brethren. Alas, that's a post for another day. This from the Catholic News Agency:
On Thursday, Archbishop Celestino Migliore, Holy See permanent observer to the United Nations in New York, addressed the 63rd session of the U.N. General Assembly which is considering the Millennium Development Goals. The archbishop asked the assembly how the world is able to find funds to save financial systems in developed countries, but cannot find the resources necessary to invest in the "most destitute" ones.

Speaking English, Archbishop Migliore highlighted how the MDGs "will be achieved if their attainment becomes a priority for all States." To do so, he continued, "we need to foment a new culture of human relations marked by a fraternal vision of the world, a culture based upon the moral imperative of recognizing the unity of humankind and the practical imperative of giving a contribution to peace and the well-being of all."

"The money and resources that the least developed countries need in terms of direct aid, financial assistance and trade advantages are meager compared to the world-wide military expenses or the total expenses of non-primary necessities of populations in more developed countries," he added...

"In these days we are witnessing a debate on an economic rescue aimed at resolving a crisis that risks disrupting the economy of the most developed countries and leaving thousands and thousands of families without work. This rescue of enormous proportions, which amounts to many times the whole of international aid, cannot but raise a pressing question. How are we able to find funds to save a broken financial system yet remain unable to find the resources necessary to invest in the development of all regions of the world, beginning with the most destitute?"

"For this reason," he concluded, "the globalization of solidarity through the prompt achievement of the MDGs established by the Millennium Declaration is a crucial moral obligation of the international community."

The "De-Feminization" of Philippine Labor Exports

♠ Posted by Emmanuel in , at 9/28/2008 04:33:00 PM
The Philippines is known as a labor exporting country par excellence. In the absence of local opportunities, millions upon millions of Filipinos have gone abroad in search of gainful employment. Last year, it sent an all-time high number of laborers abroad, eclipsing even the 2006 mark when overseas contract workers first topped a million. As long as the local economic situation does not improve significantly, Philippine labor exports look set to continue. Certainly, the sheer number of persons working abroad is astounding.

An interesting trend though is the seeming de-feminization of labor exports. When the Philippines first started sending labor abroad in large scale in the mid-Seventies, most were headed to the Middle East where the oil boom meant considerable demand for foreign workers in construction and related industries. After a while, though, the country started sending women in significant numbers in less-skilled (household service workers) and more-skilled (nurses) occupations as well as those somewhere in between (entertainers). More recently, it seems Filipino women going abroad have decreased in number. This is due mainly to two things. First, Japan was cited for "trafficking in persons" by the US State Department as quite a few entertainers from the Philippines were thought to have been exploited in the sex trade. Naturally wary of being stigmatized as such by the US, Japan raised the entry requirements for female entertainers from the Philippines and elsewhere. Meanwhile, the Philippine government itself has raised the requirements for allowing household service workers to go abroad.

That is on female side. On the male side, it is unsurprising that high energy prices have caused another boom in the Middle East. Aside from improving the energy infrastructure, various Middle Eastern nations have begun real-estate mega-projects funded out of energy revenues in hopes that such projects will give the region a lifeline when the next oil slump hits and, ultimately, oil and gas reserves are depleted. Given the shortage of locals to perform construction-related tasks, these countries have once again turned to the Philippines for making up the shortfall of engineers, . Needless to say, men are required for these jobs. From the Philippine Star:
A growing demand for male workers in the Middle East and a new policy on household service or domestic workers (HSWs) has seen the gender of Philippine labor migration shift towards males again in 2008, the Philippine Overseas Employment Administration (POEA) said Tuesday.

"When we used to see a 60-40 ratio of female OFWs (overseas Filipino workers) before, we are seeing more and more males now," POEA Deputy Administrator Carmelita Dimzon told reporters after a press conference at the Philippine Institute on Development Studies. Dimzon said the demand for male workers in Saudi Arabia and parts of the Middle East where so-called “mega cities” are being built is one of the factors for this "de-feminization." "It is unlikely that Saudi and the Middle East will hire female welders and pipe fitters," she said. "Maybe in Australia and Canada, but not in the Middle East." [Movie buffs take note: the Middle East is hardly "Flashdance."]

The POEA official also said the 2007 POEA policy on HSWs also helped reverse the feminization trend in labor migration, which started in the early 2000s. Over the past year, when the POEA policy increased the age, salary, and training requirement for leaving HSWs, the number of women leaving for overseas employment decreased by 47 percent.

The tightened Japanese immigration policy on entertainers, the bulk of whom are women, is also a contributory factor, Dimzon said. Before the new Japanese policy took effect a couple of years ago, the Philippines sent some 72,000 entertainers to Japan every year. Last year, she said, the number of entertainers deployed to Japan had gone down to 7,000.

EU's Mandelson: SWFs = "Savior Wealth Funds"

♠ Posted by Emmanuel in ,, at 9/28/2008 04:24:00 PM
I was monitoring Bloomberg when an interesting story scrolling on the ticker caught my eye entitled "EU's Mandelson, Airbus's Enders See 'Savior' in Sovereign Funds." It seems the intrepid EU Trade Commissioner and the Airbus big kahuna Tom Enders have recently been to China. While there, they reckoned that sovereign wealth funds (SWFs) ought to take a bigger role in global economic affairs by using their funds to help cushion the blow from the ongoing credit turmoil by--you guessed it--providing Western firms with increasingly scarce funding.

Nevermind that the SWFs came a cropper riding to the rescue of ailing Western banks in 2007 as the share prices of these banks had much more to fall. What Mandelson and Enders seem to imply here is, "Hey, so you got burned investing in the smoke and mirrors world of high finance. Instead, why not invest in tangible things like manufacturing?" Once more, I am wary of Western preconditions of wanting to disavow SWFs of controlling stakes in Western firms, be they in finance or manufacturing. When you're desperate for funding to stave off worse things, foreign ownership looks like a helluva better proposition than, say, receivership. Anyway, to the article:
Sovereign wealth funds will become major sources of funding for Western companies as financial markets reel, said European Union Trade Commissioner Peter Mandelson and Airbus SAS Chief Executive Officer Tom Enders. Companies will ``lack a lot of money for years to come'' because of the financial crisis in the U.S. and Europe and will push their governments to be more open to foreign investments, Enders said at a World Economic Forum meeting in Tianjin, China. Mandelson called for regulation to encourage the investments [ho-hum].

Europe's top trade official has used a four-day visit to China to add his voice to calls for the Asian nation and other fast-growing emerging economies to ``take up the slack'' in the global economy, as the U.S. government works out a $700 billion plan to bail out its banks and keep credit markets functioning, ``The sovereign wealth funds in the present context might better be termed savior wealth funds,'' Mandelson said today. ``We need to find sensible ways and a proper basis on which sovereign wealth is able to deploy and use its resources to inject much-needed liquidity into the financial system.''

Countries including China, Russia and Kuwait have set up funds to seek better returns on cash reserves by investing in equities and other assets abroad. The rising pool of money has sparked concern among some lawmakers in Europe and the U.S. that the funds may be used to gain control over strategic industries.

``You see already major companies, European, American, touring those countries that have the funds because they foresee the need for funding, and these companies will also try to persuade governments'' to be more open, Enders said. ``One of the big changes we're going to see is the acceptance of sovereign wealth funds.''

