Kim Jong-il Revisited: R-O-C-K in DPRK

♠ Posted by Emmanuel in at 2/27/2009 11:03:00 AM

We often forget that North and South Korea are officially still at war. However, given the DPRK leader's legendary hairdo, it may be appropriate to speak not of "the fog of war" but "the fog of hair." The goings-on in the DPRK are famously opaque; hence, articles such as these:
Against this backdrop of daily stories are other indications of the Hermit Kingdom opening up, such as the Kaesong Industrial Complex featured in a slick video on the official website touting economic cooperation among the Koreas. In his inimitable way, Dear Leader is asking that you invest in North Korea [1, 2]. Optimistically, the website speaks of becoming the "most important hub for trading in North East Asia." Notably, while the webpage discusses reasons why this will become so, it does not elaborate on the claim about having the lowest labor cost in Asia. Once more, will North Korea's regular bellicose mutterings be diluted by the civilizing forces of commerce?

Certainly, economic integration with the rest of the world should dispel images imparted by hyperventilating news articles. Plus, Kim Jong-il should be less subject to becoming comedian's fodder as in the video above (it makes me happy that some people have too much free time; my minor nit to pick is that Danny Cho's hair is insufficiently bouffant). What if Kim actually started a YouTube mini-site promoting North Korea minus the 160-page "brief history" that passes for his biography? If you think Al Gore and Barack Obama have problems discussing invention, get a load of this guy. Nevertheless, the cult of personality shtick is getting old. Heck, even Mahmoud Ahmadinejad is a blogger just like me, albeit far more famous. For how much longer can Kim give the world the ol' run-around?

IFIs to Give Eastern Europe $31.2B

♠ Posted by Emmanuel in , at 2/27/2009 09:45:00 AM
This post is pretty much self-explanatory as the events which led to it are obvious. During the Asian financial crisis, many affected countries decided to borrow in other currencies such as the US dollar and Japanese yen to take advantage of lower interest rates abroad. For one reason or another, Eastern European countries unwisely put off adoption of the euro during better times. Now that the world economy is souring, many of these countries are faced with the usual difficultly of paying off foreign loans when exports are down and their currencies have depreciated because, well, investors feel safer holding euro denominated assets (or Swiss francs to a lesser extent). Remember that line about those not learning from history being doomed to repeat it? Some people never learn. From MarketWatch:
Three multinational institutions issued a joint pledge Friday to provide up to 24.5 billion euros ($31.2 billion) to support the banking sector in Eastern Europe and to fund business loans.

The move by the World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank comes as Eastern European countries struggle to meet massive, foreign-denominated debt obligations. The International Monetary Fund has already provided loans to Latvia, Hungary, Serbia, Ukraine and Belarus.
Formerly robust inflows of cash have dried up amid the global economic crisis, and the region's currencies have come under heavy pressure -- a situation some economists see as a potential repeat of the Asian financial crisis of the 1990s.

Investors have grown increasingly concerned in recent days about the exposure of Western European corporations, including banks, to fragile Eastern European economies. The vulnerability of Western banks, particularly those based in Austria and Sweden, was spotlighted by ratings agency Moody's Investors Service last week.
"This is a time for Europe to come together to ensure that the achievements of the last 20 years are not lost because of an economic crisis that is rapidly turning into a human crisis," said World Bank President Robert Zoellick, according to a statement from that body.

The three organizations, the largest multilateral investors and lenders in Eastern Europe, said the package is designed to support lending to the real economy through private banking groups. Support will include equity and debt finance, credit lines and political-risk insurance.

Under the plan, the European Investment Bank is to provide about 11 billion euros in lending to small and midsize businesses in the central, eastern and southern parts of Europe. Some 5.7 billion euros are available for "rapid disbursement," with an additional 2.8 billion euros set for approval by the end of April and further funds expected to follow, the bank said.

Meanwhile, the European Bank for Reconstruction and Development has committed to provide up to 6 billion euros for the financial sector in 2009 and 2010 through equity and debt finance, loans to banks and directly to small and medium-size businesses and trade finance.

The World Bank is to provide about 7.5 billion euros in support.
Speaking of which, also visit the World Bank site. World Bank President Bob Zoellick reckons Eastern European banks will need $120 billion to see them through. The EBRD and IMF have more on this joint action, too.

Reflections on Obama's Projected $1.75T Deficit

♠ Posted by Emmanuel in at 2/26/2009 01:19:00 PM
News of the Obama administration projecting a $1.75 trillion deficit in 2009 comes as no surprise to anyone. Some thoughts:
  1. We may be reaching the upper end of estimates in our favorite parlor game, "How much more will Sammy the Beggar owe in 2009?" I say this because the Bush administration routinely overshot the mark in making these estimates. The "logic" is that the executive can subsequently claim, "See? Our fiscal responsibility ensured that we didn't run a deficit as high us our estimates." Nevertheless, outdoing the debt fetishist Bush would be some achievement;
  2. The "special FX" of dollar strength as the US gets ready to print money like mad is becoming more pronounced. For how long can repatriation flows buoy this piece of junk? Yes, Virginia, markets can be illogical, insensible, and downright delusional;
  3. Obama keeps talking of "hard choices." How about raising personal income tax rates across the board to pay for this spending spree? He offers no change, just bigger deficits. History may well regard the Obama years as a continuation of the Bush untax-and-spend ones;
  4. America is the global poster boy for how not to run a country. What a shining example of capitalist liberal democracy. Welcome to Blagojevichland; it reeks, baby, it reeks.

Volcker Tells Grandson Truth About Financial WMD

♠ Posted by Emmanuel in , at 2/26/2009 07:55:00 AM
In the course of maintaining this blog, I've subscribed to countless newsletters. Although most are quite interesting, their sheer volume has led me to prune my Inbox with extreme prejudice. Fortunately, though, I was about to zap a recent entry from John Mauldin's newsletter (highly recommended, BTW; you can subscribe here) when I caught sight of its title about "Saving Capitalist Banking and a Speech by Paul Volcker." The latter contained this very interesting excerpt concerning the former Fed chairman's views about his quant grandson's choice of profession:
Compensation practices had gotten totally out of hand and spurred financial people to aim for a lot of short-term money without worrying about the eventual consequences. And then there was this obscure financial engineering that none of them understood, but all their mathematical experts were telling them to trust. These two things carried us over the brink.

One of the saddest days of my life was when my grandson – and he's a particularly brilliant grandson – went to college. He was good at mathematics. And after he had been at college for a year or two I asked him what he wanted to do when he grew up. He said, "I want to be a financial engineer." My heart sank. Why was he going to waste his life on this profession?

A year or so ago, my daughter had seen something in the paper, some disparaging remarks I had made about financial engineering. She sent it to my grandson, who normally didn't communicate with me very much. He sent me an email, "Grandpa, don't blame it on us! We were just following the orders we were getting from our bosses." The only thing I could do was send him back an email, "I will not accept the Nuremberg excuse."
Maybe I should invoke Godwin's Law here, but the comparison is apt in some respects: Hitler's acolytes spread military mayhem across the globe, just as financial engineering's acolytes spread financial mayhem across the globe. Both are now claiming that they were "just following orders."

One of the admirable things about Americans is their willingness to let their own relatives hang out to dry if they did wrong. (There are exceptions, like the Bush family.) Especially in Catholic cultures, there's a prevalence of "amoral familism"--a perversion of filial concern. Basically, it involves an attitude of "my family, right or wrong." Dr. Volcker shows the correct example in telling it like it is. He never did like financial WMD for reasons we are now becoming painfully aware of. That his grandson packaged financial WMD doesn't change his opinion one iota. I like to contrast this with pointless financial services industry bellyaching. It's a good lesson in business ethics, methinks; let Paul Volcker show us the way.

