Paging le Carre, Forsyth: PRC Spooks Amok in UK

♠ Posted by Emmanuel in , at 1/31/2010 06:30:00 PM
People enjoy reading spy novels for understandable reasons: exotic locations, everyday people who are actually secret agents, a gallery of rogues, and healthy doses of sex and violence help the plot move along nicely and divert us from the mundanity of our 21st century domesticated existence. While the settings are different now--Cold War cloak-and-dagger has given way to terrorists hellbent on realizing radical their visions and computer geeks using tools of the digital age for surreptitious information gathering--the interplay of, yes, spy versus spy remains the focal point of interest. Oftentimes these sorts of activities have an "everybody does it, so why can't we?" feel in real life: Israel-based operators, for instance, have often targeted erstwhile "friends."

A few days ago, we had the widely reported story of Google indirectly accusing the PRC of staging phishing attacks on the accounts of human rights dissidents. Sometime ago, foreign students the PRC sends out by platoons like those at my alma mater have been portrayed as spies for the Communist Party. I bring these up because we once again have another story of industrial espionage courtesy of the London Times that appears straight out of a John la Carre or Frederick Forsyth espionage thriller:
The security service MI5 has accused China of bugging and burgling UK business executives and setting up “honeytraps” in a bid to blackmail them into betraying sensitive commercial secrets. A leaked MI5 document says that undercover intelligence officers from the People’s Liberation Army and the Ministry of Public Security have also approached UK businessmen at trade fairs and exhibitions with the offer of “gifts” and “lavish hospitality”.

The gifts — cameras and memory sticks — have been found to contain electronic Trojan bugs which provide the Chinese with remote access to users’ computers. MI5 says the Chinese government “represents one of the most significant espionage threats to the UK” because of its use of these methods, as well as widespread electronic hacking. Written by MI5’s Centre for the Protection of National Infrastructure, the 14-page “restricted” report describes how China has attacked UK defence, energy, communications and manufacturing companies in a concerted hacking campaign.

It claims China has also gone much further, targeting the computer networks and email accounts of public relations companies and international law firms. “Any UK company might be at risk if it holds information which would benefit the Chinese,” the report says. The explicit nature of the MI5 warning is likely to strain diplomatic ties between London and Beijing...
And then there are the "honeytraps":
China has occasionally attempted sexual entrapment to target senior British political figures. Two years ago an aide to Gordon Brown had his BlackBerry phone stolen after being picked up by a Chinese woman who had approached him in a Shanghai hotel disco. [I venture that they were playing "Blame It On the Boogie" at the Banana Club in Beijing while the deal was going down. Maybe I ought to write a novel of my own (or need medication ASAP).]

The report says the practice has now extended to commercial espionage. It says Chinese agents are trying to cultivate “long-term relationships” with the employees of key British companies: “An undercover intelligence officer may try to develop a friendship or business relationship, often using lavish hospitality and flattery. “Chinese intelligence services have also been known to exploit vulnerabilities such as sexual relationships and illegal activities to pressurise individuals to co-operate with them.”

The warning to British businessmen adds: “Hotel rooms in major Chinese cities, such as Beijing and Shanghai, which are frequented by foreigners, are likely to be bugged ... hotel rooms have been searched while the occupants are out of the room.” It warns that British executives are being targeted in China and in other countries. “During conferences or visits to Chinese companies you may be given gifts such as USB devices or cameras. There have been cases where these ‘gifts’ have contained Trojan devices and other types of malware.”

China has repeatedly denied spying on Britain and the West. Its London embassy did not comment. In 2007 Jonathan Evans, the director-general of MI5, had written privately to 300 chief executives of banks and other businesses warning them that their IT systems were under attack from “Chinese state organisations”. There have been unconfirmed reports that China has tried to hack into computers belonging to the Foreign Office, nine other Whitehall departments and parliament.
It goes without saying that providing cybersecurity is a likely growth industry to both government and private sector clients holding information that may be of use for intelligence or commercial purposes. All the same, you must question how many of these sorts of activities can be attributed to limits placed by Western countries on "dual-use" exports to the PRC. I am inclined to think there's some truth here even if some claims appear pretty far-fetched. Won't bog-standard antivirus pick up funny stuff on a USB stick, f'rinstance? The Chinese will of course deny everything. Alas, when pressed, their response will likely be...Don't blame it on the sunshine, don't blame it on the moonlight, don't blame it on the good times--blame it on the boogie.

Trivia Time! What's the World's Largest Trade Bloc?

♠ Posted by Emmanuel in , at 1/31/2010 12:31:00 AM
What's the world's largest trade bloc?

a. North American Free Trade Agreement (NAFTA)
b. European Union (EU)
c. Mercado ComĂșn del Sur (Mercosur)
d. China-ASEAN Free Trade Agreement (CAFTA)

OK, so that's a trick question. We need to be more specific:

If you're thinking in terms of combined population, a free trade agreement which came into effect at the start of the year that received very little coverage in the Western-centric media (with some exceptions) is the correct answer--d. From Xinhua:
The China-ASEAN free trade area covered a population of 1.9 billion and a combined gross domestic product close to 6 trillion U.S. dollars. It is the world's largest trading bloc in terms of population covered and the third largest in terms of trading volume.
Third place in trading volume terms is not to be sneezed at, either. It's a common criticism of Western media--particularly the American variety--that even "international" news tends to be parochial in nature. If it cannot be related to America somehow, then it probably won't receive much airtime. As if we needed any more evidence...

If you're thinking in terms of intraregional trade volume, though, then the EU scores a decisive victory.

If you're thinking in terms of combined nominal GDP, it's still the European Union at $18.4 trillion followed by NAFTA in the runner-up spot at $16.8T, although NAFTA inches ahead if combined GDP is expressed in purchasing power parity (PPP) terms.

Anyway, I just felt like pointing these out after noticing that my earlier post on the China-ASEAN FTA didn't mention the remarkable size of the nascent grouping even if the commitments involved are not quite as deep as those as in NAFTA, the EU, or Mercosur for that matter. (To be fair, a China-Vatican FTA or CHIVFTA as inconceivable as it sounds would dwarf NAFTA or EU in population terms given China's 1.3 billion person population.) Armed with this trivia, it's time to stump everyone else!

Fire Your Guns: Taiwan and US-China Relations

♠ Posted by Emmanuel in , at 1/30/2010 04:46:00 PM
The US and China's squabbles are legion: unbalanced trade; the renminbi's value; the Internet; human rights; Tibet; freedom of speech; the environment; global warming; and coddling of despotic regimes like North Korea, Iran, and Sudan. Today, however, we return to the issue of Taiwan which we have covered in many previous posts [1, 2, 3]. The pattern has always been the same thus far: America decides to sell weapons to Taiwan, China makes a fuss of it, and then things are forgotten after a while until the next round of US arms sales to Taiwan. Beijing, of course, has always been viewed the ROC as a renegade province. Hence, the matter of Taiwan has always been regarded as an internal matter demanding others' non-interference. During the days of independence-minded Taiwanese leader Chen Shui Bian, the PRC used to warn that force would be implemented in the event Taiwan declared independence.

So we receive news yet again of an impending US arms sale to Taiwan which has Beijing up in arms. Ironically, I've always found it curious how China expresses alarm about these arms sales when they help alleviate the chronic American fiscal and trade deficits the PRC professes concern about. Once more, PRC leadership is reiterating that Taiwan is the top bilateral issue for these two countries. From our favourite official news agency, Xinhua:
Chinese Foreign Ministry announced Saturday that China will postpone bilateral military programs and security talks and punish certain U.S. companies in response to the U.S. government's greenlight on new shipments of advanced weapons to Taiwan. According to a press release of the Foreign Ministry, China has decided to partially halt the exchange programs between the militaries of the two countries...

China will also impose sanctions on the U.S. companies involved in the arms sales to Taiwan, the press release says. Sources from the Foreign Ministry said China-U.S. cooperation on major regional and international issues will also be inevitably affected by the issue. The Chinese side made such decisions since the U.S. arms sales to Taiwan had "incurred severe damage to China-U.S. relations," the press release says.