Sovereign wealth funds, which own about $3 trillion in assets, may almost triple their investments in the next five years as oil and gas prices surge, State Street Corp. estimated in July. Estimates of sovereign funds' asset growth are ``conservatively'' placed at 17 percent a year, said State Street, the world's biggest money manager for institutions...

Both Mandelson and Enders said clear regulation is necessary to smooth the way for greater acceptance of sovereign funds. Mandelson in June suggested the funds could ease political resistance to their investments by signing a code of conduct that they seek only profit, not control of industries.

How Hard Will Asia Be Hit By US-Led Slowdown?

♠ Posted by Emmanuel in , at 9/28/2008 04:05:00 PM
For those of from Asia, I am afraid the prognosis isn't as swell as those who hold a "decoupling" theory would suggest. In fact, things may be even worse now than they were in the past as far as lower dependence on exports to the US and other Western economies is concerned. Although I keep hammering this point, there is only so much Asian countries can do to spur consumer demand in the US that they fail to do at home. The two natural limits to US mega-consumption are becoming more evident these days. Respectively, they're called "bankruptcy" and "foreclosure" (though they often go together). In a recent TIME op-ed, veteran Asia hand Stephen Roach offers this:
The U.S. consumption binge was fodder for export-led economies everywhere. This was especially the case in Asia, which since the turn of the century has been the world's fastest-growing major region. In search of rapid growth in order to achieve its development and poverty-reduction objectives, developing Asia viewed America's consumption binge as manna from heaven. Consumption-deficient Japan had a similar response, as did large, newly industrialized economies such as Taiwan and Korea.

Indeed, exports provided high-octane fuel for Asia's growth, accounting for more than 45% of pan-Asian GDP in 2007, which was a record and was more than 10 percentage points higher than the share prevailing in the mid-1990s. But this left the region more dependent on external demand than ever before. And with the American consumer — the biggest source of that demand — now in trouble, Asia's export-led growth formula is getting squeezed...

Asia's adjustments should not be surprising. The global boom of 2002 to mid-2007 was an outgrowth of the powerful linkages of globalization. No region benefited more from this connectedness than Asia. These linkages are just as strong on the downside of the global business cycle as they are on the upside. Connectivity is now hitting Asia head-on.
The entire Roach piece is well worth reading as it sets out the global implications of the current US-led slowdown concisely. Meanwhile, Bloomberg has anecdotal evidence that Japan is preparing for an export slowdown next year as Japan Air's cargo flights to LA are being cut almost by half:
Japan Airlines Corp., Asia's most- indebted carrier, will reduce cargo flights to the U.S. as a slowdown in the economy cuts demand, the Nikkei newspaper reported. The airline will end cargo flights between Narita and New York and cut flights to Los Angeles to 10 a week from 19, Nikkei said, without saying where it obtained the information. The reductions will start in January, Nikkei said. The airline cut cargo routes to Atlanta and San Francisco this past January, the newspaper reported.
The prognosis for Asia isn't too rosy when globalization is a one-trick pony whose sole trick is "sell boatloads of stuff to America."

Fun With Math: Guess the 2009 US Budget Deficit

♠ Posted by Emmanuel in at 9/26/2008 09:51:00 AM
Here's a really fun game you can invite your family, friends, and neighbors to play. I call it "How Much More Will Sammy the Beggar Owe in 2009?" Basically, the objective of this game is to guess how much the US will add to its national debt in fiscal year 2009 (October 2008 through September 2009). Needless to say, the US will set astounding new records for outright national profligacy over a one-year period. Even now, political matters are in a state of flux as the mother of all bailouts is still being fought over (although it should be finalized shortly) and Senate Democrats are proposing yet another economic stimulus package. Can the 2009 deficit really come to $1.5 trillion? Even I would be absolutely gobsmacked if it does. Note that the italicized items are not yet finalized at the time of writing. The CBO forecast made before a lot of subprime spit hit the fan called for a record $438B 2009 deficit. Add the other items in and things get pretty interesting in a multiple car crash cum Chernobyl sort of way.

What does it all mean? If you're an acolyte of that renowned economic sage Dick Cheney, absolutely nothing. Remember, "Reagan proved that deficits don't matter." If you aren't, well, these things are a rather heavy cross current and future generations of Americans will have to bear for living like there's no tomorrow.

To get you started on this exciting parlor game, I am furnishing you with a list of considerations you should probably take note of:

(1) The optimists may be right in that a bottoming out of US housing prices is near. Otherwise, count on more troubles as housing-related assets get dragged down further, necessitating yet more bailouts;
(2) Figures reported in the media will of course not represent the ultimate tab to the American taxpayer. For instance, the "$700 billion bailout plan" refers to raising the debt ceiling from $10.6 to $11.3 trillion. However, the last time I checked, the US deficit is "only" $9.788 trillion, Thus, depending on how the final bill is worded, up to a whopping $1.5 trillion can be authorized for mopping up impaired assets;
(3) Some bailout funds have already been spent in 2007 (like perhaps the Bear Stearns $29B), while others will be spent in 2010 and beyond;
(4) It's important to consider how enthusiastic America's suck...I mean honorable creditors will be buying all of Sammy's wonderful Treasuries begotten of subprime wonder and merriment. Last I heard, these creditors and their publics were becoming wary of getting royally shafted by Sammy's rip-off scheme.

One thing you can probably be sure of is that, for political economy reasons, US sovereign debt is unlikely to be downgraded from AAA status over the time period under consideration.

Commentators have been talking about whether this or that financial institution is "too big to fail?" Let me do them one better: since America's basic plan is to borrow more from loaded foreigners such as Middle Easterners and the Chinese, the real question becomes: "Is America too big to fail?"

Will Subprime Crisis Lead to Protectionism?

♠ Posted by Emmanuel in , at 9/25/2008 11:38:00 AM
With commentators often calling the current subprime crisis "the worst economic downturn since the Great Depression," it is hardly surprising that many are warning of a potential outbreak of global trade protectionism akin to the aftermath of the cataclysmic events of 1929. Only yesterday, WTO Director-General Pascal Lamy discussed this very topic, naturally bringing up Messrs. Smoot and Hawley as progenitors of protectionist trade armageddon which led to similar barriers being put up by other countries.

Note, however, that some still dispute the negative effects attributable to the Smoot-Hawley Act. Nonetheless, its passage did usher in a period when sentiment towards trade became more negative around the world. Can the same happen again? Lamy thinks so and warns against it. Here, Lamy addressing an NGO forum perhaps demonstrates a greater WTO willingness to address civil society concerns. I suggest that you read Lamy's short speech where he (of course) suggests that soon-to-restart negotiations should see to it that a Doha deal is in the offing. Here is the introduction:
This year the WTO opens its doors to the public against a background of newspaper headlines heralding a potential Great Depression “Two.” But policy-makers in the United States, who have seen several giant financial institutions sound their alarm bells last week, as well as policy-makers across the globe, are desperately seeking to avoid the series of mis-steps that accentuated the financial crisis of the 1930s.

They are all stressing that lessons from the Great Depression have been learned, and that the many policy mistakes that were associated with it will be avoided. But one of the important lessons of the Great Depression, which we must not forget, is that “protectionism” and economic isolationism do not work. They are policies of the past, which should have no place in our future.

As tempting as it is in moments of crises to give our producers comfort that we are shielding them from competition by shutting our borders to imported goods or services, this course of action must not be pursued. In fact, the infamous Smoot-Hawley Tariff Act of the 1930s that raised US tariffs on over 20,000 imported goods to record levels led to nothing but a trade war between nations. In so doing, it ended up impoverishing us all; proving that protectionism, and beggar-thy-neighbour policies, are a dead-end.