Black Swan Guy Blesses Subprime Solution du Jour

♠ Posted by Emmanuel in at 2/25/2009 01:09:00 PM
There's a new entity in town that I am now backing concerning this subprime business. You won't read about it from Nouriel Roubini or the Baseline Scenario just yet for the simple reason that it hasn't really been attempted. A few posts ago, I briefly discussed Richard Murphy's solution for the UK involving the separation of the system for facilitating payments from the banks that are currently making a ham of things due to activities largely unrelated to processing day-to-day financial transactions. As I've said, while the details need to be worked out, this would be the ideal solution for dispelling the "moral hazard" of banks taking in more risk than warranted because no 21st century economy can function properly without a payments handling system.

While visiting the Financial Times site. I came across a piece by Nassim Nicholas Taleb of The Black Swan fame. Basically, he prescribes the very same thing Murphy is suggesting:
However, when it comes to banks and other “too big to fail” entities, the problem is severe: we taxpayers in our respective countries are funding these global monsters and are coughing up money for mistakes made by bankers who retain their bonuses and are hijacking us because, as we are discovering (a little late), banking is a utility and we need them to clean up their mess. We, in fact, are the seller of that free option [in which profits are kept private but losses are made public]. We should claim it back...

This is prompting me to call for the nationalisation of the utility part of banking as the only solution in which society does not grant individuals free options to look after its risks.
Nice idea, but you're not the first to it, Mr. Taleb. Here, I must point out the difference between nationalizing the banks (the Swedish solution) and nationalizing the payments handling mechanism (the Murphy solution). The former solution leaves shareholders on the hook depending on the price the government can command when eventually taking nationalized banks private again and the accurate valuation of impaired assets. The latter solution makes it possible to decouple the fate of the banks from the essential payments handling mechanism. Making the transaction network public allows governments to do away with the "financial blackmail" banks are currently invoking "in the public interest."

Bill Gross concurs that neither forced nationalization nor drastic haircuts are bound to inspire investor confidence. Plus, he doesn't believe the scale of Sweden's financial services industry to be remotely comparable to that of America. For reasons I've already given, detaching the payments handling mechanism appears to be the more practical and feasible solution. Swedish-style nationalization is so 2007, dahling.

Obamanite Carmageddon: Of Bailouts & Invention

♠ Posted by Emmanuel in at 2/25/2009 11:26:00 AM
For all the hullabaloo it raised, Al Gore was misquoted by his opponents for political purposes when what he intended to say was that he supported funding for the Internet. He did not really mean that he "invented the Internet." Fast-forward to 2009 and we have a similar controversy. I watched the US President's address to the joint session of Congress with interest. One of the things I was looking out for was mention of how he would deal with problematic automakers GM and Chrysler. Together, they are reportedly about to ask Washington for $21.6 billion more in aid on top of the $17.4B they've already been given. Unfortunately, what little Obama discussed about the automakers is worse than enlightening; he was downright misleading. This from the remarks posted on the White House site:
As for our auto industry, everyone recognizes that years of bad decision-making and a global recession have pushed our automakers to the brink. We should not, and will not, protect them from their own bad practices. But we are committed to the goal of a re-tooled, re-imagined auto industry that can compete and win. Millions of jobs depend on it. Scores of communities depend on it. And I believe the nation that invented the automobile cannot walk away from it.

None of this will come without cost, nor will it be easy. But this is America. We don’t do what’s easy. We do what is necessary to move this country forward.
Despite the posturing, the operative phrase is "none of this will come without cost." Obama is, IMHO, preparing the public for money to be thrown down a bottomless money pit alike that extended to the banks. Before you object, also notice the "scores of communities" and the most problematic statement concerning "the nation that invented the automobile cannot walk away from it." While patriotic puffery is to be expected from these kinds of events, the latter statement is troubling. Despite still-ongoing controversies over what constitutes an automobile--does a steam-powered vehicle qualify, etc--you will be hard-pressed to find an account of America inventing the automobile. The best US claim I can find is of Oliver Evans patenting a design for a steam carriage design in 1789, and hardly anyone cites him as the "father of the automobile."

Most accounts cite Karl Benz, the legendary German engineer whose name still graces one of if not the world's most recognizable nameplate for luxury cars, Mercedes-Benz. It's a fairly inconsequential observation, but it does make you wonder what else fanciful stories the current administration will conjure to make the case for unprecedented deficit spending. What's next, America invented porn?

Going All In: US and EU Tussle Over Cybergaming

♠ Posted by Emmanuel in , at 2/24/2009 12:53:00 PM
This is probably the first and last time I'll feature something from an outlet called Poker News Daily. For obvious reasons, though, I have found consistently informative coverage of the current state online gaming regulation in the US from these sites. Before I get to that, a bit of history. The 2006 SAFE Port Act was crafted largely in response to security concerns that terrorists may load US-bound cargo with explosive material or the like. At the last minute, the Unlawful Internet Gaming (UIGEA) was tacked on as a largely unrelated measure by the then-Republican majority. Basically, Internet gaming Stateside by offshore gaming companies came to an abrupt halt after the SAFE Port Act was signed into law by President Bush.

For many reasons, UIGEA does not pass muster, the obvious one being that it has opened up the US to potentially costly complaints from trading partners, the most notable being Antigua and Barbuda thus far. Of course, their case is just small fry compared to what may come next. Europe-based firms including the ironically named Ladbrokes have been applying pressure on the US to get rid of this reeking piece of legislation. Less masochistic Democrat Barney Frank has been pushing to clarify UIGEA to make it conform with WTO law, although the current financial crisis has diverted attention from this matter. However, expect the US to pay it more attention as the EU lines up the Land of the Free in its crosshairs. As with Antigua and Barbuda, it will be like shooting ducks in a barrel if the US doesn't change its wretched ways.

From Poker News Daily (I can't believe I wrote that):
A spokesperson for Frank told Reuters that the Congressman will be introducing “legislation to repeal the UIGEA” next month [in March]. Many in the industry have been speculating as to what form the new internet gambling legislation would take. During the previous Congressional session, Frank introduced HR 2046, the Internet Gambling Regulation and Enforcement Act. The bill, which was introduced on April 30th, 2007, called for a complete licensing and regulatory framework for internet gambling in the United States. It garnered 48 co-sponsors, but did not see time on the House floor.

At the close of 2008, HR 6870, which was introduced by Frank and co-sponsored by Congressman Peter King (R-NY), was approved by the House Financial Services Committee by a 30-19 vote. However, the September vote was followed immediately by the collapse on Wall Street, which diverted attention away from internet gambling. HR 6870 would have clarified what is legal and illegal under the UIGEA, a question many banks will now face when compliance is due in December.

The enactment of the UIGEA also prompted an investigation by the European Commission into potential violations of World Trade Organization (WTO) obligations by the United States as a result of its stance towards internet gambling. A separate Reuters article revealed that the Commission is likely to recommend that the WTO act next month. However, the report added, “Sources said the E.U. executive, which oversees trade policy for the 27-nation bloc, would try to find a solution with the new U.S. government before taking any case to the global trade watchdog.”

In September, trade officials from the European Union traveled to the United States on a fact-finding mission in order to determine whether WTO obligations were being trampled on. The complaint to the Commission was brought by the Remote Gambling Association (RGA). The organization’s membership includes 888 and Party Gaming, which are both publicly-traded companies on the London Stock Exchange (under the symbols “888″ and “PRTY,” respectively). Upon the passage of the UIGEA, their online poker sites were forced to abandon the U.S. market out of deference to shareholders...

The industry will now wait and see what the text of Frank’s bill will include. Although in the September mark-up hearing of HR 6870 Frank declared that he seeks to repeal the UIGEA entirely, many have speculated that a poker-only bill may take shape during this Congressional session. In 2007, Congressman Robert Wexler (D-FL) introduced HR 2610, the Skill Game Protection Act, which exempted poker, mah jong, bridge, and other player versus player games from all existing federal legislation, including the Wire Act of 1961 and the UIGEA.
Let my people go; let the wheels of fortune spin once more in American cyberspace.