The U.S. government on Friday announced the plans to sell a package of arms to Taiwan, which include Patriot missiles, Black Hawk helicopters and minesweepers. China immediately expressed strong indignation about the sale after the U.S. government notified the U.S. Congress of the plans. Chinese Vice Foreign Minister He Yafei on Saturday has summoned the U.S. ambassador to China Jon Huntsman for an urgent meeting and lodged a solemn representation.

Such a move is gravely against the three joint communiques between China and the United States, especially the "Aug. 17" communique, in which the United States promised not to seek to carry out a long-term policy of arms sales to Taiwan, and intended to gradually reduce arms sales to the island...

The U.S. decision "constitutes a gross intervention into China's internal affairs, seriously endangers China's national security and harms China's peaceful reunification efforts," a Foreign Ministry statement quoted He as saying. The China-U.S. relations had witnessed a good start last year under the joint efforts of both sides. "This accords to common interests of the two nations," He said.

However recently, the United States stubbornly sticked to the Bush administration's wrong decision on arms sales to Taiwan, and conducted trade protectionism measures against China. "These actions severely disturbed the China-U.S. ties," he noted..."The U.S. plan will definitely further undermine China-U.S. relations and bring about serious negative impact on exchanges and cooperation in major areas between the two countries, and lead to aftermath both sides are unwilling to see," He said.

The Taiwan issue is related to China's sovereignty and territorial integrity, and concerns China's core interests and the Chinese people's national sentiments. "It is always the most important and most sensitive core issue in the China-U.S. relations," he noted...He urged the U.S. side to "fully recognize the gravity of the issue, revoke the erroneous decision on arms sales to Taiwan and stop selling weapons to Taiwan"... "Otherwise, the United States must shoulder the responsibility for the grave aftermath," he noted.

In 2008, China curtailed military exchanges with the United States after the Bush administration approved a 6.5-billion-U.S.-dollar Taiwan arms deal, including 30 Apache attack helicopters and 330 Patriot missiles.
If you're still interested in the PRC's official position, there are jillions more articles in the Xinhua link. There are any number of interesting sabre-rattling statements here:
  • Punishment of US corporations = MNCs operating in China, especially those in the arms trade?
  • Hurt cooperation on regional and international issues = get more aggressive on the trade front?
  • Grave aftermath = punish America where it hurts in the financial realm ("Russia-style")?
Longtime readers know that I am an exponent of a trade war between these two countries to sort matters out. It's not that I'm picking sides, but it's unhealthy to continue with the status quo of subprime globalization. If they won't solve problems amicably, then a nice conflict should go quite a way towards finishing it off. Likewise, Taiwan may be just the ticket to get that "grave aftermath" underway. Really, the rest of the world is sick and tired of US and Chinese posturing. Don't be all hat, no cattle. Just cut the crap and start fighting already. Jeez, even "pro wresting" goes down to the mat eventually.

Dollar Basher Roundup: Lord Turner & Bin Laden

♠ Posted by Emmanuel in at 1/30/2010 10:05:00 AM
In normal circumstances, you probably wouldn't lump the world's most famous financial regulator--Lord Turner of Britain's Financial Services Authority (FSA)--with the world's most famous terrorist. These, however, are not normal times. First up is Lord Turner inveighing against the dollar carry trade borne of abnormally low interest rates:
Lord Turner of Ecchinswell, chairman of the Financial Services Authority, said that a big part of the foreign exchange trading business of the City of London was “economically valueless” and hinted at a crackdown on a popular speculative activity called the carry trade.

In an echo of his controversial assertion last summer that parts of the City were “socially useless”, Lord Turner said that banks and hedge funds that borrowed cheaply in US dollars to bet on higher-yielding investments in emerging markets were adding no value to the real economy. “If I could wave a magic wand here, and greatly reduce the carry trade, I’m pretty certain the world would be a better place,” he said...Carry trades are a form of bank proprietary trading likely to be curbed by tougher capital rules when the international Financial Stability Board, of which Lord Turner is a member, rules on the new capital regime next year...

After a private session on casino banking and regulation, Lord Turner said of the carry trade: “It’s a form of speculative activity where you can’t work out what the value is to the real economy.” He said that speculators were relying on being able to extricate themselves from the trade before a sudden collapse of the currency they had bought. “You’re betting you’re going to get out before the train wreck — the adjustment — happens.”
I agree. Foreign exchange for trade facilitation is necessary, but that for engaging in the carry trade is of dubious purpose. Obviously, record low US interest rates have been an enabler of this carry trade.

Our next celebrity dollar basher is none other than the world's most famous terrorist. Or, at least someone who claims to be him as there is debate whether he's still alive. Bin Laden seems to have gotten off the jihad train for now to cover other issues in an attempt to incorporate third-world populism. As widely reported, he's going after industrialized countries' excess carbon emissions as well as the US dollar:
“We must also stop dealings in the dollar and get rid of it as soon as possible,” he said. “I know that this has great consequences and grave ramifications, but it is the only means to liberate humanity from slavery and dependence on America.”
America: Who loves ya, baby?

Out Now: UK Inequality Report

♠ Posted by Emmanuel in ,, at 1/29/2010 08:08:00 PM
I almost forgot to post on this: Just made available is a report commissioned by UK Minister for Women and Equality Harriet Harman and prepared by the LSE's very own Centre for Analysis of Social Exclusion. The report was co-authored by some of the biggest names in the UK working on social policy issues including Ruth Lister (social exclusion) and Tariq Modood (multiculturalism). The results should be of concern not just for feminists but society as a whole: although women up to age 44 are better qualified than their male counterparts, they earn 21% less. Minorities also fare quite poorly in relation to the reference white males:

Elsewhere, the top decile of earners is also pulling away from the rest. All in all, it's pretty damning stuff on how women and minorities have not really progressed despite all this talk you hear about Britain becoming a "multicultural" society. It sounds a heckuva lot like the United States--a more or less permanent underclass accompanied by limited prospects of upward mobility. Given that the premise of Anglo-Saxon economies was that stultified structures would be rid of as to not limit mobility, it's galling that gains are so hard to find. You can download a summary or the full report, although be prepared for some sobering reading. Meanwhile, here's the overview:

The National Equality Panel was set up to document the relationships between inequalities in people’s economic outcomes – such as earnings, incomes and wealth – and their characteristics and circumstances – such as gender, age or ethnicity. How does who you are affect the resources and opportunities available to you?

We map out in detail what these relationships look like in a way never done before. In this summary we bring together the key findings from our main report, and the challenges they create for the development of policy. There are several over-arching themes:
  • Inequalities in earnings and incomes are high in Britain, both compared with other industrialised countries, and compared with thirty years ago. Over the most recent decade according to some measures, earnings inequality has narrowed a little and income inequality has stabilised, but the large inequality growth between the late 1970s and early 1990s has not been reversed.
  • Some of the widest gaps in outcomes between social groups have narrowed in the last decade, particularly between the earnings of women and men, and in the educational qualifications of different ethnic groups.
  • However, there remain deep-seated and systematic differences in economic outcomes between social groups across all of the dimensions we have examined – including between men and women, between different ethnic groups, between social class groups, between those living in disadvantaged and other areas, and between London and other parts of the country.
  • Despite the elimination and even reversal of the differences in educational qualifications that often explain employment rates and relative pay, significant differences remain between men and women and between ethnic groups.
  • Importantly, however, differences in outcomes between the more and less advantaged within each social group, however the population is classified, are usually only a little narrower than those across the population as a whole. They are much greater than differences between groups. Even if all differences between such groups were removed, overall economic inequalities would remain wide.
  • The inequality growth of the last forty years is mostly attributable to growing gaps within social groups, however those groups are defined. The pattern of the last decade has been more mixed, with the effects of growing inequality within some groups offset by narrowing gaps between them.
  • Many of the differences we examine cumulate across the life cycle, especially those related to people’s socio-economic background. We see this before children enter school, through the school years, through entry into the labour market, and on to retirement, wealth and resources for retirement, and mortality rates in later life. Economic advantage and disadvantage reinforce themselves across the life cycle, and often on to the next generation. By implication, policy interventions to counter this are needed at each life cycle stage.
  • A fundamental aim of people with widely differing political perspectives is to achieve ‘equality of opportunity’, but doing so is very hard when there are such wide differences between the resources which people and their families have to help them fulfil their diverse potentials.
29/1 UPDATE: "Send inequality whingers to high equality Cuba"

30/1 UPDATE: You may be wondering, "Wasn't Margaret Thatcher becoming prime minister a turning point for gender equality in Britain?" Well, I was visiting the London Times website when the reason for her rise (since corrected, mind you, and an interesting article too) was revealed:

31/1 UPdATE: Also see the blurb on the LSE website.