In a financial crisis, and at times of economic distress — in particular at a time of soaring world food prices, what impoverished consumers desperately need is to see their purchasing power enhanced and not reduced. What is needed in times of crises is to enable consumers to purchase more for less. The temptation to shut our borders does exactly the opposite. There is no doubt therefore that the current hurricane that has hit financial markets must not dissuade the international community from pursuing greater economic integration and openness. But in order to be both sustainable and fair, this integration has to be based on rules. And the rule-book needs to be updated regularly.

Whither St. Petersburg, the "Russian Detroit"?

♠ Posted by Emmanuel in , at 9/24/2008 02:51:00 PM
I have been to Detroit and it's not a particularly scenic place. In part, its run-down condition reflects the waning fortunes of America's automotive industry. Not only are automotive sales in America down overall, but those of GM, Ford, and Chrysler more so. However, it may surprise some of you that high gas prices have not dented car sales the world over. Russia, of all places, is a booming automotive market. Aside from the ranks of the nouveau riche who owe their fortunes to Russia's burgeoning exports during a time of rising commodity prices, decades of repression has made Russians clamor for the joys of the open road--although the traffic from Russia to St. Petersburg is often quite bad.

From about zilch in 1991, Russia has become Europe's largest car market, surpassing Germany in the first half of 2008. How times change! Russia is expected to be the world's third largest market by 2012, surpassed only by the US and China. Interestingly, Russia's second city, the rather more scenic St. Petersburg (which I'd love to visit again), is angling to become the "Russian Detroit." Let me rephrase that--Detroit during its heyday. St. Petersburg offers inexpensive but skilled labor, healthy tax breaks, and nearness to major markets--it sounds like a page from the development state playbook. What may set this case apart, though, is a generally healthy level of domestic demand.

Which of the world's automakers have set up shop in St. Petersburg, you ask? So far, try GM, Ford, Toyota. (GM and Ford cars made in Europe are actually quite good compared to their US brethren, though that's another story.) Meanwhile, Nissan and Hyundai will soon open plants in St. Petersburg. Even better yet, with gas prices in Russia comparatively low, hulking monstrosities automakers have trouble selling elsewhere are much in demand in Russia:

For automakers like Ford, GM, Toyota and Nissan, which are struggling to boost sales in saturated home markets, emerging economies represent great opportunities at a challenging time. In Russia, many first-time buyers are strolling into dealerships. While there are 800 vehicles per 1,000 inhabitants in the United States, there are 190 vehicles for every 1,000 Russians.

Unlike customers in the other BRICs -- the acronym for the paramount emerging markets of Brazil, Russia, India and China -- Russians go for the kind of big vehicles that generate big profits for automakers. "It's a big country with long straight roads and big-sized people, so it has many of the preferences of the American market," said Shinichi Sasaki, a senior managing director at Toyota who has worked in Europe.

The only cloud I see on the horizon for St. Petersburg's burgeoning automotive industry--and it's a pretty big one--is foreign investor aversion to Russia given the country's increasing belligerence towards the West. However, it should not be so easy to expropriate facilities producing branded finished goods as opposed to unbranded commodities such as oil and gas, making carmaking a relatively safer endeavor. Though unsurprisingly biased towards the optimistic side, this Russian commentator owning a large auto dealer network suggests the auto boom is here to stay:
In our globalized economy, it's hard not to feel discouraged as we witness one crisis after another on Wall Street. But here in Russia, it's not all doom and gloom. Far from it -- at least as far as the booming Russian market for foreign cars is concerned.

Given the massive problems crippling Detroit, why does Russia's auto market continue to thrive? There are several reasons.

First, a declining stock market primarily affects only those Russians who actively invest in the stock market. Not only is this a very small group -- about 3 percent -- but it is a wealthy group. And its members typically work out of two pockets: one for investing and one for spending. Strong 2008 sales -- up 43 percent from last year -- suggest that this second pocket is still pretty full.

Second, the credit crunch has not had much effect on Russian consumers. Most buyers of foreign cars don't take out loans for their purchases, and the few who do aren't usually put off by occasional hikes in interest rates. Simply put, a 1 percent increase here or there in interest rates doesn't have the same effect in Russia as it does in other markets. In fact, as interest rates have consistently risen over recent years, the percentage of customers buying cars on credit has stayed roughly the same.

Third, the global economic downturn that has shrunk demand for cars in the United States and other developed markets has increased the number and styles of cars available to Russian consumers. Slower sales in developed markets have led to more cars being available for Russia as the number of cars in stock has increased significantly.

For automakers, 2008 is more likely to go down as the year Russia emerged as Europe's largest car market than as the year the world suffered a liquidity crisis.

While much has been made of the distinction between Russian and foreign cars, globalization is unquestionably blurring the lines between national brands. All over Russia, foreign companies are establishing factories and joint ventures, while Russian automakers are increasingly using technologies imported from abroad. Within a few years, consumers will almost certainly look more to the quality and class of a car than to its "nationality."

Whatever happens on Wall Street in the foreseeable future, the Russian auto market should continue to grow. The key to capitalizing on that growth, however, will consist of accurately gauging and effectively responding to another kind of growth -- the growth in the sophistication of Russian consumers.

The $700B Bailout Needs a National Referendum

♠ Posted by Emmanuel in , at 9/24/2008 02:04:00 PM
The (surveyed) people have spoken, and they are unhappy with the $700B bailout plan being assembled in the halls of the Federal Reserve, Treasury, and Congress. This from a recent Bloomberg/LA Times poll:
Americans oppose government rescues of ailing financial companies by a decisive margin...[b]y a margin of 55 percent to 31 percent, Americans say it's not the government's responsibility to bail out private companies with taxpayer dollars, even if their collapse could damage the economy, according to the latest Bloomberg/Los Angeles Times poll.
Note, however, that dissimilar results have been found depending on how the question is phrased. As anyone who has conducted surveys or studied survey design can attest,
many factors can influence the results. For instance:
A poll by the Pew Research Center for the People and the Press, asking a different question, found that Americans, by 57-30 percent, favored government action to save financial companies.

The Pew poll told respondents that the government is ``potentially investing billions to try and keep financial institutions and markets secure'' and asked whether that's the right thing to do. The Bloomberg/Los Angeles Times poll asked whether ``the government should use taxpayers' dollars to rescue ailing private financial firms whose collapse could have adverse effects on the economy and market, or is it not the government's responsibility to bail out private companies with taxpayers' dollars?''
I can see how the phrasing of the Bloomberg/LA Times question may have influenced the results. The term "bail out" is potentially loaded with negative connotations, while mentioning "taxpayers' dollars" frames the question more in terms of respondents bearing the burden, not just the government.

Like Daniel Gross, I believe that a US recession would be good for it and, in turn, the rest of the world. Reducing overconsumption, redressing the trade balance, and making American industries more competitive in world markets should help Americans prepare better for the future as opposed to continuing the status quo of mindless consumerism encouraged by a culpable government. Instead of these endless frantic attempts to forestall a painful episode which is sure to come, the US might as well take things as they come and make the best out of it. Meanwhile, the rest of the world will have to find other sources of final demand instead of relying on the US as consumer of last resort.