Deliver Us from Evil: ASEAN+3 Ups Chiang Mai

♠ Posted by Emmanuel in ,,,, at 2/22/2009 01:03:00 PM
Any number of Asian economies are feeling the pinch as the global economic slowdown wends its way across the globe. Featuring many economies highly reliant on exports, East Asia is vulnerable to slowdowns in demand elsewhere. Importantly, these countries still bear memories of the trauma inflicted by the IMF at the height of its Washington Consensus phase involving liberalization, privatization, and deregulation. During that crisis, the US was keen on shooting down any incipient Asian economic cooperation as it wanted to maintain influence in the region. Somewhat famously, the ever-controversial Larry Summers went ballistic when the Japanese proposed an Asian Monetary Fund to shield fellow Asian countries from the IMF's harsh austerity measures. He awoke then-Japanese Finance Ministry bigwig Eisuke Sakakibara (known in financial circles as "Mr. Yen") late at night and yelled "I thought you were my friend!"

Nowadays, of course, the Great White Master cannot poke his nose so menacingly into others' affairs as the US embarks on an orgy of deliberalization, nationalization, and reregulation. As I've said, in the hypocrite's game called geopolitics, the Washington Consensus was for everyone else except Washington itself. Which brings me to today's story. Bloomberg reports that ASEAN+3 (the +3 being China, Japan, and South Korea) have drawn up plans to expand pooled reserves to $120 billion from $80B. Do note that this will be a pooled fund, not just a series of bilateral swaps alike the Chiang Mai Initiative:
Japan, China, South Korea and 10 Southeast Asian nations agreed to form a $120 billion pool of foreign-exchange reserves that can be used by countries to defend their currencies amid the deepening global recession.

The amount is 50 percent more than the $80 billion proposed last May, and an expansion of the current arrangement called the Chiang Mai Initiative that allows only bilateral currency swaps. The nations’ finance ministers and government officials jointly announced the decision at a meeting in Phuket, Thailand, today.

“The pool will shore up confidence and provide support for these nations in any kind of emergency,” said Alvin Liew, an economist at Standard Chartered Plc in Singapore. “We cannot rule out that some countries will need to tap the fund in this crisis.”

Many Asian currencies have weakened in the past year, threatening to undermine regional stability, as fallout from the global credit crunch ripples through their export-dependent economies. The fund is aimed at ensuring central banks have enough to shield their currencies from speculative attacks such as those that depleted the reserves of Indonesia, Thailand and South Korea during the 1997-1998 financial crisis...

Japan, China and South Korea will provide about 80 percent of the currency pool with the 10 Asean members contributing the remainder, the statement said, in line with last year’s proposal. How much each country will contribute is still under discussion and no date was set for completion of the new arrangement.
Don't expect Larry Summers circa 2009 to be yelling over the phone about this. But will it be enough to deliver the region from further turmoil?

Largest Swiss Party: Let's Kick US Hiney Over UBS

♠ Posted by Emmanuel in at 2/22/2009 10:51:00 AM
So it had come to pass: I have previously discussed various industrialized countries bearing down on tax havens of every sort as times get tough and state revenues dwindle. At the moment, the US is waging jihad against Switzerland's standard bearer, UBS. Having applied a $780 million fine on UBS and obtained cooperation from Swiss authorities to fork over details about American tax dodgers, America is now going after what it believes are $14.8B in squirreled assets among 52,000 account holders. It appears the Swiss are drawing the line at the latter demand. Those with short memories are once again blabbing about "the end of Swiss bank secrecy" [1, 2]. Again, the inviolability of this confidentiality is much overstated. Consider the case of Philippine despot Ferdinand Marcos, against whom the Philippine government has been able to recover ill-gotten wealth stashed in Zurich and Lichtenstein [1, 2]. As with despots, there are always exceptions, and this is one of them.

More immediately important for this case, there is a brewing political backlash in Helvetia. The xenophobic SVP--currently its largest party--is calling for "No More Mr. Nice Guy" with Uncle Sam over this episode of rough treatment. Reuters details the tit-for-tat the SVP wants to engage in:
The right-wing Swiss People's Party (SVP) called on Saturday for retaliation against the United States over a U.S. tax probe into the country's biggest bank UBS that threatens prized banking secrecy. The populist SVP, the country's biggest party, said Switzerland should not take in any detainees from the U.S. prison for terrorism suspects at Guantanamo Bay in Cuba, which the Swiss government said last month it could consider to help shut the camp down.

Switzerland should also reconsider its policy of representing the United States in countries where it has no diplomatic presence, the parliamentary SVP said in a statement. The SVP said gold stored by the Swiss National Bank in the United States should be repatriated and Switzerland should ban the sale of U.S. funds in the country to protect Swiss investors after the failure of U.S. regulators.

The SVP has one minister in the seven-member Swiss government which is made up of the biggest four parties, but its populist policies have shaken up usually consensual Swiss politics.

The comments came after UBS agreed on Wednesday to pay a fine of $780 million and to disclose about 250 names of U.S. clients it said had committed tax fraud to settle U.S. criminal charges that it had helped rich Americans dodge taxes. U.S. tax authorities said on Thursday they were still pursuing a civil case against UBS seeking access to thousands more names of U.S. citizens it says are hiding about $14.8 billion in assets in secret Swiss bank accounts.
Is it brass knuckles time for these financial combatants?

UPDATE: Also see news of EU leaders agreeing to press the matter of tax havens at the upcoming G-20 meeting (which I will have more to say about later). The question is, will American banks in their weakened state still be able make a case for maintaining these tax havens to Uncle Sam? Britain's banks have already buckled under French and German pressure.

A Protest I Would Like to Join

♠ Posted by Emmanuel in , at 2/20/2009 08:15:00 AM
If the turkeys are going under, then let them go under. The current strategy of partial nationalization does nothing to clean these banks up or prevent further beggary. I am surprised how the archetypal man on the street knows of the two contrasting options in handling America's financial woes. Either this drip-drip-drip process of creating zombie firms alike Japan's lost decade continues or the US bites the bullet and goes for the hard medicine of Swedish-style nationalization for a couple of years to (hopefully) clean up these banks before privatizing them again. While the latter option sounds more attractive to me, I've always thought it unlikely for quite a simple reason.

Unlike Sweden during that time, the United States has long been selling to the rest of the world this idea of buying stocks as a good long-term portfolio or direct investment. Say what you will about the idea, but I don't think equity investors worldwide would react very positively to Uncle Sam--the world's biggest stock peddler--knocking foreign investors' stakes to zero via nationalization. Isn't this the sort of thing you'd expect from some banana republic and not the Land of the Free, Home of the Brave? Wouldn't doing so be equivalent to the creeping expropriation Americans fear others would inflict on them? What's to stop the US from arbitrarily doing the same to any number of other industries in danger of imminent collapse? Most economists championing Sweden II simply ignore this: Full nationalization is (geo)politically unfeasible for a country as dependent on foreign capital flows as the US. Since this purports to be an IPE blog, I believe it's necessary to say it.

Richard Murphy has an interesting proposal for decoupling the system for exchanging money from the banks which are prone to engaging in moral hazard-tempting activities precisely because they know the government must bail them out since national money-handling systems cannot be allowed to disappear. Although Murphy's implementation requires tweaking (he is well the left of me), the basic idea is sound. Screw the banks by making the payment transfer network operate independently of the banks. That way, the need for "bailing out Wall Street" becomes redundant. Now hand me my placard reading "Wall Street's Disco Days are Over."

Japan's FinMin Learns of 'Drinking' on the Job

♠ Posted by Emmanuel in at 2/17/2009 10:42:00 AM

The list of persons gaining notoriety for allegedly drinking on the job grows longer. Infamous folks who have done so include the Exxon Valdez's Captain Hazelwood, who ran his supertanker aground in Alaska, causing one of the largest oil spills in maritime history in pristine northern hinterlands. Being one of those cynical academics, I've always thought of international gatherings as fine opportunities to waste taxpayer money, party hard, score with diplomatic groupies, and of course--get drunk. It has always seemed to me that G8 meetings are A-1, top of the heap junkets of the first wafer. In 2007, France's nefarious Nicolas Sarkozy appeared quite tipsy at a G8 press conference. Luckily for him, the press did no jump on him too much for this as you almost expect this sort of behavior from a French PM, let alone Sarko.

