I'm listening via conference call to Federal Reserve Chairman Ben Bernanke deliver this speech to the Council on Foreign Relations.
There will be Q&A afterwards, which I shall liveblog with updates to this post.
I also will not say much about the international dimensions of the issue but will take as self-evident that, in light of the global nature of financial institutions and markets, the reform of financial regulation and supervision should be coordinated internationally to the greatest extent possible.
[G]iven the global operations of many large and complex financial firms and the complex regulatory structures under which they operate, any new regime must be structured to work as seamlessly as possible with other domestic or foreign insolvency regimes that might apply to one or more parts of the consolidated organization.
Y'know, you can't just wish these things into being.
ANOTHER UPDATE: Ah, I'm seeing the Fed requests for greater supervisory authority:
Currently, the Federal Reserve relies on a patchwork of authorities, largely derived from our role as a banking supervisor, as well as on moral suasion to help ensure that critical payment and settlement systems have the necessary procedures and controls in place to manage their risks. By contrast, many major central banks around the world have an explicit statutory basis for their oversight of these systems. Given how important robust payment and settlement systems are to financial stability, a good case can be made for granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems.
And here on whether the Fed should be the institution to provide "macroprudential" supervision for systemic risk:
As a practical matter... effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role. As the central bank of the United States, the Federal Reserve has long figured prominently in the government's responses to financial crises. Indeed, the Federal Reserve was established by the Congress in 1913 largely as a means of addressing the problem of recurring financial panics. The Federal Reserve plays such a key role in part because it serves as liquidity provider of last resort, a power that has proved critical in financial crises throughout history. In addition, the Federal Reserve has broad expertise derived from its wide range of activities, including its role as umbrella supervisor for bank and financial holding companies and its active monitoring of capital markets in support of its monetary policy and financial stability objectives.
ANOTHER UPDATE: OK, now the Q&A!
Bernanke does not expect any "major disagreements" with either Treasury or the Obama administration on any proposed legislative reforms.
He sees recovery beginning in 2010.
He observes that between 1929 and 1931, the Great Depression was your garden-variety financial panic. It was the collapse of Austria's Creditanstalt Bank in 1931 when things really went south. Obviously, he'd like to avoid a replay of that trigger event.
On proposed reforms of accounting rules: "These things move slowly... there's a lot of more deliberation." Wants to see more rapid movement at the global level.
In response to a question about whether he's worried more about inflation or deflation: "Mostly I'm worried about the overall economy."
When asked about the international dimension, he gives a pretty vanilla response -- greater coordination between jurisdictions, etc. He is skeptical of the G-20 producing a detailed coordination proposal (as opposed to providing overall guidance). Bernanke praises the actions following up the October G-7 meeting by central banks at injecting liquidity into the system.
His closing comment: "economics is not music or math... it's useful only to the extent that it helps people. Economics is not worth the effort unless it's applied in a way that helps people in the world."
LAST UPDATE: Here's a link to Jack Healy's write-up in the New York Times.
When Paul Krugman and Megan McArdle agree on Obama/Geithner's lackluster reaction to the economy, that's usually a good sign to go long on duct tape and shotguns. And this Brad DeLong post doesn't make me feel much better -- because I think he has the political economy just about right.
Still, I'm going to wait a month before allowing my freaking out flag to fly. Why? Because in the time that Barack Obama has been forced to react in real time, I've noticed two tendencies:
So maybe a month from now Treasury will actually have some appointments besides Geithner, and markets will be more certain about what Obama is planning to do. If these things don't happen, however, I have every confidence in my commenters saying, "I told you so."
UPDATE: OK, now we're seeing some movement! This Reuters story lists three incoming nominees at the assistant secretary level. It also explains the dithering at the more senior levels:
On Thursday, sources said former Securities and Exchange Commissioner Annette Nazareth withdrew from consideration to become a deputy Treasury secretary for personal reasons and that she would remain in her private securities law practice.
In addition, Geithner's choice for international affairs undersecretary, Caroline Atkinson, also pulled her name from consideration. Atkinson, a senior official at the International Monetary Fund, has decided to remain at the institution, a person familiar with the decision said.
Both Nazareth and Atkinson had been vetted for the jobs but had not been formally nominated.
Lee Sachs, also currently a counselor to Geithner, is widely considered a top contender for undersecretary for domestic finance, but also has not been formally nominated.
One wonders if the reasons for the withdrawal have to do with the people involved or the rigors of the vetting.
During the first month of the Obama administration, there have been a few proposals coming from the Treasury Department, and it's safe to say that markets have not been too thrilled about them. A large part of that is because the proposals are so vague and opaque that even Felix Salmon is having difficulty interpreting them.
To be fair to Geithner, however, it's not like he has a lot of help. Check out this Treasury web page listing all of the political appointees at Treasury.
ABC's Matthew Jaffe reported in fuller depth on this problem earlier in the week:
Treasury has not moved quickly enough to fill key positions -- such as deputy secretary, various undersecretary posts, and general counsel -- which may have contributed to a lack of details in Treasury's plans, which in turn caused a dive in the stock market.
"If the secretary had a full staff he would've been in a stronger position to work out the details, so I'm sure that has been part of the problem," West said....
Some analysts believe Geithner is suffering from the lack of a complete staff at his disposal.
"It's an overwhelming job even if you have a full staff, and that's certainly not yet the case," said Rob Nichols, president of the Financial Services Forum.
Nichols, a former Treasury spokesman, estimated that right now Geithner "probably has 10 or 20 percent of the political appointees around him that he ultimately will have."