Now to the political question. With even politicians like Richard Shelby (rightly) doubting the logic of loading up the country with bazillions more in debt and its dire consequences for the dollar as well as public finances, it'd be sensible to subject this matter to a national referendum. Given that national elections are coming up, the timing is right. Ultimately, the US will be subject to financial pain. Does the bailout reduce this pain in the short-term or increase it in the long-term? Perhaps it's best to...ask the people.

If there were a more appropriate matter to put to a national referendum in America, then I haven't seen it. Then again, a national referendum on the bailout may be too sensible for the folks at the controls.

Sachs and Bono Blog on MDGs @ FT

♠ Posted by Emmanuel in , at 9/24/2008 11:32:00 AM
I sometimes wonder if everyone and his dog has a blog. A few weeks ago, I mentioned the Bill Gates-inspired "Creative Capitalism" site. With world leaders now gathering at the United Nations to discuss progress (or the lack thereof) in meeting the Millennium Development Goals (MDGs) at the midpoint to 2015, the Financial Times has appropriately unveiled the formidable blogging team of Bono and Jeffrey Sachs. I am alternately cheered and dismayed by what they say. But first, let us start with Paul Collier's latest missive against the MDGs in a New York Times op-ed. Needless to say, my thinking is more similar to Collier's than to Sachs / Bono:
A further weakness with the Millennium Development Goals is that they are devoid of strategy; their only remedy is more aid. I am not hostile to aid. I think we should increase it, though given the looming recession in Europe and North America, I doubt we will. But other policies on governance, agriculture, security and trade could be used to potent effect...

International coordination has been, indeed, the great achievement of the Millennium Development Goals; all the major donor countries have bought into them. But they should now be revised so as to focus on the challenge of helping the bottom billion to converge with the rest of mankind — and on a more realistic timescale. We need not just a “Year of the Bottom Billion,” but several decades. This session of the United Nations is an appropriate moment to get started.
On the credit side, Bono at least gives lip service to other factors than just wheedling the West for aid -

BONO: For those of you, the many of you, questioning aid on this site, you’re not wrong to suggest that it’s not the only answer. Of course it’s not. It’s trade, it’s governance, it’s private investment. But aid is critical… ask Germany, ask Ireland. See it as a leg-up, not a hand-out.

I’m not talking about the aid of the 20th century by the way. For too many years, much aid was wasted and ended up redecorating presidential palaces instead of building hospitals. That was our corruption as well as theirs. Handing over billions of dollars to a corrupt dictator because he isn’t a Commie, knowing he will use it to suppress discontent and swell personal bank accounts - that makes you complicit. But, this is a new century, and a new understanding of aid and partnership means that we are starting to see different results.

BONO: I hate talking about aid and, in my experience, so do Africans – they’re entrepreneurial by nature and want our trade more than our aid. But they need seed capital and some start-up infrastructure to get going. Needless to say, it’s hard to do business if you’re dead or dying. As things stand, aid when well spent is a critical source of investment.

The hypocrisy of the "war on terror" and the the US being stingy on aid while planning a $700 billion bailout for wayward financial institution also score points -

SACHS: President Bush’s speech before the United Nations was literally terrifying. He mentioned “terror” (or “terrorists” or “terrorism”) 32 times, “extremists” 7 times, and “tyranny” 4 times. “Millennium Development Goals, “climate change,” and “environment,” did not merit a single reference. “Disease” got 3 mentions, while “poverty” and “education’ each got 2. “Health” got 1. The imbalance in the President’s approach to the world is stunning...

America’s ill-conceived and even worse-implemented “war on terror” has actually stoked terror while leaving neglected the very basic factors – poverty, famine, bulging populations, financial plunder – that have done so much to foment global instability.

SACHS: The UN meetings were abuzz that the US could find $700 billion for a bailout of its corrupt and errant banks but couldn’t find a small fraction of that for the world’s poor and dying. It didn’t make sense to the world community. The puzzlement was all the greater since the very banks being bailed out so generously had awarded themselves more than $30 billion in bonuses early this year, roughly the world’s entire aid budget for 800 million people in sub-Saharan Africa.

Turning to the debit side, it is sad that some things never seem to change. Bono still seems stuck on celebrity culture or "I will talk to my bigwig chums and set things straight" -

BONO: Tough meeting with the Président de la République of France. He’s a tough guy. We like tough guys because they get straight down to business. They don’t waste their time or yours. The French budget is out this Friday and in it we will see if France intends continuing its leadership role on the continent of Africa. In the last few years, French aid has been falling...

The meeting started with the beautiful Carla Bruni, a great ally in our efforts to better our storytelling about the effectiveness of good aid. Both the first lady and the president change the molecular structure of any room they are in - he speeds them up, she calms them down. A great team.

BONO: I’m writing this waiting for the Voice of Africa, Youssou N’Dour...

BONO: Off to meet the head honcho at the EU, President Barroso, now. Let you know tomorrow how I got on. Other things to watch out for this week: Wearing my ONE campaign hat, I should be meeting up with Senator John McCain and Governor Sarah Palin; hoping to see Senator Obama and Senator Joe Biden in the next few weeks.

Alas, it seems these two's talking points invariably return to chastising rich countries for not contributing 0.7% of their output to aid as promised. Instead of hearing about how rich country donor's proceeds have been systematically put to good use to encourage more aid, we get the ol' "shove more money" plea. Regular readers should already know that ODA hasn't been generous in recent years -

SACHS: The laggards in the struggle for the MDGs are not the poor countries or their ostensibly corrupt governments. The laggards are the rich world, so full of promises and high rhetoric and so low on delivery. The MDGs are falling short because of a lack of promised financing to put in place the clinics, schools, roads, power, and other investments needed for their success. Six years ago, the rich countries pledged in Monterrey, Mexico to “make concrete efforts toward the international target of 0.7 per cent of GNP in official development assistance.” Yet the United States stands are 0.16 per cent, Japan at 0.17, Italy at 0.19, Canada at 0.28, Germany at 0.37, and France at 0.39.

SACHS: The U.S. Government willfully ignores, or seems to be unaware, of its own commitments in these areas. After all, the U.S. Government committed in Monterrey, Mexico in March 2002 (with Bush present), to make concrete efforts to reach 0.7 percent of GNP in official development assistance.

To counterbalance things if you are too star-struck by Sachs and Bono devising ways to save Africa, William Easterly has two things for you. First, read how flaws in the formulation of the MDGs make them questionable metrics in "How the MDGs are Unfair to Africa." Second, Easterly has a forthcoming article in the Journal of Economic Literature on "Can the West Save Africa?" Alas, it seems Bono still hasn't found what he's looking for.

UPDATE 1: Naturally, the UN has an MDG blog of its own.

A Kinder, Gentler WTO?

♠ Posted by Emmanuel in , at 9/23/2008 09:10:00 AM
I was searching for something else when this op-ed in India's Financial Express caught my eye about how the "WTO has changed its spots." Unsurprisingly, most of us political science types are less enamored with the WTO than our economist counterparts. Reading the title, I reflexively thought to myself, "just what we need, another economist cheering on the WTO." Imagine the shock I received when I looked at the byline and found that the author was none other than Cambridge's Amrita Narlikar--another IPE type (albeit one who's far more widely known). Oh well, read the op-ed and decide for yourselves whether the new LDC-friendly WTO is in the offing, negotiation paralysis nothwithstanding:
The World Trade Organization has changed. It is a much fairer organisation than the organisation that became the target of the Seattle demonstrations in 1999, and is (at least in some important ways) a much nicer and evolved progeny of the GATT’s. Is it not time that this multilateral body gets the commitment it deserves?