Fannie, Freddie and a Russia Conspiracy Theory

♠ Posted by Emmanuel in , at 1/29/2010 05:50:00 PM
Former US Treasury Secretary Henry Paulson (AKA The Great Paulsonio in these parts) is coming out with an autobiography called On the Brink. An interesting claim he makes according to the FT is that, to punish the United States for its support of Georgia during the latter's conflict with Russia over breakaway territories, Russia tried to involve China in a large sell-off of Fannie Mae and Freddie Mac securities:
Russia proposed to China that the two nations should sell Fannie Mae and Freddie Mac bonds in 2008 to force the US government to bail out the giant mortgage-finance companies, former US Treasury secretary Hank Paulson has claimed...

Mr Paulson said that he was told about the Russian plan when he was in Beijing for the Olympics in August 2008. Russia had gone to war with Georgia, a US ally, on August 8. “Russian officials had made a top-level approach to the Chinese, suggesting that together they might sell big chunks of their GSE holdings to force the US to use its emergency authorities to prop up these companies,” he said...“The Chinese had declined to go along with the disruptive scheme, but the report was deeply troubling,” he said. A senior Russian official told the Financial Times that he could not comment on the allegation.
I obviously can't tell if this allegation is true. However, I can say that (1) having problems with territories keen on breaking away itself, China would not cheerfully aid someone else fomenting secession in someone else's backyard; and (2) given that these government-sponsored enterprises were already in trouble anyway, it is doubtful if Russia and the PRC could have distracted America that much.

Are the Russians really this spiteful? All I can think of is "polonium."

China Won't Save Greece by Buying $35B of Bonds

♠ Posted by Emmanuel in ,,, at 1/28/2010 05:01:00 PM
A few days ago we looked at how internationalized financial difficulties have become by analyzing how the 2004 Greek Olympics have contributed to Greece's Olympian money woes. Well, continuing with the theme of higher, stronger, faster deficits, news outlets are reporting an interesting relationship Greece is purported to have with the holder of the 2008 Olympics--China. Republicans in America have a stock solution for everything that ails of "cut taxes." If I have one, it's "sell it to the Chinese."

Apparently, the Greek authorities may have contemplated this idea in financing its gargantuan pile of debt. The Financial Times reports that while Hellas is reluctant to admit flogging Eur 25 billion ($35 billion) worth of bonds to Beijing via Government Sachs, it certainly doesn't sound far-fetched. What's more, the squelching of this rumour is causing yields on Greek bonds to rise considerably:
The mayhem unfolded after Greece denied it had given a mandate to Goldman Sachs, the US investment bank, to sell government debt to China. Greek 10-year bond yields closed at 6.70 per cent, 0.48 percentage points up on the day. The Financial Times reported on Wednesday that Athens was wooing Beijing to buy up to €25bn of government bonds in a deal promoted by Goldman. China had not yet agreed to such a purchase, the FT said.

The government’s comments unsettled markets because of their implication that China, with $2,400bn in foreign exchange reserves, was not interested in increasing its exposure to sovereign Greek debt. Experts, though, said that heavier Chinese purchases of Greek debt would be no less disturbing. For the eurozone, “a member country implicitly rescued by China would be an even worse signal than an IMF programme,” said Marco Annunziata, chief economist at Unicredit.
Yu Yongding, an astute commentator on China's international financial dealings who Chinese powers-that-be listen to, believes Greek debt is an even worse prospect than American debt, thus negating any "diversification" advantages:
China shouldn’t buy a “large chunk” of Greek government debt to help rescue the nation because the securities are more risky than U.S. Treasuries, said Yu Yongding, a former adviser to the Chinese central bank.

Greece has a lower debt rating than the U.S. and its statistics have been “sharply” criticized by the European Commission, said Yu, currently a member of the Chinese Academy of Social Sciences, a government-backed research body. The Greek Finance Ministry yesterday “categorically“ denied a report in the Financial Times that it is wooing China to buy as much as 25 billion euros ($35 billion) of its bonds. “It is unreasonable for an economist to support a diversification away from an unsafe asset class to a much more unsafe asset class,” Yu said in an e-mailed response to questions. “Let European governments and the European Central Bank rescue Greece.”
I like him pointing out that American debt is unsafe (as if the rest of the world didn't know that already). Despite official protestations about not requiring any help, I believe that any rescue package for Greece will involve the EU despite rhetoric to the contrary. If such were the case, I believe that an IMF-led programme would vouchsafe EU lending anyway. For Star Wars fans, treating Greece as the "Alderaan" of the PIGS (Portugal, Ireland, Greece, and Spain) may be just the thing to get the others to fall in line. Instead of inviting moral hazard (with Spain being the rotating head of the EU at the current time and whatnot), demonstrating "don't make me destroy you" by forcing Greece to the IMF poorhouse if it doesn't behave may be just the ticket to make these deficit-swilling countries behave.

I have a similar idea for well-deservedly humbling America for its fiscal degeneracy that I'll talk about in due time. Where's the rebel base? You sir are the fiscal rebel, and extirpating your prodigal ways is long overdue.

Is Obama a Worse Deficit Lover Than Bush?

♠ Posted by Emmanuel in at 1/28/2010 09:31:00 AM
There is much that's objectionable in the American president's address to both houses of Congress from a fiscal standpoint such as expecting that soaking the 2% wealthiest while cutting taxes on 95% of the rest will somehow help remedy the morass it has sunken into. I particularly like this sleight of hand:
At the beginning of the last decade, the year 2000, America had a budget surplus of over $200 billion. By the time I took office, we had a one-year deficit of over $1 trillion and projected deficits of $8 trillion over the next decade. Most of this was the result of not paying for two wars, two tax cuts, and an expensive prescription drug program. On top of that, the effects of the recession put a $3 trillion hole in our budget. All this was before I walked in the door.
Alright, this part is true enough. Medicare Part D did blow a big hole into America's fiscal picture. However, we need to move into the more important, "OK, so what are you going to do about it?" phase. Obama declares a figurative "war on deficits" by stating the following:
Starting in 2011, we are prepared to freeze government spending for three years. Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don't. And if I have to enforce this discipline by veto, I will.
That's really great and everything, but it's these non-discretionary spending items which are set to explode as the fabled 80-some million baby boomers begin to retire. Blaming Medicare Part D but not reining it in is, well, disingenuous. Obama admits as much:
Now, even after paying for what we spent on my watch, we'll still face the massive deficit we had when I took office. More importantly, the cost of Medicare, Medicaid, and Social Security will continue to skyrocket. That's why I've called for a bipartisan fiscal commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad. This can't be one of those Washington gimmicks that lets us pretend we solved a problem. The commission will have to provide a specific set of solutions by a certain deadline.
The larger point is that blaming your predecessors will only get you so far. Obama speaks of making tough choices, and we all know what must be done that he does not speak of at all. Moreover, it's hard to see Republicans championing tax increases on this "bipartisan fiscal commission" -
  • Introduce a national value-added tax;
  • Raise the retirement age;
  • Raise income taxes across the board;
  • Raise payroll taxes;
  • Reduce health care and pension benefits
On paper, Obama makes tough talk about "But when I ran for President, I promised I wouldn't just do what was popular -– I would do what was necessary." Well, get to it, mate--implement some of the above, or preferably all five. Financially, the rest of the world literally regards your country as a joke.