"Treasury is not moving fast enough," West said. "Given all of the enormous economic and banking challenges that we face, we really need a full team on the field."
The story gives a couple of possible reasons -- the new ethics rules, difficulties with vetting -- but they don't really pass the smell test. What I don't understand is why the Obama White House is not making this staffing issue its first, second, and third priorities right now. Given the gargantuan tasks facing Treasury right now, I guarantee that the deputy and undersecretary positions at 1500 Pennsylvania Ave. are far more important than the Secretary of Commerce.
I woked at Treasury during the last transition, when it took close to six months to get the Deputy Secretary confirmed. It was.... a difficult time, to say the least. And that was when countries like Argentina and Turkey were in trouble -- not all of the the OECD and the BRICs.
Paul Volcker is pretty angry about this -- as well he should be. But the person he should be angry at is his boss.
A prominent institution issued the following warning about the "Buy American" provisions in the stimulus package:
History and economic theory show that in facing a financial crisis, trade protectionism is not a way out, but rather could become just the poison that worsens global economic hardships.
Name that institution:
Click here for the answer.
Admittedly, the title of this post gives the game away, but it nicely highlights one of the many oddities of the current crisis.
Props to my colleague David Rothkopf for this concise description of the Department of Commerce:
The Commerce Department is a bureaucratic hodge-podge held together by those old Washington stand-bys of inertia, habit, and the self-interests of Congressional appropriators. Oh, and neglect. And ignorance. Not only do most Americans not know what the Commerce Department does -- its various missions are so diffuse most people who work there don't know all that it does.
David is being modest, however. As near as I can figure, the Commerce Department does perform one task exceptionally well -- it allow people to step up from foreign policy middleweights to heavyweights.
Prior to being at Commerce, these people are working in the think tank trenches struggling to get their op-eds placed in the Washington Post. After being at Commerce, these people are jetting to Davos, writing august tomes for Knopf, pulling down medium five figures for speeches, popping up on Sunday morning talk shows, and becoming Deans at the Yale School of Management.
Not that I'm bitter about this or anything.
Writing in the Financial Times, Jeffrey Sachs fires a warning shot across the bow of stimulus enthusiasts:
The US debate over the fiscal stimulus is remarkable in its neglect of the medium term – that is, the budgetary challenges over a period of five to 10 years. Neither the White House nor Congress has offered the public a scenario of how the proposed mega-deficits will affect the budget and government programmes beyond the next 12 to 24 months. Without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good, since the prospect of trillion-dollar-plus deficits as far as the eye can see will weigh heavily on the confidence of consumers and businesses, and thereby undermine even the short-term benefits of the stimulus package....
The most obvious problem with the stimulus package is that it has been turned into a fiscal piñata – with a mad scramble for candy on the floor. We seem all too eager to rectify a generation of a nation saving too little by saving even less – this time through expanding government borrowing. First it was former US Federal Reserve chairman Alan Greenspan’s bubble, then Wall Street’s, and now – in the third act – it will be Washington’s....
Perhaps Mr Obama should reflect on the fact that the Clinton-era boom began in 1993 with tax rises and a congressional rejection of a fiscal stimulus package. This time, there is certainly a cyclical case for deficit- financed public spending, but accompanied by phased-in tax increases to provide proper financing of crucial government functions in the medium term.
Hmmm... Sachs makes some valid points here. Maybe we should take a moment or two to ponder this.
Hey, what's this Sam Dillon story in the New York Times saying?
The economic stimulus plan that Congress has scheduled for a vote on Wednesday would shower the nation’s school districts, child care centers and university campuses with $150 billion in new federal spending, a vast two-year investment that would more than double the Department of Education’s current budget.
The proposed emergency expenditures on nearly every realm of education, including school renovation, special education, Head Start and grants to needy college students, would amount to the largest increase in federal aid since Washington began to spend significantly on education after World War II.
You know, it's nay-sayers like Sachs that are keeping our country mired in recession. I can't believe his nitpicking is going to stand in the way of
my tasty slab of pork getting America going again.
It's been fashionable as of late to predict the end of the dollar's hegemony as a reserve currency. And, to be sure, the U.S. performance in recent years does not recommend the dollar as a great store of value.
World politics is a relarive game, however, so while the dollar might have its problems, what are the alternatives? China might have its fiscal house in order, but the renminbi is not fully convertible. The yen is appreciating, but Japan's economy is too small (and its growth opportunities are not exactly robust).
The only viable alternative is the euro. But as Landon Thomas Jr. story in the New York Times suggests, that currency's odd political status is creating economic fissures within the Eurozone. The key paragraph:
For some of the countries on the periphery of the 16-member euro currency zone — Greece, Ireland, Italy, Portugal and Spain — this debt-fired dream of endless consumption has turned into the rudest of nightmares, raising the risk that a euro country may be forced to declare bankruptcy or abandon the currency.
As the story makes clear, the odds of this happening are still small. Because they are not trivial, however, uncertainty surrounding the euro will remain high. Which means that it is not going to displace the dollar anytime soon.
John Thornhill explains in the Financial Times why I've been drowning in conference requests:
Amid the economic gloom, at least one business is booming this year – conferences on the crisis of capitalism.
This week, a host of policymakers and economists – including four heads of state or government and three Nobel prize-winning economists – descended on Paris to debate how to stick the shattered world economy back together again. A flurry of similar meetings is taking place in advance of the Group of 20 summit in London in April, which aims to redesign global governance.
Read Thornhill's article to see what Francis Fukuyama, Amartya Sen and Joe Stiglitz think.