A central critique of the WTO today is that the organisation fails to deliver on fair process. This was a valid criticism of the WTO ten years ago. It is an outdated and irresponsible critique to launch against the organisation today.

Improvements in decision-making and negotiation processes in the WTO are dramatic and far-reaching. The GATT, with its opaque and exclusive decision-making procedures, was labelled the ‘Rich Man’s Club’. Even after the formation of the WTO, the Seattle ministerial conference of 1999 saw riots outside and also a revolution within the organisation as its own members complained of marginalisation from the invitation-only “Green Room” meetings. Indeed, as late as the Cancun ministerial conference of 2003, excessive informality and off-the-cuff decision-making had meant that many developing countries with their small delegations found themselves disadvantaged and unable to negotiate effectively.

Changes in process at the WTO in the aftermath of the Seattle ministerial included improvements in the transparency of its small group meetings. Unlike the much more secretive Green Room meetings of earlier days, these meetings (and their participants) came to be announced in advance. Further, they were framed explicitly as consensus-building consultative meetings rather than decision-making ones. Director General Pascal Lamy deserves special credit for having reinforced the strength of institutional reform. Under his leadership of the organisation, the old core group that led the decision-making process—the so-called “Quad” comprising the EU, US, Canada, and Japan—has come to be replaced by a much more representative grouping that takes the shape of the G4, the “Five Interested Parties” or the Quintet, the G6, and most recently the G7 in the July 2008 talks. Brazil and India, along with the EU and US, have constituted—with consistency—all permutations of this core group.

Moreover, these improvements in the internal transparency of the organisation have been accompanied by unprecedented external transparency. The WTO’s website is to be commended for the richness of the information that it provides to members of the general public. Lamy’s engagement with the NGOs and other stakeholders through his blog and other e-conferences is unprecedented...

Coca-Cola's Huiyuan Bid: Protectionist Payback?

♠ Posted by Emmanuel in , at 9/22/2008 10:25:00 AM
The instances where Chinese firms seeking to buy stakes in Western companies were rebuffed over "national security" concerns are well-known: CNOOC decided not to make a bid for American energy firm Unocal over lawmaker bellyaching. Huawei was discouraged from buying trifling bits of 3Com over the latter handling sensitive defence technologies.

Now, it seems Coca-Cola is testing the waters to see if American protectionism will be returned with its attempted purchase of Huiyuan Juice Company for the sum of $2.4 billion. (Huiyuan is the PRC's largest juice maker.) Something Coca-Cola needs to clear is the newly passed "Anti-Monopoly Law" in which foreign acquisitions of Chinese companies listed in Hong Kong require regulatory approval. The US firm filed just today. While this antitrust law purports to be about preventing the formation of monopolies, some view it as a way to safeguard Chinese firms from purchase by foreigners. Remember, foreigners cannot regularly buy "A" shares (or the majority of stocks) in the Chinese mainland. However, coursing matters through Hong Kong can be a route to get around this limitation, especially as quite a few PRC-based firms raise capital in Hong Kong.

Will Coca-Cola be turned down via the "Anti-Monopoly Law"? We'll soon see as the Chinese Ministry of Commerce will hand down its decision in a months' time. Also, you may laugh about there possibly being "national security" claims against purchasing a juice maker, but don't forget the French case of Danone's "yoghurt protectionism." To each his own protectionist folly.

Reuters has a backgrounder from a few days ago:
Coca-Cola, looking to make inroads into a pure-juice segment of the market it is absent in and shoring up its lead in the overall domestic beverages industry, is paying three times the market price for the Hong Kong-listed Chinese firm.

Some industry experts argue Beijing has no interest in killing a non-sensitive deal but others say a public outcry will have regulators scurrying to protect a beloved national brand.

Chen Yuan, a lawyer at legal firm Linklaters, argued the high-profile acquisition may tweak nationalistic sensibilities but the government is unlikely to kill the deal without good reason, partly because the world is watching...

Donald Straszheim, vice chairman of Roth Capital Partners, was skeptical the deal would be allowed, noting a regulation protecting "famous brands" from foreign acquisition.
Meanwhile, the Times of London mentions the vociferous discussion in China on whether this takeover would injure national pride:
Witness the current uproar in China over Coca-Cola's bid for the Huiyuan Juice Group, dubbed by protesting nationalists a “dragon head enterprise” that it would be “traitorous” to let pass into foreign ownership.
Although I am usually quick to offer an opinion when asked, I am unsure of the outcome of Coca-Cola's bid given today's topsy-turvy economic environment. Will China go into retribution mode for clear past instances of US protectionism or will it play along for now? Stay tuned.

Bilateral Trade Pacts: US / Colombia & EU / Russia

♠ Posted by Emmanuel in ,, at 9/22/2008 09:20:00 AM
Bilateral trade deals look set to multiply exponentially as the Doha round flounders. It goes without saying that if countries didn't find benefits from trade, they wouldn't be so keen on engaging in trade pacts. Commentators such as WTO Director-General Pascal Lamy have noted the proliferation of such deals, and the trend looks like it won't die down anytime soon. Today, though, we look at two deals which are challenged by domestic factors. In the case of US - Colombia, American lawmakers have become increasingly sceptical about trade's benefits. In the case of EU - Russia, the recent conflict between Russia and Georgia may herald a cooling of relations between the West and Russia.

Largely overlooked during this time of America-sourced financial turmoil is that Bush talked about the ongoing crisis while Colombian President Alvaro Uribe was paying the White House a visit. Alongside the usual paeans to the benefits of trade, Bush took pains to mention the strides made by Colombia in meeting environmental and labour standards which the Democratically-controlled US Congress prizes. Plus, like Pervez Musharraf back in the day, Uribe is a full-fledged ally in the war on terra:
Today, President and Mrs. Bush are hosting President Alvaro Uribe of Colombia. Colombia is a strategic ally of the United States, and this visit underscores the deep friendship and extensive cooperation between the United States and Colombia. The two leaders will discuss a range of issues, including their shared commitments to the U.S.-Colombia FTA, reducing violence, and increasing peace and security in Colombia and democracy throughout the region.

President Bush submitted legislation to implement the Colombia FTA to Congress for approval in April 2008, but House Speaker Nancy Pelosi has refused to allow it to come to a vote. Passage of legislation to implement the FTA would demonstrate U.S. support for an important ally and help cement the gains made by President Uribe, who has worked closely with the United States to accommodate concerns, including revising the FTA to include rigorous labor and environmental protections.

* President Uribe is a strong and effective partner in fighting crime and improving safety for labor unionists. Since President Uribe took office in 2002, the Colombian government has reported dramatic reductions in homicides (down 40 percent), kidnappings (83 percent), and terrorist attacks (76 percent). Homicides of labor unionists dropped 80 percent, from 186 in 2002 to 39 in 2007. Since 2002, Colombia has also extradited more than 720 criminal suspects – mostly for drug trafficking – to the United States.