Unforunately, Japan's FinMin Shoichi Nakagawa, is learning that the Japanese are not as forgiving of looking drunk on the job at a G8 gig. See the clip above (are those two bottles' worth of alcoholic drinks in front of him?) The current LDP Prime Minister Taro Aso is in eminent danger of being sacked given his abysmal approval ratings, and this latest setback of Nakagawa resigning over this incident does not help him. Understandably, the Japanese are not in a very forgiving mood right now for "drunken" behavior from its FinMin on the world stage as Nippon's economy shrinks dramatically and exports shrivel. While Nakagawa has used the excuse of being jetlagged and under medication, its the media impression that counts in today's 24-hour news cycle.

Aso's somewhat more popular predecessor Junichiro Koizumi has already attacked the current PM's criticism of the postal service's privatization. In the meantime, Aso has asked his Economic Minister Kaoru Yosano to also handle the Finance Minister role. Certainly, these are interesting times for Japan--interesting enough to consider the DPJ ascending into power in relatively short order. There is a good reason why Missus Clinton is meeting with the DPJ leader Ozawa Ichiro on her swing through Japan. Now, if you'll excuse me, I shall hunt down a bottle of Mumm--the official champagne of Formula One. The drunken master style has many adherents and I intend to find out why [cue the overture from Bizet's Carmen.]

American Badass: Securitization Lobby Revisited

♠ Posted by Emmanuel in , at 2/15/2009 06:20:00 AM
The moniker "American Badass" evokes a rich vein in US (marketing) history, from outlaws of the Wild West to today's more commercialized varieties such as self-styled trailer trash Kid Rock and pro wrestling's Undertaker. From what I gather, the Undertaker has used Kid Rock's song entitled such to make his ring entry on a motorbike. Today, however, I will discuss the true American badass. This is not the time for me to semantically parse what being "badass" really is. Nevertheless, posing to sell records and faking ring violence pale in comparison with causing $2.2 trillion in financial losses worldwide (and counting) as well as fostering conditions for global recession. If you want dudes with major b-b-b-bad mojo, they are neither tattooed nor wear leathers. No sir, those who've succeeded in inflicting mass misery instead come in suits and ties via the secrutization lobby.

Blogs usually have their running gags; mine happens to be the securitization lobby [1, 2]. If their stated mission was to "screw up the world," I wouldn't have raised an eyelash. Representing virtually all major financial services firms operating in America, these fine folks are quite unrepentant in their activities. Thumbing their nose at the rest of us, they will once again hold a megabuck annual meeting at the Venetian, the fake Venice of Las Vegas. The symbolism of gambling with others' fortunes is apparently lost on them despite some $10.2 trillion in destroyed American wealth. If that's not enough for you, have a look at this article from the American Securitization Journal entitled "Why Securitization Still Matters" (I am not making this up):
Securitization has become the scapegoat of the credit crisis. Once a word which carried no meaning for the general public, it now enjoys widespread notoriety and has been held up as the ultimate cause of America’s fve-year credit boom-turned-bubble bursting. But just because the crisis first took hold in the mortgage-backed securities (MBS) market doesn’t mean that we can, or should, pin all the market’s current troubles to its lapels.

By now it is clear that the excess leverage built up throughout the fnancial system was widespread and unsustainable — and would have unwound sooner or later, somehow or other. That has not stopped politicians, some regulators and market pundits from pointing the finger at financial engineering as a root cause of the crisis.

It may be a tempting target, especially 18 months or more into a broad credit crunch. But similar jibes were not thrown at the equities market after the Internet bubble burst, or at bond and loan markets whenever defaults have hit hard there. Then, it was called poor investing, or bad risk management or bad lending. Te instruments themselves, though, were never seriously attacked.

No doubt there was a lot of bad securitizing of bad loans for a couple of years — not least in subprime-backed mortgages bonds and collateralized debt obligations (CDOs). But the basic technology has worked as it was supposed to. Scott McMunn, head of credit investment at RBS Asset Management, argues that subprime-heavy U.S. residential MBS and asset-backed CDOs account for almost all the losses attributable to structural defects in securitization — two relatively new asset classes for which there was little useful historical data. In contrast, he notes that although spreads have blown out for other asset classes — student loans, automobile loans and credit cards — the underlying credit performance is consistent with historical experience, which is based on a much better set of data. Defaults on consumer credit increase when the economy heads into a recession regardless of whether the loans are securitized. Even collateralized loan obligations have performed as expected in times of stress. “The accusation that securitization is flawed is wrong,” McMunn says. “The flaws came from two asset classes that evolved very quickly in a short period of time.”
See? It's "other badass dudes got away with the Internet bubble, so why can't we?" The rest of the article recommends reflating the securitization machine, albeit with more oversight as other securitized products weren't so bad after all--they're just being inappropriately tarred by subprime. I guess being badass also involves pushing a troubled agenda as if nothing had happened. They conclude:
Once the banks regain their footing, the more robust infrastructure being mapped out by market participants ought to restore and underpin investor confidence. Then securitization will be poised to resume its rightful role in providing credit, the lifeblood on which economic growth depends.
I've always been troubled by this American debt culture and the idea that what it takes for the recession to end is...piling on even more debt as facilitated by securitization and other fancy schemes. It suppose others have different ideas. In their dreamiest of dreams, CDO-squared takes the starring role, not Kid Rock or the Undertaker. Badass, indeed.

A Double Dose of Aussie-fied Protectionism

♠ Posted by Emmanuel in , at 2/13/2009 02:37:00 PM
The forest is not the only thing on fire in the Land Down Under. Here is a quick take on two stories. The first is about the Chinese state-owned company Chinalco buying a hefty 18% stake in the world's third largest mining firm, Rio Tinto. Previously, I've discussed how China was keen on breaking up a mooted BHP Billiton takeover of Rio [1, 2]. The PRC feared that such an entity could exercise monopoly power on it. Now that the Billiton bid is history, China (and Chinalco) are probably delighted to be able to stretch their investment money a whole lot more after the commodity boom petered out. Rio Tinto certainly isn't coping too well in the downturn, having laid off 14,000 workers late last year. Not only are they getting a sweet deal on a company badly in need of cash due to its ill-advised acquisitions, but they're also fulfilling a blocking function so prized by the apparatchiks.

Or are they? The Sydney Morning Herald warns us about Aussie protectionism rearing its ugly head. It's not entirely certain that the government will let this deal through on those "national security" grounds so beloved by protectionists the world over. Certainly, you can say this is a case of "strategic" investing on China's part. That is, its motives are not entirely to do with simply getting shareholder's returns:
Chinalco yesterday agreed to invest $US19.5 billion ($30 billion) in debt-laden Rio in a deal which will eventually see the Chinese company controlling 18% of the world's third largest miner and gives it stakes in a suite of iron ore, copper and aluminium assets.

Rio, which rejected BHP Billiton's $US66 billion hostile bid last year, will use the money to cut its $US38.9 billion of debt incurred after buying Alcan in 2007. Rio shares lost $1, or 1.9%, to close at $51, after hitting an intra-day low of $49.59.

Analysts have mixed feelings about the alliance, which will be scrutinised carefully by the Federal Government - with Treasurer Wayne Swan announcing on Thursday a tightening of foreign investment rules. Rio said on Friday it was confident of winning Federal Government support for the deal.

But CMC Markets senior dealer Dominic Vaughan said there were doubts about whether the deal would get government or shareholder approval. "With Rio, they're sitting there digesting what has gone through,'' Mr Vaughan said. "We're not really sure whether the deal put together with Chinalco will actually go through.''