Question to readers: if you could have your dream conference on this subject, who would you invite?
After bailouts designed to pump up the flagging finance and auto sectors, you knew that this was going to come at some point:
As the 2009 AVN Adult Expo opens in
Las Vegas this week, Girls Gone Wild CEO Joe Francis and HUSTLER magazine publisher Larry Flynt are petitioning the newly convened 111th Congress to provide a financial bailout for the adult entertainment industry along the lines of what is being sought by the Big Three automakers, a spokesperson for Francis announced today.
Adult industry leaders Flynt and Francis sent a joint request to Congress asking for
$5 billion in federal assistance, "Just to see us through hard times," Francis said. "Congress seems willing to help shore up our nation's most important businesses, we feel we deserve the same consideration. In difficult economic times, Americans turn to entertainment for relief. More and more, the kind of entertainment they turn to is adult entertainment."
But according to Flynt the recession has acted like a national cold shower. "People are too depressed to be sexually active," Flynt says, "This is very unhealthy as a nation. Americans can do without cars and such but they cannot do without sex."
While not to the degree felt by banks and automakers, the Adult Entertainment industry has been hit by the effects of the economic downturn. DVD sales and rentals have decreased by 22 percent in the past year as viewers turn to the internet for adult entertainment.
Crazy as this sounds, Flynt and Francis do make one penetrating insight in their complaint -- adult entertainment sales and rentals are shrinking much more quickly than overall DVD sales and rentals. So it would be fair to say that compared to mainstream Hollywood, the adult entertainment sector is getting pounded. Unless the economy can manage to mount a robust and vigorous upturn sometime soon, it makes sense for the adult entertainment industry to beg for a more direct and forceful stimulus package.
Hat tip: Free Exchange
What is truly worrisome, however, is that a lack of cooperation on trade could spill over into a lack of coordination on fiscal policy. Coordination on these two issues are linked. States running trade deficits worry that export engines like Germany and China will free ride off of their own fiscal expansions, boosting the growth prospects of these exporters without any serious fiscal expenditures on their part. Already, other Europeans are upset over Germany's inaction on the fiscal front. German Finance Minister Peer Steinbruck's warning against "crass Keynesianism" to NEWSWEEK's Stefan Theil has merely stoked these concerns even more. If this fear persists, there is a danger that any Keynesian boost will come attached with protectionist provisions to ensure that the benefits remain within national borders. Some reputable economists are already advocating this kind of action in the absence of global policy coordination. As the global downturn persists, these political pressures will become harder to ignore. What has been a mild backlash against trade liberalization could quickly turn into a tsunami. If trade wars break out in the wake of the global financial crisis, they will not take the form of Smoot-Hawley—but they will be equally dangerous.And, hey, on cue, the New York Times' Louis Uchitelle reports the following on the U.S. steel industry in the United States:
The industry itself is turning to government for orders that, until the September collapse, had come from manufacturers and builders. Its executives are waiting anxiously for details of President-elect Barack Obama’s stimulus plan, and adding their voices to pleas for a huge public investment program — up to $1 trillion over two years — intended to lift demand for steel to build highways, bridges, electric power grids, schools, hospitals, water treatment plants and rapid transit. “What we are asking,” said Daniel R. DiMicco, chairman and chief executive of the Nucor Corporation, a giant steel maker, “is that our government deal with the worst economic slowdown in our lifetime through a recovery program that has in every provision a ‘buy America’ clause.” (emphasis added)What it truly disturbing about this request is that it contradicts the narrative about the U.S. steel sector in recent years, a narrative tat Uchitelle comments on later in his story:
Not since the 1980s has American steel production been as low as it is today. Those were the Rust Belt years when many steel companies were failing and imports of better quality, lower cost steel were rising. Foreign producers no longer have an advantage over the refurbished American companies. Indeed, imports, which represent about 30 percent of all steel sales in the United States, also are hurting as customers disappear.The political economy implications of this are pretty disturbing. Steel, which can compete with the rest of the world, should be one of the last sectors to seek protection from foreign competition. With its mini-mills, Nuxor is one of the most competitive firms within the U.S. steel sector. If this is how Nuxor is behaving, however, how much protectionist lobbying will come from the less competitive sectors of the U.S. economy? Developing.....
If you can fake authenticity in the new year, you will have it made. Authenticity was already a buzzword in business and politics before the credit crunch. It will become an essential virtue following the curtain twitch that revealed so many Masters of the Universe to be Wizards of Oz. At one executive leadership seminar I attended recently, the trainer explained that authenticity was the main attribute delegates needed to radiate, including “different types of authenticity for different audiences”. This means being a technocrat in the boardroom, a pragmatist among middle managers and an Average Joe on the shop floor.One does wonder if this increases the likelihood of bloggers -- who were in on the ground floor of this whole "constructed authenticity" deal -- making it in the corporate world.
My favorite part is the initial B-roll, during which Megan towers above me.