* The U.S.-Colombia FTA will advance our national security. President Uribe's Administration has fought terrorists, demobilized paramilitaries, and stood strong against hostile anti-American states and forces in Latin America. An impressive example of President Uribe's leadership came during July, when members of the Colombian military successfully rescued 15 hostages – including three Americans – held captive by the FARC. It is in America's interest to support Colombia in the face of these threats, and the best way to do so is for Congress to allow a vote on the FTA legislation.
Meanwhile, the delayed dance between the EU and Russia looks set to continue after Russia meets some preconditions set by the EU with regard to the ongoing conflict in Georgia. As Western Europe relies quite a bit on Russian energy, the outcome here carries weight:
The European Union may start talks with Russia on a new trade agreement next month should Russia fulfill its commitments under a plan to end fighting over a breakaway Georgian region, the French premier said.

There are ``no reasons'' why the talks on a new accord shouldn't start in October if Russia honors the so-called Sarkozy- Medvedev plan, French Prime Minister Francois Fillon told a press conference today with his Russian counterpart, Vladimir Putin, in the Black Sea resort of Sochi.

French President Nicolas Sarkozy brokered a peace plan with Russian leader Dmitry Medvedev to end five days of fighting in August after Russian forces entered South Ossetia in response to a Georgian attempt to retake it. The EU suspended talks Sept. 1 on a new Partnership and Cooperation Agreement and Putin said today that the Russian government was ready for new negotiations.

``We are ready to continue this work,'' Putin said. ``It wasn't us who stopped it.''

Russia recognized the independence of South Ossetia and another breakaway Georgian region, Abkhazia, on Aug. 26, a decision Fillon said France disagreed with. Medvedev pledged to remove all Russian troops from Georgian territory within a month of a Sept. 8 accord with Sarkozy, whose country holds the EU's rotating presidency.

Fillon and Putin were in Sochi, the host of the 2014 Winter Olympic Games, for a forum on Russia's investment climate, which has been tarnished by the Georgian conflict and a shareholder spat over BP Plc's Russian venture...

This is a Test of Asia's Emergency System

♠ Posted by Emmanuel in , at 9/21/2008 10:24:00 AM
A decade after the Asian financial crisis, countries in the region now have the (admittedly unwelcome chance) to test whether the preparations they have made during the intervening years have bulked up their defence mechanisms to withstand the "animal spirits" unleashed by periodic dislocations, this time the US-led subprime crisis. Let us begin with South Korea, a country strongly beset the last time around that was forced to borrow from the IMF as lender of last resort. Although its president believes the country's larger firms are now "action-ready" come what may, the traditionally more interwoven role of the "development state" is still there as the government claims that it stands ready to assist smaller firms which may come under duress:
South Korean President Lee Myung Bak urged officials to take ``immediate and active'' steps to protect against fallout from the global credit squeeze, including aid to any small companies facing cash shortages.

``Most recently, the local and overseas financial situation has stabilized,'' Lee was quoted by his spokesman as saying in a meeting with ministers and aides in Seoul today. Still, further unexpected events may arise ``and have a negative impact on the real economy...''

`Larger companies have some reserves but small and medium- sized companies can go bankrupt, even if they post profit, because of a cash shortage,'' Lee said. ``Financial authorities and related institutions should closely review individual companies' status and prepare countermeasures.''
Bloomberg then goes on to discuss Asia's efforts in general to calm matters down. In particular, China and Thailand are mentioned. China is interesting for while it didn't really get affected by the Asian financial crisis with its very capital controls and pegged currency, Thailand did. Thailand, of course, got the contagion a-rolling. Of particular relevance here is the cushion of a whopping $3.3 trillion piled on in reserves by Asian countries exactly to guard against what is happening now. If that weren't enough, there is a system allowing a total of $83 billion in bilateral swaps through the Chiang Mai Initiative should some of the less reserve-endowed in the region suffer from balance of payments problems:
China and Thailand's central bankers said there has been limited fallout for their banks from the U.S. credit crisis that sent Lehman Brothers Holdings Inc. into bankruptcy and wiped $19 trillion from world stocks in the past year.

``There is not much impact on Asia this time because the problems haven't taken place here,'' Bank of Thailand Governor Tarisa Watanagase told reporters today in Bangkok, where she is hosting a meeting of central bankers. ``So far the impact on Thai banks is very little.''

The region's policy makers this week played down concerns that their countries will be subjected to a meltdown similar to that of 1997, saying contagion from the U.S. turmoil is unlikely to infect their financial systems. Asia's key stock index rebounded yesterday from a three-year low as central banks pumped cash into money markets and the U.S. worked on plans to shore up banks and insurers.

``The direct impact of the subprime crisis is currently limited,'' China central bank Deputy Governor Su Ning said at a financial conference today in Shanghai. Still, ``China will be highly alert to the negative effects of unstable global financial markets and decreasing overseas demand.''

The MSCI Asia Pacific index rose 5.5 percent yesterday and Asian currencies, including the South Korean won, Philippine peso and Indonesia rupiah, advanced. The U.S. government announced plans to purge banks of bad assets and crack down on speculators who drove down shares of financial companies...

Central banks in Japan and Australia pumped $113 billion into money markets this week, joining European and U.S. counterparts in supporting the financial system and attempting to revive confidence. Earlier in the week, China cut interest rates for the first time in six years and allowed most banks to set aside less reserves.

``We central bankers need to be watchful and decisive,'' Tarisa said today. ``We have a swap arrangement between us and standby credit to inject liquidity if problems arise.''

Central banks around the region have boosted cooperation to strengthen their financial markets and set up emergency measures to bail out their systems in case of crisis. Japan, South Korea, China and Asean countries are discussing the creation of a pool of $80 billion in Asian foreign-exchange reserves to be tapped in case the nations need to protect currencies.

The reserve pool is an expansion of a current arrangement that only allows for bilateral currency swaps. It is designed to ensure central banks have enough to shield their currencies from speculative attacks like those that depleted the reserves of some countries during the Asian financial crisis a decade ago.

The region has since accumulated more than $3.3 trillion of reserves, about half of the global total.

Thailand, which triggered the Asian financial crisis with the devaluation of its baht in July 1997, has no shortage of capital and the nation's lenders are ``strong and resilient,'' Tarisa said this week.
Despite being far better placed to withstand contagion, I have no doubt that Asia will be affected by the US-led slowdown. Despite the passage of time, these countries have done little to generate more regional demand as opposed to relying on the West (particularly the US) to buy their stuff. Metaphorically speaking, there are fewer folks willing to buy Asia's flat screen TVs when many Americans are, well, flat broke.

Sell Ford and GM to the Chinese (Part 2)

♠ Posted by Emmanuel in , at 9/19/2008 05:55:00 PM
I am quite frankly bemused that the Big Three (or whatever is left of them) are once again badgering old, broke, and tired Uncle Sam for moolah. The current mortgage mess is dredging up endless mentions of the Chrysler bailout of so long ago. It reminds that, in nearly three decades, Detroit's fortunes have gone nowhere but down. I do not need to elaborate on the following points as they should be self-evident to any reasonable, unbiased observer:

(1) That the automakers are now billing themselves as environmental champions keen on high fuel efficiency and alternative power sources is bunk. For starters, they have been combating tighter emission regulations for years. Had they started selling green vehicles before gas prices spiralled upwards, they wouldn't be in as much of a bind as they now are in. Years of selling monsters trucks with poor mileage that can't be moved off dealer's lots nowadays is testament to this. The "American Prius" is nowhere to be found in dealers' showrooms. And now politicians are saying that these same automakers will lead the charge to an energy-efficient future? Give me a break.

(2) Political pandering--especially in key swing states with large auto manufacuring presences--is largely the reason why politicians aren't bickering too much about facilitating another bailout. Ladling pork and vote-getting go hand in hand. Now more so than ever with the 2008 elections looming large.