Goldman Sachs JBWere analysts said Rio was now in a weak position after selling its assets to Chinalco of China at the bottom of the commodity cycle. "We think Rio is at a strategic and marketing disadvantage versus its peers going forward,'' analysts led by Neil Goodwill said in a report dated yesterday. "Even with the cash injection of $US19.5 billion, Rio is still in a weak position in terms of its balance sheet and would be unable to easily participate in expansions, acquisitions or increase dividend payments for some time."

Goldman Sachs JBWere, the Australian affiliate of the US broking firm, has a "hold'' recommendation on Rio Tinto, saying "there is value in the asset base even if the strategic position of the company is irreversibly damaged in its current form.
And speaking of commodities, Prime Minister Kevin Rudd is keen on fending off American-style pleas of, well, buy Australian. Just as the American bill favors the purchase of American steel in government procurement, so too have been calls for the proposed Australian one:
Prime Minister Kevin Rudd has resisted calls from the steel industry for the inclusion of a ''Buy Australian'' clause in the Federal Government's [AU]$42 billion stimulus plan, in a move that may have averted the start of an "economic war''. Steel firms and the Australian Manufacturing Workers Union requested the Federal Government insert a clause requiring the use of locally produced steel for infrastructure projects earmarked in the spending package to maximise the creation or preservation of Australian jobs.

The spending bill passed the Senate this afternoon without such a clause after independent Senator Nick Xenophon switched his vote. ''We're not against free trade,'' said Ian Cairns, national manager for industry development at the Australian Steel Institute, trade body representing steel manufacturers and distributors. ''We're not calling for a ban in imports.'' Mr Cairns said Australian steelmakers weren't seeking a new trade policy for the nation but an exception to strict free trade principals was worth considering.

Critics, however, claim the would have been the first step in unravelling Australia's free trade position, helping to set off a flurry of retaliatory trade measures around the world. NAB head of economics Jeff Oughton said using preferential sourcing at the expense of free trade amounted to "war''. "It's economic war,'' he said.

During a slowdown of this magnitude, the "last thing you want is geopolitical tensions to exacerbate the situation,'' he said, conceding governments are under "extreme domestic pressure ... given the global shocks that have emerged unexpectedly.''

Economists have taught governments there are major benefits from trade and liberalisation of markets and finance, said Mr Oughton. "It's well accepted,'' he said. "Except in times of tension when you ... tend to see people do protectionist things.''

The Australian steel industry's request came in response to a proposed "Buy American'' requirement considered for the planned $US789 billion ($1.2 trillion) stimulus package in the US. If passed in the US, the provision would threaten about $500 million in Australian steel exports each year. Last week, the International Monetary Fund warned the US against including a ''buy American'' clause in its stimulus package, saying those policies would slow the global recovery.

Trade Minister Simon Crean, writing before the vote, said the inclusion of a ''Buy Australian'' clause could trigger a round of further ''buy local'' provisions by Australia's trade partners, as governments around the world scramble to protect their local industries. The World Trade Organisation, the global body overseeing trade agreements, requires member countries such as Australia to keep trade barriers low and eschew protectionist measures that give priority to local industry.

Mr Cairns questioned the honesty of "free trade'', which has dominated global economics in the past two decades. "There's certainly ways that many countries have certain targets and tariffs on a range of goods,'' said Mr Cairns. "If you look deeply into how countries do business, then complete free trade is a bit of a furphy" [Aussie slang for a fanciful tale].
Gosh, I sometimes feel this blog should be renamed the International Protectionism Zone. Here's a free idea from me for any budding blogger. Certainly, there is no lack of such news during this day and age. In any event, Kevin Rudd seems to be a sensible chap. A fluent speaker of Mandarin, he ain't your average Great White Protectionist. I hope he gives these rent-seekers no shelter. You know, the land of Oz has a xenophobic, isolationist party appropriately called the Australian Protectionist Party.

Me So Toxic: India Underdogs in a WTO Toy Case

♠ Posted by Emmanuel in ,, at 2/12/2009 07:05:00 AM
As you can see, this story presents me with another opportunity to doctor photos for my (fleeting) amusement. To me, international economic diplomacy is the most ridiculously fascinating thing--it's just that many do not present the subject matter in lively enough fashion. [As a plug, Birmingham is one of the few schools offering a graduate-level course.] Certainly, there is enough comic fodder here to last a lifetime--banana wars, bra wars, etc. Today we feature the ongoing toy wars. A few days ago, I featured news that China was about to launch a formal complaint at the WTO over India banning toy imports from China without much reason. While we're all waiting for that action to happen, things have not stood still. The Business Standard of India consulted with a bunch of trade law experts on the WTO legality of India's toy ban. As you will read below, the judgment is unanimous--India's ban on Chinese toys fails to pass muster on the following grounds:
  • India did not field formal complaints as a procedure before making the ban;
  • There have been no tests conducted to demonstrate the toxicity of specific Chinese toys;
  • A ban purportedly made in the "public interest" should be applied where toxicity is found to local products as well as those of other trading partners.
I am sorely tempted to label posts like this "stupid protectionist tricks" instead of just "trade" if it weren't for the former eating up more screen space. In any event, my intuition is that the Indian government itself knew that the ban wouldn't pass muster. Rather, it was hastily imposed for a period of six months to ensure that the fallout was limited on India's part. It will lose if push comes to shove, but it will probably not lose big. Then, the government can tell the toymakers, "See? We told you this &"£$ would happen." As I've said before, the ban should be in the past by the time China gets proceedings underway. Still, the Indian government had to please domestic toy manufacturers doing the ol' rent-seeking jig, so what you see is what you get:
India’s move to ban import of Chinese toys may not be compatible with the World Trade Organization (WTO) rules. Trade experts and lawyers told Business Standard that if China drags India to the WTO, the country may find it difficult to justify the ban. However, Indian toy manufacturers see the ban as an opportunity to reclaim their lost market share. “There are certain norms under which a country can impose such prohibitions. It seems the ban is not compatible with them,” said a Delhi-based international trade expert.

The notification, issued on January 23, said the move had been carried out in “public interest” and would be effective for six months. However, there were no details of the grounds on which the ban was imposed...Government officials said there has been no official intimation from China on this. “There is a procedure through which they have to come. They have to seek consultations,” Commerce Secretary Gopal K Pillai said recently. The ministry said any country can restrict imports from a country in public interest.

Government sources said the ban was imposed because of health concerns. In 2007, many varieties of Chinese toys were found to carry toxic substances like lead and many international companies had recalled millions of such toys across the globe.

Lawyers specialising in international trade disputes point at Article 20 of General Agreement on Tariffs and Trade (GATT), which defines conditions under which import restrictions can be imposed. These include protection of public morals as well as health and safety concerns. However, the article specifies that such measures cannot be used to discriminate between countries.

“For this, there has to be scientific evidence that there has been an impact on citizens’ health. Moreover, if India says that the ban was imposed as quality norms for Chinese toys did not match its standards, it has to apply the same standards on domestic toy manufacturers. If India has not done its homework, it may lose to China in the WTO,” said a lawyer specialising in trade. “They should have at least mentioned that the ban was imposed after complaints related to toxicity. Clearly, WTO procedures have not been followed,” he added. Experts said the notification could have at least mentioned more elaborately the reasons for the ban or banned import of toys with specified toxic content from all countries. “Toxic toys can come from anywhere, why only China?” said the expert.

Significantly, the DGFT [Directorate General on Foreign Trade] widened the ambit of the ban in a subsequent circular, which said the ban would apply to all toys manufactured in China. This means that even a toy imported from a third country but manufactured in China won’t be allowed into the country.

Domestic toy manufacturers, who peg their market size at Rs 3,000-3,500 crore, have been complaining that cheaper Chinese toys have grabbed over 40 per cent of the market, impacting them adversely. “The ban will help the domestic industry augment their share,” said AK Bansal, chief managing director, Hanung Toys and Textiles Ltd, which sells about Rs 100 crore worth of toys in India. According to industry estimates, about 20-25 per cent of the industry is organised. “Toy makers in the unorganised sector have been hit the most by cheaper Chinese toy imports,” added Bansal.
I would've concluded with an appeal to "set the Bratz loose" if it weren't for their own legal wrangles Stateside.