The New York Yankees represent the very worst of America. Overstatement? Consider the times. Cornerstone industries are faltering, taxpayers are being asked to bail out mismanaged financial institutions and their overpaid CEOs, and decent, hard-working men and women are being laid off or worrying that they could be next. Now consider the eight-year, $180 million contract the Yankees reportedly handed first baseman Mark Teixeira Tuesday. Stack it on top of the $161 million deal signed by pitcher CC Sabathia and the (relatively) modest $82.5 million promised to A.J. Burnett and you have the most egregious display of financial irresponsibility in the history of sports. The Yanks' insane overspending would be bad for baseball in the best of times. These are not the best of times.... What's wrong here is obvious. It's also not really new. Unlike the NFL, NBA and NHL, baseball has no salary cap. Those leagues do not have caps for the sheer, unbridled joy of finding loopholes and exceptions. They have them as part of an effort to maintain some kind of competitive balance among teams from different-size markets in disparate parts of the country.Sheridan's response is pretty typical of non-Yankee fans -- which is disturbing, because it's so wrong on so many levels. First, it would be awesome if American corporations acted more like the Yankees. One cause of the deepening recession is that firms are afraid to do anything other than hold cash in hand at the moment. The smart ones should invest in expansion -- capital is ridiculously cheap right now and they'll be well-poised once the economy takes off again. If enough firms acted that way, the economy actually would take off again. In signing these players, the Yankees have made long-term investments while keeping their expenditures constant relative to last year's payroll. Given their move to a new stadium, their revenues should increase. They have made these moves in order to improve their chances of competing. That's how corporations should behave. As for Sheridan's point about competitive balance -- well, let's go to Joe Posnanski, who has some useful data on this point:
it always gives me great comfort to see the following facts: -- Over the past 10 years, eight different teams have won the World Series. In all, 15 teams made the World Series -- half of the teams in baseball. -- Over the past 20 years, 14 different teams have won the World Series. In all 22 teams made the World Series. Now, we're at more than two-thirds who have reached the Series. -- Over the last 30 years, 20 different teams have won the World Series, and only four -- Cubs, Mariners, Rangers and the Expos/Nationals -- have failed to get there... I'm not saying that the Yankees will not win in 2009 -- that's an awfully good team now, absolutely the best that money can buy. But just remember that key fact: 20 teams have won a World Series in the last 30 years. And by comparison: -- Only 14 teams have won the Super Bowl over the last 30 years. -- Only 14 different men have won Wimbledon over the last 30 years. -- Only 13 teams have won the Stanley Cup over the last 30 years. -- Only nine teams have won an NBA title over the last 30 years.It is telling that the team sports with salary caps actually have more dynasties than baseball. In baseball, more money can make the Yankees better, but it can't guarantee them anything. As a Red Sox fan, I'm perfectly happy to have the rest of America hate the Yankees along with me. Holding them up as the symbol of what's wrong with the country, however, is pretty ludicrous. UPDATE: Thanks to YFSF, I see that Dan Szymborski has made a similar argument over at Baseball Think Factory:
The Yankees do spend more money than other teams in MLB, but the differences would be less drastic if the payrolls of many teams had been rising up to the waves of new cash that have entered baseball in recent years. Going by the NFL formula, very generous considering the MLBPA is far more powerful an entity than any other union in sports, the payroll floor for 2009 would almost certainly be in the $100 million range. 58% of league revenue, as the players in NFL get, would be, in baseball, an average team payroll of a hair under $120 million. It's pretty clear that while the Yankees are outspending everyone comfortably, the rest of baseball has just as much to do with the payroll disparity as the Yankees do. Now, what about the Yankee mindset? The Steinbrenners aren't anywhere near as rich or as liquid as some other owners in baseball such as Carl Pohlad of the Twins. The difference is that the Steinbrenners have always invested in their team, always striven to put the best product possible out on the field. The Yankees have certainly made some terrible trades, especially when King George was hands-on the most, but they were done with the motive of making the team better. Yes, the Yankees got a huge, undeserved payday from the locals for their stadium, like most teams in baseball did, but it's a mitigating factor that they're actually plowing those funds back into the on-field product. And the team never threatened to not compete until they got their sweet check. Perhaps a small difference, but I see it as a good bit more ethical than Kevin McClatchy demanding taxpayer moneys to help the Pirates compete and then turn around and use all the money to fund his failing media empire.
Students are applying to the state's public colleges and universities in record numbers, as the nation's financial crisis forces more families to consider less expensive schools. The new application figures confirm a widely forecast "flight to price" among students. They also follow a sharp increase in fall enrollment in the public system, which consists of 15 community colleges, nine state colleges, and the five University of Massachusetts campuses. The increase will sharpen competition for spots in this fall's freshman classes, bumping some students who in previous years could have counted on being admitted, college counselors say. Applications for early admission to UMass-Amherst, the state's flagship campus, rose 29 percent over last year, and applications for regular admission have climbed 23 percent at UMass-Lowell. Framingham State and Westfield State colleges have seen more than 40 percent increases in applicants from this time a year ago, while the Massachusetts College of Liberal Arts in North Adams has seen a 60 percent jump. Early-action applications at the Massachusetts College of Art and Design in Boston have risen 75 percent.... With most four-year public colleges unable to handle a significant increase in enrollment, the heightened competition will probably have a ripple effect across the state, college officials and high school guidance counselors say. The shift toward public colleges takes place as small private colleges in Massachusetts, which educate a sizable portion of the state's low- and moderate-income students, grapple with heavy financial losses from stock market declines, jeopardizing their ability to award financial aid. "You might have a perfect storm where public colleges will be the only place to get your foot in the door, and they don't have enough seats," said Bob Giannino-Racine, executive director of ACCESS, a Boston nonprofit that helps students find ways to afford college. "They've always been a fail-safe, but now they have a real challenge to remain places of access."I seriously doubt that this phenomenon is limited to the state of Massachusetts.