The problem with the American political system is that it's hard to come up with a Lord High Executioner like the UK's Peter Mandelson. That is, someone insulated from the bellyachers when wielding the axe to make...necessary adjustments. Who will be the Yankee hatchet man during this time when politicos must readjust national aspirations to diminished expectations? Until he does something worthwhile, I think it's fair to say Obama's at least as much a deficit lover as the free-spending fiscal degenerate who preceded him. Perhaps it's a prerequisite of the post in a country that's seen its better days--and certainly looks keen on keeping it that way.

The Motherlode on China-US Economic Relations

♠ Posted by Emmanuel in ,, at 1/28/2010 12:30:00 AM
It is always humbling when you fail to notice the proliferation of highly useful and informative blogs on the Internet. Today, I have stumbled upon an amazing blog for junkies of China-US economic relations written by those who should know much about it. Baker Hostetler is among the American law firms with a large presence in the international trade law arena. As such, you won't be surprised to know that their blog offering, China-US Trade Law, makes exhaustive analyses of the aforementioned economic relations. With its emerging emphasis on trade rows between the two nations, the firm's regular dealings with key US bodies dealing with trade matters (Department of Commerce, International Trade Commission, Consumer Product Safety Commission) makes for informed reading.

Topics are covered in considerable depth--almost too much depth for blog posts, I think. As expected, more detailed analyses also means that topics are covered some time after the fact. Nonetheless, it's a wonderful find overall. For instance, here's their explanation on why China perhaps wrongly prefers to contest trade disputes at the WTO while ignoring those in the US International Trade Court:
Since accession to the WTO, China has been participating in trade disputes according to the rules, but less than fully. Unlike other countries, China is not appearing before the ITC. It is not appealing adverse agency determinations in U.S. courts. It is not pursuing administrative reviews of countervailing duty orders, when final duties are determined and set for collection. It is not even answering questionnaires in administrative reviews in support of its own companies. Instead, China is counting on the WTO for trade vindication, a strategic choice almost certain to disappoint...

China is participating just enough in trade disputes arising in the United States to be informed and to complain, but not enough to prevail. Respondents to trade remedy petitions in the United States hope, but do not expect, to prevail at the ITC. They have little hope at Commerce except to build a record for appeal. Respondents, therefore, who do not appear at the ITC and do not appeal Commerce determinations do not expect ever to prevail. China’s choice of partial participation must be for some other reason.
If China doesn't roll with the punches Stateside, I shudder to think what its response will be if a growing majority of actions against it are not subject to WTO resort.

Cybersecurity Comes of Age in US Policy Dialogue

♠ Posted by Emmanuel in , at 1/27/2010 02:26:00 PM
This post is just a follow-up to the thoughts I've expressed in previous posts that, contrary to conspiracy theories, it is unlikely that the United States is using "information imperialism" to not so surreptitiously foment overthrow of socialist regimes and other unsavoury types. What follows are excerpts from the unclassified version of a White House-commissioned study on how securing US cyberspace. The Internet has become a backbone of everyday life. Hence, securing it against potential attacks is of paramount importance. Notably, the White House concedes that the United States is quite vulnerable to cyberattacks at the current time--which are my thoughts exactly. How can conspiracists say the US uses the Internet to destabilize other regimes when America itself lacks the protection to counter cyber-attacks? It cuts both ways, baby. The gist of the threat is in this paragraph:
The architecture of the Nation’s digital infrastructure, based largely upon the Internet, is not secure or resilient. Without major advances in the security of these systems or significant change in how they are constructed or operated, it is doubtful that the United States can protect itself from the growing threat of cybercrime and state-sponsored intrusions and operations. Our digital infrastructure has already sufered intrusions that have allowed criminals to steal hundreds of millions of dollars and nation-states and other entities to steal intellectual property and sensitive military information. Other intrusions threaten to damage portions of our critical infrastructure. These and other risks have the potential to undermine the Nation’s confidence in the information systems that underlie our economic and national security interests.
Meanwhile, here is the executive summary...

Executive Summary

The President directed a 60-day, comprehensive, “clean-slate” review to assess U.S. policies and structures for cybersecurity. Cybersecurity policy includes strategy, policy, and standards regarding the security of and operations in cyberspace, and encompasses the full range of threat reduction, vulnerability reduction, deterrence, international engagement, incident response, resiliency, and recovery policies and activities, including computer network operations, information assurance, law enforcement, diplomacy, military, and intelligence missions as they relate to the security and stability of the global information and communications infrastructure. The scope does not include other information and communications policy unrelated to national security or securing the infrastructure. The review team of government cybersecurity experts engaged and received input from a broad cross-section of industry, academia, the civil liberties and privacy communities, State governments, international partners, and the Legislative and Executive Branches. This paper summarizes the review team’s conclusions and outlines the beginning of the way forward towards a reliable, resilient, trustworthy digital infrastructure for the future.

The Nation is at a crossroads. The globally-interconnected digital information and communications infrastructure known as “cyberspace”underpins almost every facet of modern society and provides critical support for the U.S. economy, civil infrastructure, public safety, and national security. This technology has transformed the global economy and connected people in ways never imagined. Yet, cybersecurity risks pose some of the most serious economic and national security challenges of the 21st Century. The digital infrastructure’s architecture was driven more by considerations of interoperability and eiciency than of security. Consequently, a growing array of state and non-state actors are compromising, stealing, changing, or destroying information and could cause critical disruptions to U.S. systems. At the same time, traditional telecommunications and Internet networks continue to converge, and other infrastructure sectors are adopting the Internet as a primary means of interconnectivity. The United States faces the dual challenge of maintaining an environment that promotes eiciency, innovation, economic prosperity, and free trade while also promoting safety, security, civil liberties, and privacy rights. It is the fundamental responsibility of our government to address strategic vulnerabilities in cyberspace and ensure that the United States and the world realize the full potential of the information technology revolution.

The status quo is no longer acceptable. The United States must signal to the world that it is serious about addressing this challenge with strong leadership and vision. Leadership should be elevated and strongly anchored within the White House to provide direction, coordinate action, and achieve results. In addition, federal leadership and accountability for cybersecurity should be strengthened. This approach requires clarifying the cybersecurity-related roles and responsibilities of federal departments and agencies while providing the policy, legal structures, and necessary coordination to empower them to perform their missions. While eforts over the past two years started key programs and made great strides by bridging previously disparate agency missions, they provide an incomplete solution. Moreover, this issue transcends the jurisdictional purview of individual departments and agencies because, although each agency has a unique contribution to make, no single agency has a broad enough perspective or authority to match the sweep of the problem.

The national dialogue on cybersecurity must begin today. The government, working with industry, should explain this challenge and discuss what the Nation can do to solve problems in a way that the American people can appreciate the need for action. People cannot value security without first understanding how much is at risk. Therefore, the Federal government should initiate a national public awareness and education campaign informed by previous successful campaigns. Further, similar to the period after the launch of the Sputnik satellite in October, 1957, the United States is in a global race that depends on mathematics and science skills. While we continue to boast the most positive environment for information technology firms in the world, the Nation should develop a workforce of U.S. citizens necessary to compete on a global level and sustain that position of leadership.

The United States cannot succeed in securing cyberspace if it works in isolation. The Federal government should enhance its partnership with the private sector. The public and private sectors’ interests are intertwined with a shared responsibility for ensuring a secure, reliable infrastructure. There are many ways in which the Federal government can work with the private sector, and these alternatives should be explored. The public-private partnership for cybersecurity must evolve to deine clearly the nature of the relationship, including the roles and responsibilities of each of the partners. The Federal government should examine existing public-private partnerships to optimize their capacity to identify priorities and enable eicient execution of concrete actions.