Czechs Affronted by French Auto Protection Stunt

♠ Posted by Emmanuel in at 2/11/2009 08:29:00 AM
Commenting on how national character affects international economic diplomacy is a tricky act. Some would say it's a futile one. Nevertheless, I do believe that what we have here is a genuine case of miscommunication between the Czech Republic and France. Recently, French President Nicolas Sarkozy bad-mouthed French automakers relocating production to Eastern Europe to cut costs, spurring the current row. Before I get to that, let me digress a little. A Yanqui teacher I once had spelled out what most are probably aware of about the American national character: their primary interest is in commerce. People have often misunderstood this passage from Adam Smith's Wealth of Nations to promote Gordon Gekko-style selfish behavior:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.
More thoughtful Adam Smith scholars do not see this as license for self-interested behavior. Rather, it is very much others-regarding in that the protagonist here is concerned not with cadging his neighbor but being able to offer a fair deal in return. In a similar fashion, Americans have often been accused of crass commercialism or mercenarial spirit. Nothing could be further from the truth. I have found dealing with Americans to be very straightforward once you understand this. Like Adam Smith intoned, commercially-oriented society is very much about "you scratch my back, I scratch yours." There are excellent reasons why the liberal international economic order is largely by American design as many others have bought into this reasoning. Sure, the US tries to get the better of everyone once in a while, but its interests in maintaining this economic order precludes it from getting too cute. Witness Obama backtracking on "Buy American." At heart, Americans are not mean-spirited people.

This lengthy digression leads me to the French. In contrast to their American counterpart, the French national character is more challenging to decipher. I have commented at some length on how French diplomacy aims to couch self-interest in the rhetoric of altruism [1, 2]. Like the British, the French are in some measure still trying to deal with a loss of clout on the world stage. Whereas the British try to influence American policy to get what they want, the French have thought of the EU as their stomping ground for a project to make Europe an alternative to American hegemony (or whatever is left of it).

The problem is that the French regularly push the limits of getting too cute. In this case, they have offended the current rotating head of the EU, the Czech Republic. A word on Czech national character is in order here. The Czechs have long been bossed around by their powerful neighbors, forcing them to cope in novel ways:
The Czech Republic is a small country, centrally located, continually occupied, oppressed, and overshadowed by larger neighbors (first Austrians to the south, then Germans from the west, and finally Russians from the East). Only the Jews have a more acute sense of historical persecution or as black a sense of humor.
My Czech friends have many endearing qualities, combining German concern for efficiency with decidedly non-German warmth of character. Plus, what higher compliment can you give to a nation that saw it fit to make Frank Zappa [!] a national advisor of sorts during its transition from the Communist era on the finer points of capitalism in general and trade in particular?
Then, in January 1990, Vaclav Havel appointed Frank Zappa as "Special Ambassador to the West on Trade, Culture and Tourism," much to the disgruntlement of U.S. Secretary of State, James Baker, who is famous for declaring: "You can do business with the United States or you can do business with Frank Zappa" [!!!] Still, Vaclav Havel's friendship with Frank Zappa grew, and Zappa shared his ideas about increasing tourism to Czechoslovakia, and explained the concept of credit cards which were then an unknown quantity in this part of the world. It was Frank Zappa's brief interlude in the world of international trade and diplomatic relations— and the vantage-point was Prague.
You can't make this stuff up; the Czechs really are that cool. What Jim Baker obviously missed was that Zappa himself was, despite all his alt-culture stylings, a good American capitalist at heart. Remember, we're only in it for the money. Needless to say, I don't think the French *get* Zappa--as much an American icon to the rest of the world as George Washington and Garfield the Cat. Which brings me to the conflict here. Whereas an Angela Merkel knows how to humor then dismiss Sarkozy and his zany protectionist ideas, the Czechs are still coming to grips with how to do this. Despite being the current EU head, the Czechs are simply unused to being in a position of power unlike their French predecessors in the post. From the IHT:
An emergency European Union summit meeting on the economic crisis was announced Monday after a fierce public rift between France and the Czech Republic prompted accusations that Paris was promoting protectionism and undermining Europe's single market.

In Prague, Prime Minister Mirek Topolanek of the Czech Republic, which holds the EU's rotating presidency, made a rare and blunt attack on a fellow leader after President Nicolas Sarkozy last week criticized French car companies that relocate to Eastern Europe to cut costs...

Sarkozy's "protectionist" comments threatened ratification of the EU's Lisbon Treaty in the Czech Republic, Topolanek said...The bitter infighting highlights tensions over Europe's response to the financial crisis and underlines fears in some quarters that France will use the downturn to undermine market and competition law inside the EU, which is the world's largest trading zone...

Amid the bitter infighting, Topolanek and the European Commission on Monday rushed out an announcement of the emergency EU summit meeting - without a date or definite venue - to preempt any attempt by Sarkozy to claim credit for setting up such a meeting.

Hours later, the Élysée Palace released the text of a joint letter written with Chancellor Angela Merkel of Germany in which Sarkozy called on EU leaders "to meet informally in Brussels by the end of this month to jointly assess the situation." It also called for EU governments to tackle the toxic assets on bank balance sheets that have crippled lending in the European economy.

Public feuding between the country holding the presidency and a major European nation is rare. But the tension has been building for weeks, and Czech officials suspect the Élysée of inspiring a series of articles in the French press critical of their leadership.

At a news conference in Prague on Monday, Topolanek said Sarkozy's attitude risked provoking a series of "beggar thy neighbor" actions to protect national economies. It was, Topolanek said, "the really selective and protectionist steps and statements of, among others, President Sarkozy that led me to the intention to call this extraordinary council" of EU member states. "It is these kind of statements, made by some European statesmen, that will lead to a higher level of protectionism among individual states, which will absolutely undoubtedly lead to an escalation of similar actions and in the end only extend the crisis," he warned, the Reuters news agency reported from Prague.
Pressure from France is understandably strong. Nevertheless, Prime Minister Topolanek should probably not make too much of Sarkozy's latest melodramatic fit. Merkel ought to tell the Czechs how to defuse French aggression. Sarkozy is just trying to rattle the new guy into making unwarranted concessions for France. After all, the Czech Republic is in the driver's seat now unlike during the majority of its history. As the late FZ would probably advise the Czechs, Sarkozy is just like Uncle Meat.

Wussonomics: Russian Petro-Tyrant in Hard Times

♠ Posted by Emmanuel in at 2/10/2009 10:16:00 AM
It wasn't too long ago that Russian President-cum-Premier Vladimir Putin bestrode the globe like a colossus-in-waiting. His country's future--and I do mean his country--looked assured given strong global growth and seemingly boundless demand for the country's energy exports. There he was going on a shirtless fishing expedition after meeting up with Prince Albert II of Monaco in August 2007. At the end of that year, he was named TIME's Person of the Year. Before handing power to his handpicked successor--ol' what's his name--Dmitri Medvedev, Putin was definitely a man in control of his country's destiny with much discretion over what went on in the rest of the world.

Then, of course, came the fall. The dramatic turnaround in oil prices as the world entered a period of significant slowdown has affected Russia quite badly. What had looked like a significant foreign exchange reserve stash of well over half a trillion dollars now looks quite puny. Like Venezuela's Hugo Chavez, Vladimir Putin appears to be little more than a petro-tyrant reliant on high oil prices to stay afloat. For all their bluster, they have ignored the very first thing they teach you in business school--portfolio diversification. With next to all of their export revenues coming from oil, you know how the story goes. At the rate Russia is now burning foreign exchange reserves--think disco inferno circa 2009--perhaps Putin had better find alternative employment as a Men's Health cover model. As you can see from the chart above, $200 billion spent in the last three months to prop up the ruble's value hasn't done much to shore it up. This activity is clearly unsustainable lest Russia go begging at the IMF like it did in 1998, which is precisely the sort of humiliation Putin wants to avoid at all costs.