(3) One of the complaints these automakers have expressed is that credit is not easy to obtain ever since their ratings were downgraded to junk. Therefore, they need to obtain government-sponsored funding. Again, what kind of capitalist economy is this where credit rationing is done based not on creditworthiness but rather political expediency? Who is it who said from each according to his abilities, to each according to his needs? American automaking is becoming more like a communist enterprise than anything remotely capitalist. Make crappy products few want to buy and be rewarded for it: sounds like the halycon days...of the Soviet Union.

(4) At heart, what we have here is yet another American industry which cannot cut it in its own backyard. The US airline industry is known worldwide for its substandard service; it's able to cadge bucks off Uncle Sam for "national security" reasons. Can automakers make the same (dubious) claim? Sammy's finances just keep getting worse. Airlines...automakers...banks... the supplicants lined up at the door of the biggest supplicant of them all--Sammy the Beggar-- seems endless.

(5) Is it just me or are "private equity" workouts not supposed to be at taxpayers' expense? Isn't sorting matters out in private the whole reason behind purchases like that of Chrysler by Cerberus?

As I've said before, the solution to the automakers' woes is staring them in the face: Sammy the Beggar keeps rattling his cup in front of Mao the Multibillionaire (China). Detroit and the politicians should recognize the writing on the wall: for the benefit of all concerned, it's better to sell Ford and GM to the Chinese. The logic is impeccable:

(a) Protectionism and China-bashing will of course come to the fore if the US automakers and Chinese ones enter talks about, say, Chery buying Ford or GM. Nevertheless, if Detroit wants to keep thousands of auto jobs, it seems the one with the really deep pockets are the Chinese, not Sammy. Logically, being employed by the Chinese seems to be a better proposition than being unemployed. As someone once said, don't offend the Chinese, the real owners of America.

(b) More importantly, what would the Chinese gain from buying the likes of Ford and GM? They would gain recognized brands and established dealerships. Unlike the Japanese (too many to mention) and the Koreans (Hyundai and Samsung), the Chinese have not been enable to establish brands with global cachet (at least so far). These the automakers can still provide a semblance of in America--still the world's largest auto market--although things may get worse with delay.

(c) Chinese auto marketing is, well, kind of cheesy. Especially troubling is their seeming inability to come up with respectable car names. Even the Big Three can teach them a thing or two about these things. Don't believe me? Go see for yourselves.

America must learn to swallow its pride and recognize these manufacturing dinosaurs have seen better days. If the automakers want someone with deep pockets to partner with who are able to throw wads of cash at them, then they will come from the Middle Kingdom. While Detroit can still offer something of value, they better get to it quickly. The only question is, will the Chinese want them, baby?

My Big Mouth: Is Full Nationalization the US Plan?

♠ Posted by Emmanuel in at 9/19/2008 05:50:00 PM

Bonehead here may live to regret saying this just two posts back: The US can try to bail out the whole damn banking system if it wants. The real question, though, is the above: But who will bail out America? If you want further proof of the unlimited amount of fear attending to the markets at the current time, an as-yet undeveloped plan to mop up toxic securities from the US financial system caused the DJIA to jump 400+ points yesterday and perhaps the same amount today. Berpaulosi (see picture) to the rescue, eh? You'd think that most commentators would have learned their lesson by now, but this latest Jah comes down from the mountain story is not fooling me. Why? Let us count the ways:

(1) In Paulson's most recent statement, this latest initiative involves Fannie Mae and Freddie Mac purchasing boatloads more mortgage-backed securities. Wasn't it a bloated portfolio which helped lead to them getting into such a mess in the first place? With private sources of housing finance drying up, making the US even more of a monopoly-like provider is not likely to help. Of course, I am assuming that home prices have further to sink--no stretch of the imagination is required there. Tell me: how does guaranteeing even more depreciating assets help Fannie and Freddie? Said Paulson: The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. That's really great and everything, but isn't Paulson setting them up to buy more illiquid mortgage assets (MBS, anyone?) that WILL lose value as the housing correction proceeds?

(2) Subprime mortgages gone bad are just the tip of the iceberg. When the whole iceberg reeks, ring-fencing the tip won't do you any good when all else is also going awry. For convenience's sake, Paulson seems to suggest that this problem is confined to subprime Although subprime borrowers were the first to feel the pain since they were most vulnerable to a housing-led slump, increasingly insolvent, bankrupt and/or foreclosed American households will ensure the cascading of troubles into other forms of debt. You name it: credit card, automobile, student loans, etc. Thus, mopping up subprime-related securities alone will not do the trick. Unless the US government can miraculously (a) resurrect home price values, (b) wipe clear trillions worth of American household debt and (c) increase stagnant incomes which have been flat since the start of the millennium, call me unconvinced.

(3) Why would making Uncle Sam more indebted than he is now improve matters for the US? Not only will doing so not change the fundamental picture in (2), but it will also do little to shore up the confidence of America's increasingly wary creditors. I initially thought estimates that this mess would cost the US government up to $2 trillion rather high, but it appears my view needs revision. The dollar will get a long, hard beating in years to come, "special FX" notwithstanding.

Bottom line: If you think the US government is your knight in shining armour, you are losing your mind. The magnitude of America's problems will not be solved by an entity that has so far demonstrated little ability in helping avert a crisis partly of its own making. Garbage in, garbage out.

The World Bank's Remittance Comparison Site

♠ Posted by Emmanuel in , at 9/18/2008 02:20:00 PM
Workers' remittances are big money: in 2007, the World Bank estimates that $317 billion was sent internationally as remittance flows. Given the seeming inevitability of further migration, this amount should increase even further. Those with an interest in migration should welcome the news that the World Bank now has a new website comparing the rates for sending remittances internationally in 120 common North to South corridors. In remittance-speak, a corridor is simply a country pairing such as Italy-Serbia or US-Ecuador. The World Bank site complements the UK Department for International Development (DfID) site, which also makes price comparisons among different remittance providers. The World Bank's effort cites the following as reasons for putting up their webpage entitled "Remittance Prices Worldwide":
Research and publication of remittance pricing worldwide will serve four important purposes:
  • First, updated periodically, this database will provide a benchmark proxy by which to measure improvements in transparency, efficiency, and competition within remittance corridors. Thus, the impact of projects designed to enhance these market characteristics will be measurable.
  • Second, a streamlined database will allow for comparisons of markets across countries and regions. Regions/corridors in which markets are working well can be studied and inform reform efforts elsewhere.
  • Third, simply the act of publishing this database may serve to reduce remittance transfer prices. Publication of prices in corridors in which they are high can bring government and public pressure to bear on companies to reduce their fees and other charges. An example of this has been the case of Latin America, where publication of remittance pricing was a factor in the reduction of total costs from 15%, on average, in the region in 2000, to 5.6% in 2006.
  • Finally, the database may help consumers to better understand their local remittance market and inform their decisions regarding money transfer products. The utility of this function would be improved by increasing the frequency of updates after the first year.
Visiting is still very much worthwhile for it links directly to the remittance services whose rates are being compared. However, this DfID site tends to have more information for corridors involving the UK as the sending country as you would expect. Moreover, the data presented does not indicate "all-in" fees as a percentage of the amount sent.