The Nation also needs a strategy for cybersecurity designed to shape the international environment and bring like-minded nations together on a host of issues, such as technical standards and acceptable legal norms regarding territorial jurisdiction, sovereign responsibility, and use of force. International norms are critical to establishing a secure and thriving digital infrastructure. In addition, differing national and regional laws and practices—such as laws concerning the investigation and prosecution of cybercrime; data preservation, protection, and privacy; and approaches for network defense and response to cyber attacks—present serious challenges to achieving a safe, secure, and resilient digital environment. Only by working with international partners can the United States best address these challenges, enhance cybersecurity, and reap the full beneits of the digital age.

The Federal government cannot entirely delegate or abrogate its role in securing the Nation from a cyber incident or accident. The Federal government has the responsibility to protect and defend the country, and all levels of government have the responsibility to ensure the safety and well­being of citizens. The private sector, however, designs, builds, owns, and operates most of the digital infrastructures that support government and private users alike. The United States needs a comprehensive framework to ensure a coordinated response by the Federal, State, local, and tribal governments, the private sector, and international allies to signiicant incidents. Implementation of this framework will require developing reporting thresholds, adaptable response and recovery plans, and the necessary coordination, information sharing, and incident reporting mechanisms needed for those plans to succeed. The government, working with key stakeholders, should design an effective mechanism to achieve a true common operating picture that integrates information from the government and the private sector and serves as the basis for informed and prioritized vulnerability mitigation eforts and incident response decisions.

Working with the private sector, performance and security objectives must be defined for the next-generation infrastructure. The United States should harness the full beneits of technology to address national economic needs and national security requirements. Federal policy should address requirements for national security, protection of intellectual property, and the availability and continuity of infrastructure, even when it is under attack by sophisticated adversaries. The Federal government through partnerships with the private sector and academia needs to articulate coordinated national information and communications infrastructure objectives. The government, working with State and local partners, should identify procurement strategies that will incentivize the market to make more secure products and services available to the public. Additional incentive mechanisms that the government should explore include adjustments to liability considerations (reduced liability in exchange for improved security or increased liability for the consequences of poor security), indemniication, tax incentives, and new regulatory requirements and compliance mechanisms.

The White House must lead the way forward. The Nation’s approach to cybersecurity over the past 15 years has failed to keep pace with the threat. We need to demonstrate abroad and at home that the United States takes cybersecurity-related issues, policies, and activities seriously. This requires White House leadership that draws upon the strength, advice, and ideas of the entire Nation.

"America Uses Internet to Spread Regime Change"

♠ Posted by Emmanuel in , at 1/26/2010 03:36:00 PM
Here's yet another interpretation of Google in China if you're unsatisfied with the Emmanuel-esque take on them [1, 2, 3]. This one's broadly in line with the "information imperialism" school of thought that the official publication The Global Times put forth. At least that's a paraphrase of what the World Socialist Website (WSWS) says about Hillary Clinton's recent speech:
This was, however, only a cover for the assertion of a global mandate for Washington to destabilize or overthrow governments worldwide. Clinton praised the Twitter and Internet organizing behind US-backed "color revolutions," including most recently the June 2009 Green Revolution that unsuccessfully tried to overturn the reelection of Iranian President Mahmoud Ahmadinejad. She noted, "In Iran and Moldova and other countries, online organizing has been a critical tool for advancing democracy and enabling citizens to protest suspicious election results."

Other US-backed "color revolutions" include the 2003 Rose Revolution that installed President Mikheil Saakashvili in Georgia, the 2004 Orange Revolution in Ukraine that placed President Viktor Yushchenko in power, and the failed 2005 Tulip Revolution in Kyrgyzstan and 2006 Denim Revolution in Belarus.

Clinton reserved the right to engineer such “revolutions” anywhere in the world: "The United States is committed to devoting the diplomatic, economic and technological resources necessary to advance [Internet] freedoms. We are a nation made up of immigrants from every country and every interest that spans the globe… We will work with partners in industry, academia and nongovernmental organizations to establish a standing effort that will harness the power of connection technologies and apply them to our diplomatic goals."
Like most agitprop, I take these sort of pronouncements with a grain of salt. To be fair, I must disclose that this blog is hosted by Blogger which is owned by Google. I am not shy in disclosing that I have found it to be a wonderful service that offers pretty much everything blogs you need to pay for offer in terms of features. Plus, I can't complain about Google's search results which drive a good amount of traffic in my direction.

With that out of the way, let's return to WSWS. In the next set of statements, we actually get something which I honestly missed before. What commentators (including me) have largely overlooked in the Internet debate is that China is a large country with many (non-Han Chinese) minorities of varying propensities towards seeking independence. Hence the PRC leadership's many pleas for a "harmonious society." On a related note are the growing incidences of civil unrest there:
Though it carefully censors news of popular protest, the Chinese state press is well aware of massive discontent in China, and fears that it could come under the control of political forces hostile to the CCP. The number of “mass incidents” —that is, protests, strikes or riots, typically repressed by mass police or paramilitary actions—reached 120,000 in 2008, up from 90,000 in 2006 and 74,000 in 2004.

According to some estimates, the figure for 2009 could be 230,000. A Chinese Academy of Social Sciences study in December found that of the 77 major “mass incidents” in 2009, 30 percent were spread by the Internet and mobile phones.

In this context, Clinton's speech amounts to a threat that the State Department might try to seize upon and direct protests to undermine the Chinese government—as it already has done in Eastern Europe, the ex-USSR and the Middle East.
I honestly doubt whether Hillary Clinton--or any of her colleagues or predecessors--deliberately harnesses the Internet to spread regime change. As far as conspiracy theories go, this one is pretty far-fetched. However, something that may have some value is the assertion that protest movements use information and communication technologies to get the word out. Again, I am not quite sure that anyone who uses ICT are against the workers of the world uniting instead of being the workers of the world uniting. Moreover, the author does not convincingly connect the various colour revolutions which occurred in Eastern Europe with American propagation of ICT.

Late last year, the PRC's minister of public security, Meng Jianzhu, made claims that these "mass incidents" should be quelled by even heavier policing of the Internet:
Meng demanded faster and more sophisticated extinguishing of riots and protests, and stricter control over the country's already heavily censored Internet. "As soon as a mass incident breaks out, we must ensure that it is quickly located, reported and brought under control," Meng wrote. "Mass incidents" is a term Chinese officials use to refer to protests, riots and mass petitions.

Police forces needed to become more skilled at coordinating and sharing information, overcoming entrenched bureaucratic boundaries, Meng wrote. He demanded more specialist forces and equipment to break up mass unrest...some small-town protests in the past couple of years have snowballed into violent confrontations involving thousands of residents, many of hearing of the unrest through mobile phone messages or over the Internet.

Deadly riots in the ethnically-divided western region of Xinjiang in July also underscored the potency of modern communications in spreading seeds of discontent. Authorities needed to intensify oversight of the Internet, guarding against signs of unrest and ideas and information damaging to Party control, wrote Meng. "The Internet has become an important means for anti-China forces to engage in infiltration and sabotage," Meng wrote. "Give greater prominence to correct guidance of Internet opinion," he added.
I wonder what John Kerry would make of this. To me the Chinese are just trying to shoot the medium and not even the messenger.

Sleeping On the Blog: Fed to Kill Int'l Swap Lines

♠ Posted by Emmanuel in , at 1/26/2010 12:17:00 AM
An old professor of mine pointed out that "business intelligence" did not often require special connections to movers and shakers of high finance and holders of office. No, it might be something as mundane as reading the pages of the Wall Street Journal and picking up a story that most everyone else missed for one reason or another. Try and connect the dots in an otherwise jiggery pokery image and you may eventually realize a pattern that no one else sees.

As quite a few readers probably know, Brad Setser--then of RGE Monitor, subsequently with the CFR, and now working for the White House's National Economic Council--gave me my first break in blogging. Then, as now, we shared an obsession with China's trade relations with the United States. Hence, a guest post I did for him concerned my bread-and-butter material of Sino-American trade conflicts. Working for the White House, Dr. Setser is naturally more guarded in expressing his personal opinions nowadays lest his comments be misinterpreted as deviating from a tightly controlled line. The limited output we get from him like this post prior to the Pittsburgh G-20 is understandably supportive of Obama administration efforts. It is likely that we disagree on major points of American policy nowadays, but I learned a lot from him nonetheless. Hey, if arch-Chicago School doctrinaire Milton Friedman had Andre Gunder Frank of leftist "underdevelopment" fame as a PhD student, then I suppose I'm not much of a stretch.