From the Financial Times:
It is 10 years ago that Russia returned to economic growth after the collapse of the 1990s. It is also 10 years since Vladimir Putin, Russia’s premier, ascended to the pinnacle of power. His popularity has rested in large part on the good fortune of high oil prices. As Russia enters its first recession on his watch, his government cannot afford any serious mistakes in its most consequential economic decisions yet.

Exchange rate policy presents the most urgent challenge. As declining oil prices have dragged the rouble down, the central bank has tried to brake its fall. This effort has not come cheaply: about $200bn, a third of the central bank’s foreign exchange reserves, flowed out of its vaults in the past three months. The authorities found the price worth paying to prevent a repeat of 1998 when the rouble precipitously lost three-quarters of its value, the government defaulted on its debts and many Russians were ruined.

Still, the bleeding of reserves must stop, or it will haemorrhage until nothing is left. Much of the drained reserves benefited banks that borrowed roubles from the central bank itself in order to speculate against it. By committing to the current rouble floor, the central bank is setting itself up as a target for speculative attack. Hoping that oil prices will recover is no option; waiting will just make the losses larger and the eventual adjustment more painful. Russia should let the rouble float, stabilise its reserves and focus on fighting the recession and softening the impact on Russians of the rouble’s fall.

The Rebirth of British Manufacturing (No, Really)

♠ Posted by Emmanuel in at 2/09/2009 08:36:00 AM
Auto enthusiasts are no doubt familiar with wisecracks about British car brands from the days of yore. There is, of course, the bumper sticker saying "genuine British parts are falling from this motorcar." Instead of Germany's supplier of ever-reliable parts, Robert Bosch, many British makes had to do with Joseph Lucas--AKA "The Prince of Darkness" for its history of electrical failure. Although foreign carmakers now dominate the auto manufacturing scene in the UK, their sales aren't faring too well for obvious reasons. Nevertheless, there is a movement afoot led by no less than Mandy (New Labour stalwart and former EU Trade Minister Peter Mandelson) to reindustralize Britain after years of losing share in terms of UK employment and output--especially to the now-vilified financial services industry. It is a refrain that is being heard the world over: we need to make stuff, not package securitized riffraff. Aversion to the machinations of finance is strong indeed. Maybe they can build innovative products like the hydrogen-powered Morgan LIFECar pictured here, a collaboration between the venerable make, UK government, and academia.

The question that countries need to address though is whether they have a competitive advantage manufacturing goods for export. Moreover, even if they do manufacture such goods, the current time doesn't seem to offer much promise that export demand exists. Perhaps the weak sterling can help in this respect. It will be interesting to watch. After all, why did so much British manufacturing disappear in the first place? Remember, LSUK--the successor of Lucas--shut its doors (probably for good) late last year after holding out for an Indian savior. Here's an excerpt from the Financial Times:
[This] view fits into a debate about whether Britain should attempt to “rebalance” its economy back towards manufacturing. The notion has grown in recent months that the country that gave the world the industrial revolution now suffers from the fact that it “no longer makes things”. According to the resultant stream of rhetoric, “reindustrialisation” is the key to boosting the economy in the aftermath of the financial crisis.

"For the future, Britain needs an economy with less financial engineering and more real engineering,” Lord Mandelson, the business secretary, recently told parliament [now you're telling us, Mandy]. Opposition politicians and leading industrialists have echoed his sentiments – in a debate whose importance reaches beyond the UK. As one of the first developed economies to deindustrialise, Britain’s approach to bolstering the sector is potentially applicable to other countries.

Sir Anthony Bamford, chairman and owner of the JCB excavators group, is keen to highlight some of the difficulties, especially at a time when UK manufacturing has been severely hit by the recession – with its output plummeting in recent months at above the rate for other sectors. “I’d hate to give up on British manufacturing,” he says. “But we’ve lost an awful lot [of manufacturing production] in the UK in recent years and it’s going to be hard to bring it back.”

In 2007 manufacturing accounted for less than 13 per cent of UK value-added output at current prices, compared with nearly 33 per cent in 1970 and a peak of close to 40 per cent in the 1950s. Some 3m people now work in manufacturing, compared with 7m in 1980 and a high of 8m in the 1950s. (By comparison, some 6.5m are employed in financial services, up from 3m in 1980.)

Yerkes-Dodson Law: Stimulus in Blagojevichland

♠ Posted by Emmanuel in , at 2/06/2009 01:19:00 AM
Einstein once said that insanity was doing the same thing over and over again and expecting different results. So it is with modern-day America. Just as the current mess was brought about by Bushian untax-and-spend policies, the current administration is attempting to undo the mess by enacting even larger untax-and-spend policies. Unfortunately, America expects this orgy of nonsensical spending to be at LDCs' expense. I'll spare everyone why the rest of the world should tell Uncle Sam to go suck an egg when given such an indecent proposal as I've covered this before [1, 2] This pile of mostly unrelated spending takes a "toss it against the wall and see if it sticks" approach. In psychology, there is a body of research concerning this everything-but-the-kitchen-sink pathology. You may accuse me of stretching the stimulus analogy too far, but for what it's worth...

The Yerkes-Dodson Law--let's just say the "law"part is iffy--is a psychology theory concerning the relationship between performance and stimulus drawing from the pioneering research of the eponymous authors. As the chart depicts, there is an inverse u-shaped relationship. At lower levels of stimulus, subjects do not perform well because their interest or motivation is not really engaged. Ideal levels of stimulus occur at some middle range, where the tasks given balance arousal with the subject's ability to cope. However, excessive levels of stimulus stress overwhelm the subject's cognitive mechanisms. You know exactly what I have to say here. Like a lab rat, America overwhelmed with stimulus doesn't have a clue what to do anymore as it is embarks on loosely related tasks it can ill endure. All this stimulus has reduced it to a nervous wreck--and I do mean wreck.

Those of us from developing countries are watching US plans to pour $900 billion in stimulus down the money pit with no small amount of bemusement. I can probably pick nits with lots of items. For brevity's sake, let me just say rebuilding America through infrastructure projects is high comedy. The House version of the stimulus bill allocates $30 billion to highways alone. Here is a critique from the days when the famous American anti-corruption crusader Paul Wolfowitz ruled the roost at the World Bank before being himself removed for corruption:
Just as the [World Bank] vows to get tough on corruption, it has simultaneously announced a big increase in its support for infrastructure, the sector perceived to be the most corrupt globally according to Transparency International. In fact, approximately half of the World Bank anti–corruption unit’s investigations that have led to specific corrective actions were linked to infrastructure projects.

Massive, centrally planned and financed water, energy, transport and other public works projects are particularly prone to corruption, thanks to their complexity, capital intensity and high price tags. They offer larger spoils than small-scale projects and programs to increase the efficiency of existing infrastructure. Unless corruption is checked in the earliest stages of the planning process, corrupt politicians, government officials and construction companies will always favor large-scale projects to address a country’s infrastructure needs.
You can download the quoted reports by the World Bank on infrastructure projects and Transparency International on the same. Equally amusing (in a very sad way) is the assertion that these projects will create jobs that America needs. Throughout the developing world, roads are forever being dug up and fixed. Ostensibly the result of efforts to provide employment, these amount to little more than doling out jobs based on patronage--vote buying. This is not saying that American public works are by nature corrupt; rather, these large-scale projects present opportunities for adverse selection in awarding contracts and hiring workers. The following is an excerpt from FT reporter Edward Luce's fine book on India, In Spite of the Gods (pp. 88-89):
The government cannot blame lack of manpower [for the decrepit roads in Uttar Pradesh]: the highways department [of India] employs one worker for every two kilometers of road, among the highest ratios in the world. But many of them do not bother to turn up for work because they cannot be sacked; and any attempt to offer voluntary redundancy to public sector workers prompts an outcry about abuse of workers' rights.
For so long, America has shoved the "clean government" agenda down LDCs' throats. It turns out America's rhetoric stops at the water's edge. When the US itself gets into trouble, it too will resort to corruption-prone infrastructure projects. With massive projects coming down the pike Stateside, pay-to-play is the order of the day--in Illinois, appropriately enough here. Somehow, I remain unconvinced that all this Blagojeviching will spur untold economic growth--just as it hasn't in any number of LDCs where patronage politics accompany infrastructure projects. Uncle Sam, I will have none of your Kool-Aid. Just like Obama's economic adviser Larry Summers, this $900 billion stimulus bill is, alas, full of pork.