President-elect Barack Obama this morning named Daniel K. Tarullo to the Federal Reserve Board of Governors, the first step in an unusual opportunity Obama has to remake the Federal Reserve at a time the institution is undergoing dramatic change.Although it is common for presidents to appoint several Fed governors by the end of a term, Obama will be able to appoint three of seven members of the Fed's board of governors immediately upon taking office, subject to confirmation by the Senate. He can either reappoint or replace Chairman Ben S. Bernanke when his term expires in January 2010, and he will make the same decision for Vice Chairman Donald L. Kohn when his term ends that June. Governors serve a 14-year term, though in practice, slots turn over every few years. Thus, within 18 months of taking office, Obama will likely have appointed five of seven Fed governors, including its top two members. Tarullo, if confirmed, will be one of them. He was a top aide to President Bill Clinton for international economic policy in the 1990s and since then has taught at Georgetown University's law school. He published a book this year on the Basel II international standards for bank regulation, arguing that the approach needs to be changed in major ways to prevent financial crises like that now underway. He is thus well poised to represent the Fed in its coordination with bank regulators around the world in responding to the financial crisis, and to take part in what is likely to be a vigorous debate on how the U.S. financial regulatory system should be overhauled and what the Fed's role should be.... The Obama administration is likely to move quickly to fill the three open governors slots, said Democrats who have been in touch with the transition team. Two of those slots are currently vacant -- nominations were held up by congressional Democrats -- and a third is occupied by Bush appointee Randall Kroszner, whose term has expired but who is serving until his replacement takes office. In filling the three governor slots, Obama should seek to bring a diversity of experience to the Fed in an effort to manage the various dimensions of the crisis, said economists who study the central bank. With Tarullo, he has filled one with an expert in international banking regulation. For the other two, he might appoint one person with a background in financial markets and another academic experience in macroeconomics and monetary policy.
With plunging exports and economic contraction overtaking inflation and liquidity as concerns, Asian central banks are starting to buy dollars, raising devaluation worries. Patrick Bennett, Asian currency strategist at Société Générale, said there was evidence that central banks in Singapore, Malaysia, India and South Korea had started dollar buying “in the last couple of days”. HSBC has highlighted “a shift to depreciation policy”, notably in Thailand and Taiwan, which recently bought dollars for the first time since August 2007 and April of this year respectively. The Asian Development Bank gave warning last week that “we need to avoid unnecessary and excessive interventions in the foreign currency markets, especially to depreciate domestic currencies”. Writing in this week’s FT, Michael Pettis, finance professor at Peking University, expressed caution about “a grave risk” that Asian countries would seek to force overcapacity adjustment on to trading partners through currency depreciation and other trade-related measures.A restriction of global trade is not going to happen through traditional means, like high tariffs. It's going to happen through domestic content rules on any fiscal programmes and on currency manipulation. [Um... any good news?--ed. Well, I suppose it is encouraging that the developing world has its financial house in sufficient order that it can engage in fiscal expansion. But that's about it.]
From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets. In the short run, falling oil prices are leading to welcome relief at the pump for American families ahead of the holidays, with gasoline down from its summer record of just over $4 to an average of $1.66 a gallon, and still falling. But the project delays are likely to reduce future energy supplies — and analysts believe they may set the stage for another surge in oil prices once the global economy recovers.So, let me see if I have this right:
The World Trade Organisation has dropped plans to convene ministers to push for an outline deal in the troubled global trade talks – a further blow to world leaders’ promises to combat protectionism. Pascal Lamy, WTO director-general, said a meeting, originally planned for next week, “would be running an unacceptably high risk of failure which could damage not only the round but also the WTO system”.... The outcome runs counter to promises made by leaders of the Group of 20 major economies in Washington last month, who were committed to reaching an outline deal this year and promised no new protectionist actions within 12 months. Since then at least five of the G20 – Russia, India, Indonesia, Brazil and Argentina – have announced their intention to raise import tariffs or otherwise restrict trade.... Trade experts said the episode underlined the weakness of rhetorical agreements such as the G20 statement to constrain governments faced with domestic political pressure. Douglas Irwin, trade economist at Dartmouth College in the US, said: “Such statements may sometimes act as a signal to local legislatures, but there is usually ample room for governments to renege or weasel out of their commitments.” Since the G20 meeting, Russia has announced it will increase import tariffs on cars, India has raised duties on iron, steel and soy and Indonesia has alarmed trading partners with measures to benefit local producers. Brazil and Argentina have argued for an increase in external tariffs for Mercosur, the Latin American trade bloc of which they are the two biggest members. The G20 was lauded by attendees as a landmark meeting that would put big developing countries at the heart of global policymaking. Following last month’s summit, Gordon Brown, the UK prime minister who will host the next G20 meeting, said there would definitely be a meeting of trade ministers this year. Downing Street did not return calls on Friday. The countries that have raised tariffs deny breaking the agreement. The US said on Friday that it could not be blamed for the stalemate in Doha.