I bring this up because, sometime ago, he had a somewhat famous post concerning "Where is My Swap Line?" in the aftermath of the onset of global financial crisis. If you will recall, the Federal Reserve extended swap lines to friendly foreign countries to help them deal with difficulties obtaining dollars. The Federal Reserve describes these "temporary reciprocal currency arrangements" with other central banks thusly:
On December 12, 2007, the FOMC announced that it had authorized dollar liquidity swap lines with the European Central Bank and the Swiss National Bank to provide liquidity in U.S. dollars to overseas markets, and subsequently authorized dollar liquidity swap lines with additional central banks. The FOMC has authorized through February 1, 2010, the arrangements between the Federal Reserve and each of the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, Sveriges Riksbank, and the Swiss National Bank.

These swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve.
We are of course nearing the first of February when these swap lines end. The gist of Setser's post was that, despite the onset of crisis, the United States, the only country in the world that can print dollars, still had a very important role in ensuring that mechanisms of global finance did not seize. Despite all the talk about America being a has-been you get from this and other blogs, America was still in a position to provide global public goods via relatively inexpensive access to dollars using swap lines. Or, at least to foreign central banks that were democracies on good terms with Washington.

Having provided you with perhaps more background information than you want to know, the Wall Street Journal now reports that these swaps--which at one time totalled $500 billion+--are going the way of the dodo unless these lines are renewed once more:
The Federal Reserve is on track to end a program begun during the financial crisis that provides U.S. dollars to institutions overseas through foreign central banks. In the depths of the crisis, the Fed shipped more than $500 billion overseas through arrangements with other central banks, in exchange for their currencies. Such lending is down sharply and officials expect to end the program according to plan on Feb. 1.

As of Jan. 20, the Fed held $1.25 billion in dollar "swap" agreements with foreign central banks, down from $63 billion in early September and $583 billion in late December 2008 as the financial crisis was worsening. Before the crisis, many foreign financial institutions depended on short-term money markets to borrow dollars to fund their holdings of U.S. dollar assets, like mortgage-backed securities. These markets froze when the crisis hit and many foreign banks and investors found themselves short of the dollars they needed to finance their holdings.

The central banks stepped in, with the Fed offering dollars to foreign central banks like the Bank of England and the European Central Bank, which in turn lent dollars to financial institutions in their local markets. The move helped to stem the credit-market panic. The Fed said in December it was "working with its central bank counterparties to close its temporary liquidity-swap arrangements by February 1." With the Fed's next policy meeting coming on Tuesday, Jan. 26th, and Wednesday, Jan. 27th, it is likely to formally announce plans to shut the program down.
Optimists will conclude that the credit crisis is ending because commercial lending in dollars worldwide is no longer in short supply. Perhaps; but pessimists like me naturally see America receiving its comeuppance somewhere down the line as the price for near zero interest rate policy to help make this happen. Speaking of which, maybe I should send the good Dr. Setser an e-mail to see what he thinks of Paul Volcker putting one over Geithner and Summers although I'll probably get a "no comment"!

There's No Country Without Chinese Trade Issues

♠ Posted by Emmanuel in ,, at 1/25/2010 12:07:00 AM
I have often pondered how China can better win friends and influence people in the world economy. The definition of "hegemony" is often given as the ability and willingness to provide public goods that others cannot. Hegemony, of course, differs from mere preponderance--you can be streets ahead of everyone else, but they won't get with your programme if they perceive you're only looking out for #1. This being me to yet another discussion of China. It seems that its trade practices have had precisely the opposite effect of annoying pretty much everybody else. By re-establishing a peg of 6.83 yuan to the dollar, it has followed America's bedraggled currency unit down and enhanced its export competitiveness in the process--especially against countries which have not heavily "managed" their currencies alike those in the Eurozone. While my post title may be something of an exaggeration, it is only just: China's trade rows with the US are legendary and are well-covered here. Ditto for the European Union, from bra wars to tussles over steel. In its own backyard, China seems to have trouble quelling dissent as Indonesian legislators ponder a time out on trade despite ASEAN having agreed to a pact with China a long, long time ago.

Let's now turn our attention to two of the so-called BRICS countries. It's timely since the term has had an anniversary of sorts and there's much stuff on the FT website concerning building BRICS. Supposedly, these countries made a sensible grouping since Brazil had the agricultural products to feed (and power) the world population; India the services for the information age; China the widgets of all shapes and sizes, and Russia the energy and natural resources. Which is not to say that relations among BRICS countries have been entirely smooth. In previous posts, I have mentioned the Bratz wars [1, 2] that have occurred when Indian toymakers successfully persuaded their government to limit toy imports from China on dubious "safety" grounds. However, there's more.

To be short, India naturally fancies itself as an exporter as well. Who doesn't? Alike with many other countries--developed and developing--India is running a rapidly swelling surplus with China that threatens relations. Currency issues aside, many of the PRC's partners perceive the presence of several non-trade barriers (NTBs) that hamper market access, and India is no exception. From this perspective, Bratz wars and other limits placed on Chinese goods are merely tit-for-tat. However, things may be reaching a boiling point in Sino-Indian relations:
India has claimed Wen Jiabao, the Chinese premier, has given his personal commitment to rebalance a booming bilateral trading relationship skewed overwhelmingly in China’s favour by non-tariff barriers. New Delhi asked Beijing to take “corrective steps” to address a growing trade imbalance between the world’s two fastest-growing large economies in high level meetings in the Chinese capital this week.

Among the corrective steps recommended by Anand Sharma, India’s commerce minister, was the abolition of restrictions on Indian exports to China of products including information technology, Bollywood films and fresh food. In the first Joint Economic Group meeting between the two countries for four years, China undertook to buy more value-added goods from India, according to the Indian delegation. India’s commerce ministry also said it had extracted a commitment from Mr Wen “that both sides could work together to ensure more balanced trade”.

The concern over the difficulty of exporting to China is one of a number of grievances that have marked a deterioration in relations between New Delhi and Beijing over the past year. Amid the global economic slowdown, India restricted the import of a variety of Chinese products, including toys, chocolates and non-branded mobile phones...

China has recently dislodged the US as India’s largest trading partner. But New Delhi is irked by a rising trade deficit with China that has widened over the past decade to $16bn last year. Indian officials and industrialists are concerned that raw materials are shipped from India to China, whereas trade in the other direction is of manufactured goods that are undercutting India’s small and medium-sized business. China’s exports to India were worth about $29.5bn last year in a total bilateral trade of $43.4bn...

Mr Sharma, during his visit to China, highlighted the need for China to remove restrictions on the import of power equipment, rice and Indian television content. He also complained about time-consuming bureaucratic procedures blocking India’s drugmakers. “The issue of non-tariff barriers is an issue that refers to the World Trade Organisation but it would be mutually favourable to sort this out at the bilateral level,” said Amit Mitra, the general secretary of the Federation of Indian Chambers of Commerce and Industry. “The problem is: how do we get market access?”
Let Indian soap operas and Bollywood movies enter China. Ditto for generic drugs and agricultural products. It's getting pretty serious when the head of the chamber of commerce there threatens recourse to the WTO. For China, the road to hegemony probably means not taking others to the cleaners so blatantly--especially fellow BRICS and developing countries like India. Giving in a little may go a long way in the Dale Carnegie sweepstakes. Opening the PRC consumer market should help, definitely.

[NOTE: I tried to resist doctoring Bratz photos this time but failed again. Trust me, following old guys bicker over trade day in and day out will drive you nuts.]

What Would Adam Smith Do About Ben Bernanke?