There are a variety of providers now competing for the business still dominated by big operators such as Western Union and MoneyGram in certain corridors. For migrants' welfare, this sort of competition is good as it lowers the costs of sending money home. Hopefully, efforts such as these can help migrants sort out which are the most cost-effective means of sending home remittances. Of course, Internet access and computer literacy are prerequisites for taking advantage of these services--or tech savvy relatives receiving remittances can also use them to suggest to their emigres better ways of sending remittances.

There are all sorts of ways of sending remittances nowadays that promise to lower charges that migrants bear. I refer you to a (prize-winning!) International Finance Corporation / Financial Times submission by yours truly comparing the advantages and disadvantages of various technologies such as informal channels, banks, money transfer operators, prepaid cards, the Internet, and via cell phones. Happy reading...

Dead Ducks IV: But Who Will Bail Out America?

♠ Posted by Emmanuel in at 9/17/2008 06:00:00 PM
The picture here depicts insurance policy holders in AIG's Singaporean subsidiary taking whatever they can from the stumbling institution. What can I say? These Singaporeans are well-advised to cut their losses to AIG given who owns it now--the US government. Given America's bludgeoning deficits, can you blame these Singaporeans if they lack confidence in Uncle Sam's financial management skills? As Nouriel Roubini intones, the United States cannot indefinitely continue bailing out failing financial institutions lest it become insolvent itself. In effect, American shareholders are being made to foot an open tab without clear limits:
This latest action on AIG follows a variety of many other policy actions that imply a massive - and often flawed - government intervention in the financial markets and the economy: the bailout of the Bear Stearns creditors; the bailout of Fannie and Freddie; the use of the Fed balance sheet (hundreds of billions of safe US Treasuries swapped for junk toxic illiquid private securities); the use of the other GSEs (the Federal Home Loan Bank system) to provide hundreds of billions of dollars of “liquidity” to distressed, illiquid and insolvent mortgage lenders; the use of the SEC to manipulate the stock market (restrictions on short sales); the use of the US Treasury to manipulate the mortgage market (Treasury will now for the first time outright buy agency MBS to manipulate and prop up this market); the creation of a whole host of new bailout facilities (TAF, TSLF, PDCF) to prop and rescue banks and, for the first time since the Great Depression, to bail out non-bank financial institutions; the recent extension of the collateral available for the TSLF and PDCF facilities to a much wider range of toxic securities including equities and thus allowing the Fed to effectively manipulate even the stock market; and a whole range of other executive and legislative actions (including the recent bill to provide a public guarantee to mortgages for banks willing to reduce their face value).
The US Treasury has just announced that it will mount an auction to replenish the Federal Reserve's balance sheet, damaged as it has been by mopping up the financial system's variegated detritus in exchange for T-bills. So, it will soon auction $40 billion worth of 35-day (short-term) bills. Notably, Bloomberg implies $263 billion worth of Federal Reserve "investment" in assorted assets of dubious worth through the assorted facilities mentioned earlier:
Fed holdings of Treasury securities have fallen to $478 billion as of Sept. 10, from $741 billion at the beginning of the year, as the central bank has made room on its balance sheet for the new lending facilities.
And there is more in store. As I said, it's an open tab at taxpayers' expense:
Between the $29 billion the Fed pledged to swing the Bear Stearns sale to JPMorgan in March, $100 billion apiece to rescue mortgage finance firms Fannie Mae and Freddie Mac, up to $300 billion for the Federal Housing Authority, Tuesday's $85 billion loan to insurer AIG and various other rescue deals and loans, taxpayers are potentially on the hook for more than $900 billion.
America's deficits were already huge without having to account for these assorted bailouts. A country that already relies on the kindness of strangers to keep it afloat can only resort to borrowing even more in the event of further valiant but wrongheaded and ultimately unsuccessful attempts to salvage a subprime financial system. Given that foreigners are becoming warier of investing in America, will aversion increase in light of current events? The US can try to bail out the whole damn banking system if it wants. The real question, though, is the above: But who will bail out America?

Is there no limit to the amount of handouts the US government will give? Reuters now reports that Detroit's Not-So-Big Three have successfully petitioned the government to lend them $25 billion in a sweetheart deal. If you recall, borrowing costs for GM and Ford went through the roof when their debt was downgraded to junk. Voila! Sammy to the rescue

UPDATE 2: Ken Rogoff has a new op-ed out in the Financial Times which appeared after this posting that suggests his thinking is similar (HT: Trade Diversion). First, the US has already spent between $200-300B on subprime-related activities. Second, the ultimate tab should amount to about a trillion (if not more), necessitating a foreign "bailout" of Uncle Sam. Third, it is odd that the dollar has been strengthening, although I must point out the euro staged a strong rally yesterday along with gold.

Dead Ducks III: Over at the Securitization Lobby...

♠ Posted by Emmanuel in at 9/17/2008 04:43:00 PM
Believe it or not, there is an industry group championing the spread of asset securitization. In this day and age of housing contagion, I suppose that the American Securitization Forum (ASF) would get more members if it were the "Root Canal Fun Society" or the "Gary Glitter Kiddie Klub." It seems no one wants a piece of subprime.

A few months ago, I highlighted the rich symbolism of the ASF holding its annual conference in Las Vegas, of all places. This was not apt as the securitization of subprime mortgages and related detritus has played a large part in the fiasco now roiling US and global financial markets. First, Las Vegas is one of the epicentres of the subprime fallout; having risen so much so quickly, home prices in the area now have much room to fall. Second, holding a meeting in gambling capital of the US is not particularly encouraging to those you'd want to market securitized assets as safe investments. Third, Las Vegas is well-known for its fakeries of famous landmarks. In reality, many mistook securitization of subprime loans for real progress, but how wrong they were. Truly, it is "casino capitalism."

Given the rather poor public image of securitized products, the ASF is now mounting a campaign to clean up their image. It has launched the catchily-titled Residential Securitization Transparency and Reporting initiative or (get it?) Project RESTART. The gist of the project is that securitization itself is not flawed. Rather, better transparency regarding the composition of securitized assets and better, more timely reporting should assuage investor concerns. Do you buy it? The ASF's future probably hinges on the response:

On July 16, the American Securitization Forum (“ASF”) announced the public launch of ASF’s Project on Residential Securitization Transparency and Reporting (“ASF Project RESTART” or “Project”) to restore investor confidence in mortgage and asset-backed securities. Restoring this confidence and thereby restoring over time institutional investor capital to the securitization markets should ultimately increase the supply and lower the cost of mortgage and consumer credit in America. The Project has sought to identify areas of improvement in the process of securitization and refashion, in a comprehensive and integrated format, the critical aspects of securitization with market-based solutions and expectations. Each of the Project’s phases has been sequenced to be developed and released for comment throughout the remainder of 2008 for implementation at specific recommended times in 2009. Although the initial focus of the Project has been on the private-label residential mortgage-backed securities (“RMBS”) market, similar efforts are expected to be pursued in other major asset classes such as student loan, credit card and automobile securitizations.

In addition to announcing the broad direction of each of the phases of Project RESTART, the ASF has also released the first major deliverable of the Project—a request for comment (“RFC”) on granular recommendations of an ASF RMBS Disclosure Package. Although principle-based topics of transparency, disclosure and diligence have played a critical role in the Project’s discussions over the course of the past year, the request for comment on the ASF RMBS Disclosure Package included in this document reflects the Project’s intense focus on developing specific and detailed market standards and practices that, through market-imposed incentives, will likely result in widespread implementation by applicable industry participants.