Shoe Made Hu: PRC Blameless in Crisis Says Wen

♠ Posted by Emmanuel in , at 2/06/2009 01:14:00 AM
I almost missed this fascinating Financial Times interview with Chinese Premier Wen Jiabao, recently on the receiving end of a shoe-throwing tantrum. You can also read the full transcript and see the video from the first link. The post's title concerns the blame game now being waged by major world economies. Just who started this mess? From my POV, American dissaving and investment in unproductive endeavors are largely responsible. From others' POV, an excess of LDC savings "forced" the US to use surplus global investment in suboptimal ways. More reasonable commentators would say that there's plenty of blame to go around. After all, it takes two to tango.

Anyway, to today's feature. Prior to the shoe throwing fracas at Cambridge University--AKA Shoes 'R' Us--Premier Wen arranged to have an interview with the Financial Times. For some reason this highly informative interview has largely been overlooked. I urge you to read it carefully if you are at all interested in world affairs. Here, I will give you some interesting excerpts. Let us begin the beguine with Wen's thoughts on using China's legendary two trillion in reserves for replenishing the IMF:
Hopes in London and elsewhere that China would hand over a large chunk of its near $2,000bn (€1,560bn, £1,380bn) foreign reserves to help recapitalise the International Monetary Fund are likely to be disappointed.
I am inclined to believe that it is infeasible for China to simultaneously fund the IMF and prop up the dollar. If China ever put more money into the IMF, the unit of account would have to be changed into special drawing rights (SDRs)--an artificial reserve currency. Also, China is not as free to do what it pleases with its reserves unlike, say, Saudi Arabia and its manna from heaven. It is also striking to me how China still skirts participation in key international institutions. However diminished American power is, one thing is clear: it can still exert influence via these institutions. Next, Wen pooh-poohs multilateral environmental regimes:
Mr Wen also plays down the idea of signing up to a new environmental treaty at the talks in Copenhagen later this year that would place limits on the country’s carbon emissions.
China is the world's largest carbon emitter. This is in no small part due to its exceedingly energy inefficient economic activity. With Obama climbing aboard the green bandwagon in a way his predecessor didn't, look for China to be branded the world's #1 environmental rogue state--which it is. We then turn to the thorny matter of spurring consumption in China. Wen and other officials keep giving it lip service though consumption as a percentage of Chinese GDP keeps falling:
But also key is a long list of measures aimed at providing the softer context to a comprehensive stimulus effort – including initiatives to boost consumer spending and welfare.

The sales tax on vehicles with small engines has been halved. Meanwhile, 74m low-income people have received lump-sum spending subsidies. Former employees of state-owned enterprises received pension supplements, there have been subsistence allowances for vulnerable groups, and Beijing has significantly increased the salaries of 12m primary and middle school teachers in the state system.

The trick in spurring consumer spending is not to engage in sloganising, Mr Wen says, but actually to put money into people’s pockets. “We do believe that consumer spending is vital in boosting economic development.”

Several commentators in the west have called upon China to overhaul its economic model by rebalancing away from its current heavy reliance on investment, savings and exports and embrace a more consumer-oriented system instead. Most observers agree that such a shift would require Beijing to relieve pressure on consumers by beefing up social welfare, healthcare and education provisions.

Mr Wen reiterates his pledge to put in place a “fairly comprehensive social safety net”. He adds that Beijing has already announced an Rmb850bn medical care spending plan and would spend Rmb600bn on unspecified technological upgrading.
Fair enough. We'll wait and see, though I remain apprehensive as a command-and-control system built on leveraging the commanding heights of export industry isn't as suited to spurring product innovation. There's yet more fun stuff as Wen takes aim at The Great Paulsonio's assertion that LDC savings precipitated the crisis:
Shortly before he left office, Hank Paulson, former US Treasury secretary, said in an interview with the Financial Times that the huge volume of savings in countries such as China had been one of the root causes of the crisis because it reduced risk premiums around the world.

Mr Wen is having none of it. “I think the main reason for this global financial crisis is the imbalances of some of the economies themselves. For a long time they have had double [fiscal and current account] deficits and kept up high consumption based on massive borrowing.” Banks used excessive leverage to reap huge profits. “And when such a bubble bursts, the whole world has been exposed to a big disaster,” he says.

“It is completely confusing right and wrong when some countries that have been overspending then blame those that lend them money for their spending,” he argues. Mr Wen points to a famous proverb in China about Zhu Ba Jie, a fictitious character in the 16th-century Chinese fable, Journey to the West , who always blames others who try to help him. “When I shared this view at Davos with the world business leaders, they all agreed with me on that,” he says.
Those looking to avert a US-China trade war may take (cold?) comfort in Wen's (public) insistence that China isn't going to wield its reserves as a weapon. But if the US makes more aggressive moves...
He gives equally short shrift to the argument put forward by Timothy Geithner, the new US Treasury Secretary, that China is “manipulating” its currency. “Completely unfounded,” he says: the renminbi had appreciated 21 per cent since China adopted a managed float of its currency in 2005.

Mr Wen refuses to make an explicit commitment not to devalue the Chinese currency during the crisis – as the government did after the Asian financial crisis in 1997, a pledge that helped engineer the eventual recovery and won China a lot of prestige. But he does rule out any big shifts in the value of the Chinese currency.

“I want to make it very clear that maintaining the stability of the renminbi at a balanced and reasonable level is not only in the interests of China but also the interests of the world,” he says. “Many people have not yet come to see this point that if we have drastic fluctuation in the exchange rate of the renminbi, it would be a big disaster.”

Mr Wen says that Hu Jintao, China’s president, and Mr Obama spoke late last week on the telephone, but would not confirm reports in the US that Mr Obama had told his Chinese counterpart that the new administration would not take a confrontational approach over the currency issue. He expresses a hope for “increased co-operation” with the US, but says that there are a lot of different “voices” in the US debate.

Mr Wen says China, which is the largest foreign holder of US Treasury bonds, would continue to be an active participant in the market. “We believe that it is important to stabilise the current Treasury bond market. To do so will be in the interest of shoring up market confidence, overcoming the global financial crisis and facilitating the early recovery of international markets,” he says.

But he also issues a veiled warning that China might rethink its long-term investment strategy for its reserves once the immediate crisis is over, when some economists believe the huge borrowing the US is undertaking could lead to a slump in the value of the dollar. “We will take into account China’s own needs to maintain the safety and good value of our foreign exchange reserves,” he says.
I will save you from my favorite line that cheap foreign capital fuels American spending nonsense. For that I direct you to my other post for the day. One thing that surprised me with Wen, though, is that he reads classic political economy--something many of his "Western" counterparts don't. It's food for thought that makes me wonder why Obama and Co. are so lacking in the foundations of political economy:
An eclectic reader, Mr Wen says that when he travels he always carries a copy of The Theory of Moral Sentiments by Adam Smith, the Scottish economist, which lays out the moral underpinnings for governing societies – and market economies. “Adam Smith wrote that in a society if all the wealth is concentrated and owned by only a small number of people, it will not be stable,” he says. It is an observation that holds just as well for the crisis-ridden US as it does for China, with its skewed model of development and rising inequality.
Thought provoking, indeed.