♠ Posted by Emmanuel in at 1/23/2010 03:54:00 PM
At the risk of a dressing down from Gavin Kennedy, Adam Smith would get rid of B-B-B-Bennie of the Feds straight away and get another Fed chief. As you probably know, Bernanke's renomination as Federal Reserve chairman is being subject to political football at the moment. See the Financial Times and the Wall Street Journal for more. While there is some argument as to what would happen in the event that his renomination does not run into procedural tussles by garnering less than sixty votes in the US Senate--will he be forced to step down as head of the FOMC or not--this much is clear: his renomination is not a sure thing as discipline on the Democratic aisle is breaking down, with elections looming and a president losing popularity.

Let us return to one of Smith's most quoted statements:
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 own necessities but of their advantages.
While naive readings of this statement (think Chicago School) believe it to be an argument for selfishness, an interpretation more consistent with Smith's prior works suggests otherwise. This more nuanced argument is profoundly others-centred. In contemporary vocabulary, we do not beggar-thy-neighbour during transactions by trying to sucker them into a bum deal. We should think, "how can we offer our neighbours a fair deal ?" that meets with approval in the eyes of the impartial spectator?

Contrast an informed reading of the butcher-brewer-baker metaphor with modern America featuring Bernanke at the helm. Thus guy tries to give America's counterparties a raw deal at every turn--helicopter dropping money, buying up junk securities that foul up the Fed's balance sheet, reducing returns to a pittance via near-zero interest rate policy and so forth. Bernanke best symbolizes the moral turpitude of modern America embodying those hallmarks of "kick the can down the road" and "give your partners a raw deal."

As an unfortunate dollar holder still, I hold Bernanke in utter contempt. If America wants to salvage any decency in the eyes of the rest of the world, it should appoint someone else as Fed chief, pronto. And, of course, we're not talking about Larry "Wooden Racquets" Summers here. When your country is the laughingstock of your biggest creditors, I think it's time for some deep reflection on what has caused you to be held in such low regard.

Love Reign O'er Me: Tobin Tax Re-Re-Re-Visited

♠ Posted by Emmanuel in , at 1/23/2010 12:39:00 PM
[Before reading on, cue The Who--see, 70s music this time.] It's somewhat odd that the Great Banker Backlash is gaining momentum only so many months after the fact, but here we go. Perhaps all those fat banker bonuses from artificially huge spreads--borrow cheap care of expansive fiscal policies but still led relatively expensively--did them in. Barack Obama got this most recent round going only a few days ago with proposals to separate "banks" from "casinos" as well as limits to bank size. It's not quite Glass-Steagall II insofar as the delineation between investment and retail banking isn't as clear. Plus, limits to interstate presences of banks in Glass-Steagall will not be reinstituted--the concern the so-called Volcker plan raises has more to deal with balance sheet size as opposed to geographic spread.

At any rate, the race is on for world governments in one-upmanship for implementing banking regulation. Not to be outdone, our very own Gordon Brown is again raising the spectre of a Tobin tax. Financial Services Authority (FSA) head honcho Lord Turner suggested implementing this tax not so long ago, if you will recall. In its original form, Nobel laureate James Tobin proposed that international foreign exchange transactions be taxed to limit currency volatility near the end of the dollar-gold standard era. Proceeds from the tax could then be used for socially productive endeavours. I will spare you the arguments for and against this tax; the Wikipedia entry has grown a jillionfold since I last visited it so you can find much food for thought there even if it's rather helter-skelter in typical Wiki thousands-of-people-assembling-it fashion. You may find this OECD Observer commentary to be more cogent and intelligible.

The most recent BIS data suggests daily FX volume exceeds three trillion dollars. It is imperative, however, to separate FX transactions dealing with actual trade from those based more on speculation which I assume is what they're trying to control. Think, for example of harming Kenyan importers who have a requirement for US dollars to bring in much-needed goods: should their transactions be lumped in with those of Conglom-o-Capital Corp speculating on the dollar's direction with HedgieWedgie plc? I think not.

The latest news from 10 Downing Street is that Gordon wants to bring back attention to a Tobin tax given improved political appetite elsewhere for major rule changes. In particular, he wants to bring the cause up in global fora:
Gordon Brown plans to exploit Barack Obama's surprise crackdown on Wall Street banks to step up Britain's campaign for a new global transaction tax on financial products. The prime minister believes the dramatic US move to curb risky activities by major US banks indicates a new-found willingness on the part of Washington to contemplate radical reform of markets...

Amid signs that key opponents of a transaction tax in Obama's administration have been sidelined, Brown intends to use a series of meetings in the coming weeks and months to build international support for a "Tobin tax", which he floated at last autumn's G20 meeting. Lord Myners, the City minister, is to host a crucial mini-summit on Monday at which US officials will spell out the details of the Volcker plan – through which Obama intends to stop banks running hedge funds, private equity arms and taking bets on markets with customer deposits.
Back in America, meanwhile, Obama is saying to the others, "Right on, right on." I hadn't foreseen motivation of this extent many months before, to be honest, but it's happening anyway. What can be said to the new components of the emerging global financial architecture?
  • Limits to banker bonuses;
  • Crackdowns on offshore tax havens (paradis fiscaux);
  • Curbs on leverage;
  • Higher reserve and capitalization requirements;
  • Separation of commercial banking and speculative trading, especially among major banks;
  • Crackdowns on banks setting up proprietary private equity and hedge funds;
  • Limits to the outright size of financial institutions (to render them not too big to fail); and
  • Taxes on international financial transactions
There's always the cynical response that crafty banks almost always find ways to outsmart regulators. Perhaps, but such a possibility places the onus on authorities to really straitjacket the bankers. Topping the list, of course, is the requirement that countries the world over apply similar rules and not try to attract casino capitalists via regulatory arbitrage. I hope this is possible; perhaps Obama help can deliver on the "change we can believe in" he promised in his campaign. Sticking it to Larry "Wooden Racquets" Summers is certainly a good start. Love reign o'er me, indeed.

UPDATE: One thing that bothers me about activists is that worthwhile causes they sometimes pursue are not argued very well. At one extreme, you have Naomi Klein-style nincompoopery (and dodgy causes anyway). I am afraid that some Tobin tax proponents also make similar arguments: Online, the "Tobin Tax Initiative" offers us these factoids:
  • Currency speculators trade over $1.8 trillion dollars each day across borders. The market is huge, and volatile;
  • Each trade would be taxed at 0.1 to 0.25 percent of volume (about 10 to 25 cents per hundred dollars);
  • Billions in revenue, estimated at $100 - $300 billion per year, would be generated.
Simple arithmetic tells me that the tax rates that need to be applied to generate such revenues (assuming volume is unaffected--and that's a big if) are 100/1800=5.56% for $100B and 300/1800=16.67% for $300B. You can be as socialist as you wanna to be online. However, you are not likely to persuade many with such blatant mathlexia. Some people should never have been allowed past the fourth grade.

PRC to Hillary: Shove Yer "Information Imperialism"

♠ Posted by Emmanuel in , at 1/22/2010 04:17:00 PM
Now it's payback time. Continuing our recent Internet in China series [1, 2, 3], we left off with me suggesting that US government action on behalf of Google was imminent. Lo and behold, the State Department recently released a plea from Missus Clinton for China to respect Internet freedom. I've long wondered why she's chosen to play second fiddle to Barack Obama, a far less formidable figure as we're beginning to find out. Now, however, we may be getting to the point where we can test Missus Clinton's mettle against the most recalcitrant foe you can possibly imagine in the PRC. In some things you can see win-win scenarios; here, they're quite difficult to imagine. Here are some excerpts from her recent speech:
During his visit to China in November, for example, President Obama held a town hall meeting with an online component to highlight the importance of the internet. In response to a question that was sent in over the internet, he defended the right of people to freely access information, and said that the more freely information flows, the stronger societies become. He spoke about how access to information helps citizens hold their own governments accountable, generates new ideas, encourages creativity and entrepreneurship. The United States belief in that ground truth is what brings me here today...

The internet has already been a source of tremendous progress in China, and it is fabulous. There are so many people in China now online. But countries that restrict free access to information or violate the basic rights of internet users risk walling themselves off from the progress of the next century. Now, the United States and China have different views on this issue, and we intend to address those differences candidly and consistently in the context of our positive, cooperative, and comprehensive relationship.

Now, ultimately, this issue isn’t just about information freedom; it is about what kind of world we want and what kind of world we will inhabit. It’s about whether we live on a planet with one internet, one global community, and a common body of knowledge that benefits and unites us all, or a fragmented planet in which access to information and opportunity is dependent on where you live and the whims of censors. [Take that, 30000-strong PRC censorship battalion!]

Information freedom supports the peace and security that provides a foundation for global progress. Historically, asymmetrical access to information is one of the leading causes of interstate conflict. When we face serious disputes or dangerous incidents, it’s critical that people on both sides of the problem have access to the same set of facts and opinions.
Now we receive word of the Chinese response care of yet another official mouthpiece. Like all other Chinese media, I am of course fond of the Global Times. Here, it demonizes a certain Hillary Clinton. Notably, in contrast to more measured responses of the past towards the issue, this one is quite strident in declaring the presence of "information imperialism":
The US campaign for uncensored and free flow of information on an unrestricted Internet is a disguised attempt to impose its values on other cultures in the name of democracy. The hard fact that Clinton has failed to highlight in her speech is that bulk [sic] of the information flowing from the US and other Western countries is loaded with aggressive rhetoric against those countries that do not follow their lead. In contrast, in the global information order, countries that are disadvantaged could not produce the massive flow of information required, and could never rival the Western countries in terms of information control and dissemination...

It is not because the people of China do not want free flow of information or unlimited access to Internet, as in the West. It is just because they recognize the situation that their country is forced to face. Unlike advanced Western countries, Chinese society is still vulnerable to the effect of multifarious information flowing in, especially when it is for creating disorder.

Western countries have long indoctrinated non-Western nations on the issue of freedom of speech. It is an aggressive political and diplomatic strategy, rather than a desire for moral values, that has led them to do so. The free flow of information is an universal value treasured in all nations, including China, but the US government's ideological imposition is unacceptable and, for that reason, will not be allowed to succeed.

China's real stake in the "free flow of information" is evident in its refusal to be victimized by information imperialism.
To me, this leftover Marxism is not a very cogent response. (By the way, the Global Times has an entire section devoted to Google in China propaganda.) Please review my recent post on how ICANN is relinquishing a lot of its powers to accommodate complaints about US Internet domination. Given the open-ended nature of the Internet, a lot of traffic unwanted by America is also allowed to go through--think of terrorist movements at home and abroad that are hard to shut down. On a related note, monitoring by US authorities is often done to monitor extremists online.

More importantly, China's image of "information control" by Western authorities overwhelming developing states is difficult to justify. With popular media rife with discontent with politicians the world over, why wouldn't Western authorities seek to muzzle it at every opportunity? Go figure.

Once more, the gauntlet is thrown down by China, this time for Missus Clinton to pick up. I am of the opinion that she's tougher than her boss. Remember, she once was named by Men's Journal as one of the "Toughest Guys in America." Now, show those apparatchiks who wears the pants around cyberspace, Missus C. Enough pretending that the US and China are "friendly" with one another. Make a trade case out of this. Heck, why don't you just cut crap and start fighting China already?

Is Larry Summers Behind Obama's Bank Bashing?

♠ Posted by Emmanuel in , at 1/21/2010 11:25:00 PM
Two days ago, I read Simon Schama's insightful piece on how US President Obama should adopt FDR-ish populist policies to regain momentum against resurgent Republican opposition. While I have been hard on Obama once in a while, make no mistake that I regard him as a lesser evil than those from the party of his predecessor. It now seems Schama was prescient: Obama has just unleashed new proposals to limit the remit of big banks in terms of trading on their own account and cornering "excessive" market share. What I would really like to know is what Larry Summers thinks of all this. While Summers' predecessor as Treasury Secretary Robert Rubin is often lumped as a "neoliberal" proponent of financial innovation and other shenanigans that contributed to the current mess, those who are better informed may beg to differ.

For reasons too long to mention, I have read Rubin's autobiography In an Uncertain World: Tough Choices from Wall Street to Washington. There, he offers us this insight which the Washington Post relays in passing:
Rubin declined to comment for this article, but provided excerpts from his book, "In an Uncertain World," in which he writes that his deputy, Larry Summers, "thought I was overly concerned with the risks of derivatives. . . . Larry characterized my concern about derivatives as a preference for playing tennis with wooden racquets -- as opposed to the more powerful graphite and titanium ones used today."
So I find it questionable that Buttonwood of the Economist intones Summers was somehow responsible for this new round of regulation as this streak is difficult to remove in diehards. OTOH, the Financial Times offers what I think is a more accurate appraisal of how this proposal came about: It's Paul Volcker, legendary former Fed chairperson gaining the trust of Obama at the expense of unnamed but easy-to-figure persons at the Treasury and White House:
Mr Volcker has intellectual clout and political capital in Congress, which will be needed as the administration tries to gather support for its new proposals. Ironically, it was the Treasury and the White House – where Mr Volcker heads an economic advisory board – that had given his ideas the cold shoulder.
It doesn't require much imagination to fill in the blanks here: it was likely current Treasury Secretary Tim Geithner and Larry Summers of the White House's National Economic Council who gave Volcker the cold shoulder. After all, why would the Treasury secretary when the Financial Services Modernization Act of 1999 was passed (Summers) turf it with great enthusiasm a decade later? In other words, would Summers trade his titanium racquet for a wooden one all of a sudden? I can't offer you the answer with complete certainty but it's food for thought.

Otherwise, I am not averse to this effective reconstitution of Glass-Steagall with a little bit of mustard. Still, I must offer some qualifiers based on the proposal's description from the White House -

The proposal would:

1. Limit the Scope - The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

Not being entirely unfamiliar with banking, my sense is that this will be difficult to operationalize. In banking terminology, large depositors are known as HNWI or "high net worth individuals." For obvious reasons, those making larger placements demand larger returns. Oftentimes, these HNWI are known as "private banking" clients as opposed to "retail banking" clients (or us small fry). While there have undoubtedly been underhanded ways of enhancing returns via tax evasion schemes and the like, banks are understandably in competition with each other to offer better returns to HNWI clients. Hedge funds and private equity funds are often risky ways for private banking clients to enhance returns on their funds. And therein lies the rub: if it's their money, shouldn't it be theirs to lose? This possibility contrasts with the second proviso about limiting "proprietary operations unrelated to serving customers for profit." More clarity here, please, since hedge funds and private equity have often been set up at the behest of clients seeking better returns or "serving customers for profit."

2. Limit the Size - The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

That's really great and everything, but many banks operating in the United States do not operate in America alone. What's to limit US banks from "excessive growth" abroad? Also, what's to stop HNWI from fleeing American banks in search of better returns offered by foreign financial services providers? That would seem to hurt them more than help them.

To be fair, we haven't seen the full details of the proposed legislation yet. In any event, efforts of this sort may be bound to backfire if they aren't applied evenly in the rest of the world as I've suggested before in relation to the British bashing of banker bonuses. In the meantime, I'd be very interested to hear Larry "Wooden Racquets" Summers comment on the matter along with his erstwhile protege Tim "Deficits Still Don't Matter" Geithner. Are we seeing Obama turn away from the Summers-Geithner axis? It's certainly a welcome thought. (Rest assured that I do not look forward to the Palin administration.) In the meantime, go Paul Volcker! For that matter, go wooden tennis racquets! Just love that Bjorn Borg.

UPDATE 1: The Tories--assumed successors to Labour--seem keen on trading curbs as well. With both Anglo-Saxon economies more uniformly applying these sorts of rules, the scope for regulatory arbitrage is limited.

UPDATE 2: Pictures of a beaming Paul Volcker and a downcast Larry Summers say a thousand words.