Harvard will have to take a “hard look at hiring, staffing levels and compensation”, wrote Drew Faust, the university president, on December 2nd in a surprise letter to Harvard deans. The Harvard endowment, which was worth $36.9 billion at the end of June, has since lost at least 22%, says Ms Faust. The university should brace itself for losses of 30% in the fiscal year to next June, she adds, although even that may prove far too optimistic. Its ambitious plans for new buildings on the other side of the Charles river seem likely to be scaled back, or at least slowed down. Harvard is not alone. At Stanford University, the president, provost and other senior executives have taken a 10% pay cut. There is speculation that its endowment, which at $17 billion in June was third only to Harvard’s and Yale’s, has performed horribly since then. Many smaller endowments—only six were bigger than the $8 billion that Harvard says it has lost so far—have suffered too. Williams College has seen its endowment plunge by 27%, from $1.8 billion to $1.3 billion, while Wesleyan University’s has tumbled by 24% to $580m.The scary thing about the article is that these schools did not follow the "Yale model" of portfolio investment -- a model that will sound familiar to those who know anything about sovereign wealth funds:
The creator of the Yale model is David Swensen, who was persuaded by James Tobin, a Nobel-prize winning economist, to become the university’s chief investment officer in 1985, when the endowment stood at just over $1 billion, and increased it by June of this year to $22 billion. As Mr Swensen explains in his influential book, “Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment”, which was published in 2000, the “permanent” endowments of universities (and of some charitable foundations) meant that they could be the ultimate long-term investors, able to ride out market downturns and liquidity droughts. By investing heavily in illiquid assets, rather than the publicly traded shares and bonds preferred by shorter-term investors, an institution with an unlimited time horizon would earn a substantial illiquidity premium. By 2006, Yale was aiming to invest a staggering 69% of its endowment in illiquid alternative asset classes such as hedge funds, private equity, property and forests. Others followed. According to “Secrets of the Academy: The Drivers of University Endowment Success”, a new study by Josh Lerner, Antoinette Schoar and Jialan Wang in the Journal of Economic Perspectives, Ivy League endowments increased their allocation to illiquid assets from 9.3% to 37.1% between 1993 and 2005. On average, universities raised their allocation from 1.1% to 8.1%. (emphasis added)This suggest suggests another arena where the state is going to be playing a larger role than it has recently. Until recently, the standard lament from the "public Ivies" on down had been that the endowment explosion from the elite private schools had opened up an appreciable gap in resourcesbetween public and private schols. No longer. The downturn is going to hammer the schools with the biggest endowments. Those with the smallest -- that would be public schools -- should be better equipped to ride out the downturn.
Four new power brokers—Asian sovereign investors, petrodollars, hedge funds, and private equity firms—are having a growing impact on global capital markets. In this update to a 2007 report, MGI examines how the new power brokers have fared since then, during the turmoil of skyrocketing oil prices, evaporating liquidity, and disappearing leverage.
MGI finds that the financial and economic events since mid-2007 have, if anything, accelerated the trends identified earlier: The power brokers' wealth and clout have grown. They have adapted by expanding their investment strategies. And they have increased the use of private financing as an alternative to public markets. Their actions have brought clear benefits in containing the financial market crisis but also have highlighted the risks associated with their rise....
Despite the financial crisis, MGI projects that the power brokers will continue to grow in wealth and clout. Under a conservative, base–case scenario, their combined assets will grow to $21 trillion (excluding overlap between them) by 2013. If, instead, they grow more briskly, at their 2000 to 2007 pace, their wealth would rise to $31 trillion, equivalent to roughly 60 percent the expected size of global pension funds or mutual funds in 2013.
The rapid rise of the new power brokers also poses potential risks. The report examines four main concerns: that the additional liquidity might foster asset price inflation; that state investors might use their wealth for political purposes; that hedge fund failures might destabilize the financial system; and that private equity firms' heavy leverage might increase credit defaults. MGI concludes these concerns remain on the table and justify careful consideration and monitoring. But overall, the rise of these new power brokers has been largely beneficial to global capital markets.
The possibility of hedge funds destabilizing the system certainly remains in play, but most of the rest of this looks pretty silly. Of MGI's four new power brokers, only Asian sovereign investors still look like their power will be growing.I really don't mean to pick on McKinsey. In fact, readers are strongly encouraged to comb through the archives of danieldrezner.com to see what I got wrong. Here's my prediction post from the end of last year -- I only batted .500, but I do think I got the big things right.
The world economy is on the brink of a rare global recession, the World Bank said in a forecast released Tuesday, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries predicted to plunge 50 percent. The projections are among the most dire in a litany of recent gloomy forecasts for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty. Even more troubling, several economists said, there is no obvious engine to drive a recovery. American consumers are unlikely to return to their old spending habits, even after the United States climbs out of its current financial crisis. With growth in China slowing sharply, consumers there are not about to pick up the slack from the Americans. The collapse in oil prices — a side effect of the crisis — has knocked the wind out of consumers in oil-exporting countries. “We know that the financial crisis now is likely to be the worst since the 1930s,” said Justin Lin, the chief economist of the World Bank, summarizing the projections. The bank forecasts the global economy will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. That is the slowest pace since 1982, when global growth was 0.3 percent. Developing countries will grow an average of 4.5 percent next year — a pace that economists said constituted a recession, given the need of these countries to grow rapidly to generate enough jobs for their swelling populations.You can access the World Bank forcast directly by clicking here. Not that I have a sophisticated model or anything, but I actually think the Bank is being overly optimistic in its growth assessments for next year, for the following reasons:
Mr. Obama compared his infrastructure plan to the Eisenhower-era construction of the Interstate System of highways. It brings back the Eisenhower era in a less appealing way as well: there are almost no women on this road to recovery. Back before the feminist revolution brought women into the workplace in unprecedented numbers, this would have been more understandable. But today, women constitute about 46 percent of the labor force. And as the current downturn has worsened, their traditionally lower unemployment rate has actually risen just as fast as men’s. A just economic stimulus plan must include jobs in fields like social work and teaching, where large numbers of women work (emphasis added).There's a word to describe Hirshman's argument here. I think the word is "wrong," since it's based on a faulty premise:
Men are losing jobs at far greater rates than women as the industries they dominate, such as manufacturing, construction, and investment services, are hardest hit by the downturn. Some 1.1 million fewer men are working in the United States than there were a year ago, according to the Labor Department. By contrast, 12,000 more women are working. This gender gap is the product of both the nature of the current recession and the long-term shift in the US economy from making goods, traditionally the province of men, to providing services, in which women play much larger roles, economists said. For example, men account for 70 percent of workers in manufacturing, which shed more than 500,000 jobs over the past year. Healthcare, in which nearly 80 percent of the workers are women, added more than 400,000 jobs. “As the recession broadens, the gap between men and women is going to close somewhat,” said Andrew Sum, director of the Center for Labor Market Studies at Northeastern University. “But right now, the sectors that are really getting pounded are intensely male.”Click here for more background information on the data provided above. Now, maybe this is unfair -- maybe more women have entered the labor force, and therefore their unemployment rate has risen as fast as men. Nope, that's not it. Monthly data from the Bureau of Labor Statistics shows that Hirschman's assumpton is a flat-out falsehood. Immediately prior to the start of the recession (November 2007), the unemployment rate for men was 4.7%; the rate for women was 4.6%. As of November 2008, the unemployment rate for men has increased to 7.2%, while the unemployment rate for women has only risen to 6%. So, to sum up: there is no way to spin this data to support the assumption that drives Hirschman's op-ed. Readers are invited to proffer their reasons for a) how Hirshman could be so wrong in her premise; and b) why the New York Times op-ed page did not fact-check this out of the essay. UPDATE: Hirshman provides her rationale for this assumption in a comment over at Megan McArdle's site:
Here is the data from the November report of the BLS, available to anyone with a click of the mouse, showing the female unemployment rate rising as the downturn worsened, and, coincidentally, the jobs stimulus rose to the top of the political pile as the salient issue. Since extracting information from printed sources does not seem to be your strong suit, allow me to summarize the data: From October to November 2008, men's and women's unemployment rate rose .2. From September, 2008 to November, 2008, which was when the downturn worsened, men's unemployment rate rose .4 and women's .6.This is, at best, cherry-picking the data, because it ignores the massive gender splits of the eight months of the recession prior to September. If the recession started in December of last year, I don't see a reason for looking only at a couple of months of data. ANOTHER UPDATE: Hirshman posts another comment below, which is essentially a reprint of what she wrote at McArdle's site. My response:
Liberals are growing increasingly nervous – and some just flat-out angry – that President-elect Barack Obama seems to be stiffing them on Cabinet jobs and policy choices. Obama has reversed pledges to immediately repeal tax cuts for the wealthy and take on Big Oil. He’s hedged his call for a quick drawdown in Iraq. And he’s stocking his White House with anything but stalwarts of the left. Now some are shedding a reluctance to puncture the liberal euphoria at being rid of President George W. Bush to say, in effect, that the new boss looks like the old boss. “He has confirmed what our suspicions were by surrounding himself with a centrist to right cabinet. But we do hope that before it's all over we can get at least one authentic progressive appointment,” said Tim Carpenter, national director of the Progressive Democrats of America. OpenLeft blogger Chris Bowers went so far as to issue this plaintive plea: “Isn't there ever a point when we can get an actual Democratic administration?” Even supporters make clear they’re on the lookout for backsliding. “There’s a concern that he keep his basic promises and people are going to watch him,” said Roger Hickey, a co-founder of Campaign for America’s Future.Steve Hildebrand pushes back at the Huffington Post. I look forward to the 2010 debate about whether:
Barack Obama's chief economic adviser was one of the youngest people to be tenured at Harvard and later became its president. His budget director went to Princeton and the London School of Economics, his choice for ambassador to the United Nations was a Rhodes scholar, and his White House counsel hit the trifecta: Harvard, Cambridge and Yale Law.... [S]keptics say Obama's predilection for big thinkers with dazzling résumés carries risks, noting, for one, that several of President John F. Kennedy's "best and brightest" led the country into the Vietnam War. Obama is to be credited, skeptics say, for bringing with him so few political acquaintances from Illinois. But, they say, his team reflects its own brand of insularity, drawing on the world that Obama entered as an undergraduate at Columbia and in which he later rose to eminence as president of the Harvard Law Review and as a law professor at the University of Chicago.... The Ivy-laced network taking hold in Washington is drawing scorn from many conservatives, who have in recent decades decried the leftward drift of academia and cast themselves as defenders of regular Americans against highbrow snobbery. Joseph Epstein wrote in the latest Weekly Standard -- before noting that former president Ronald Reagan went to Eureka College -- that "some of the worst people in the United States have gone to the Harvard or Yale Law Schools . . . since these institutions serve as the grandest receptacles in the land for our good students: those clever, sometimes brilliant, but rarely deep young men and women who, joining furious drive to burning if ultimately empty ambition, will do anything to get ahead." The libertarian University of Chicago law professor Richard Epstein, who is not related to Joseph Epstein, worries that the team's exceptionalism could lead to overly complex policies. "They are really smart people, but they will never take an obvious solution if they can think of an ingenious one. They're all too clever by half," he said. "These degrees confer knowledge but not judgment. Their heads are on grander themes . . . and they'll trip on obstacles on the ground." All agree that the picks reveal something about Obama, suggesting he will make decisions much as he did in the U.S. Senate -- by bringing as many smart people into the room as possible and hearing them out.... [Nicholas] Lemann said Obama's penchant for expertise seems tempered with a respect for people who had, like Obama, left the path to academic jobs or big law firms to run for public office.And then there's the New York Times' Frank Rich:
The stewards of the Vietnam fiasco had pedigrees uncannily reminiscent of some major Obama appointees. McGeorge Bundy, the national security adviser, was, as Halberstam put it, “a legend in his time at Groton, the brightest boy at Yale, dean of Harvard College at a precocious age.” His deputy, Walt Rostow, “had always been a prodigy, always the youngest to do something,” whether at Yale, M.I.T. or as a Rhodes scholar. Robert McNamara, the defense secretary, was the youngest and highest paid Harvard Business School assistant professor of his era before making a mark as a World War II Army analyst, and, at age 44, becoming the first non-Ford to lead the Ford Motor Company. The rest is history that would destroy the presidency of Lyndon Johnson and inflict grave national wounds that only now are healing. In the Obama transition, our Clinton-fixated political culture has been hyperventilating mainly over the national security team, but that’s not what gives me pause. Hillary Clinton and Robert Gates were both wrong about the Iraq invasion, but neither of them were architects of that folly and both are far better known in recent years for consensus-building caution (at times to a fault in Clinton’s case) than arrogance. Those who fear an outbreak of Clintonian drama in the administration keep warning that Obama has hired a secretary of state he can’t fire. But why not take him at his word when he says “the buck will stop with me”? If Truman could cashier Gen. Douglas MacArthur, then surely Obama could fire a brand-name cabinet member in the (unlikely) event she goes rogue. No, it’s the economic team that evokes trace memories of our dark best-and-brightest past. Lawrence Summers, the new top economic adviser, was the youngest tenured professor in Harvard’s history and is famous for never letting anyone forget his brilliance. It was his highhanded disregard for his own colleagues, not his impolitic remarks about gender and science, that forced him out of Harvard’s presidency in four years. Timothy Geithner, the nominee for Treasury secretary, is the boy wonder president of the Federal Reserve Bank of New York. He comes with none of Summers’s personal baggage, but his sparkling résumé is missing one crucial asset: experience outside academe and government, in the real world of business and finance. Postgraduate finishing school at Kissinger & Associates doesn’t count.There are a few other examples of stories like this, but I think you get the drift. These stories are just as overblown as the "team of rivals" meme. Halberstam's "best and brightest" were known primarily as brilliant scholars before they joined the Kennedy administration. While many Obama's major appointments are smart, none of them besides Larry Summers have any extensive experience working at an Ivy League institution. Indeed, as Lemann observed in the Post above, Obama likes people who have stepped away from the academy. The other irony is that the undercurrent of these stories contradicts the overt theme. The undercurrent is progressive dissatisfaction with Summers, Geithner, and others who worked for Robert Rubin. The critics' suggestion for how to correct for this bias? Apparently, they should hire more academics. Rich writes, "In our current financial quagmire, there have also been those who had the wisdom to sound alarms before Rubin, Summers or Geithner did. Among them were not just economists like Joseph Stiglitz and Nouriel Roubini." See Michael Hirsch and Josh Marshall as well. So, really, this "best and brightest" critique is kind of an unholy alliance between conservatives grasping at straws to criticize the Obama transition and progressives who feel screwed over by the economic appointments. [But aren't the progressives right? Wouldn't Stiglitz be a smart pick for an administration position?--ed. Um... no, because this overlooks the fact that, based on his DC experiences in the nineties, Joe Stiglitz's managerial, bureaucratic, and political skills are all really, really bad. Furthermore, his writings since that time suggest that the DC experience has curdled rather than improved on these skills.]
Nonfarm payroll employment fell sharply (-533,000) in November, and the unemployment rate rose from 6.5 to 6.7 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. November's drop in payroll employment followed declines of 403,000 in September and 320,000 in October, as revised. Job losses were large and widespread across the major industry sectors in November.Since every other sector of the economy is asking for federal assistance, I'm wondering if this Boston Globe story by Robert Gavin will prompt the male gender to ask for special assistance:
Men are losing jobs at far greater rates than women as the industries they dominate, such as manufacturing, construction, and investment services, are hardest hit by the downturn. Some 1.1 million fewer men are working in the United States than there were a year ago, according to the Labor Department. By contrast, 12,000 more women are working. This gender gap is the product of both the nature of the current recession and the long-term shift in the US economy from making goods, traditionally the province of men, to providing services, in which women play much larger roles, economists said. For example, men account for 70 percent of workers in manufacturing, which shed more than 500,000 jobs over the past year. Healthcare, in which nearly 80 percent of the workers are women, added more than 400,000 jobs. "As the recession broadens, the gap between men and women is going to close somewhat," said Andrew Sum, director of the Center for Labor Market Studies at Northeastern University. "But right now, the sectors that are really getting pounded are intensely male." The divide is far starker than it was in last recession, when the technology crash battered professional and technical sectors in which women now hold more than 40 percent of jobs. From the beginning of 2001 to the beginning of 2002, the number of employed men declined by about 900,000, while the population of women with jobs fell by about 700,000.In semi-seriousness, one wonders if this kind of gender breakdown will lead to a skew in infrastructure spending towards male-dominated industries (like road construction) rather than female-friendly infrastructure sectors (like, say, expanding broadband capabilities or boosting education spending).
By now, Eisman knew everything he needed to know about the quality of the loans being made. He still didn’t fully understand how the apparatus worked, but he knew that Wall Street had built a doomsday machine. He was at once opportunistic and outraged. Their first stop was a speech given by the C.E.O. of Option One, the mortgage originator owned by H&R Block. When the guy got to the part of his speech about Option One’s subprime-loan portfolio, he claimed to be expecting a modest default rate of 5 percent. Eisman raised his hand. Moses and Daniel sank into their chairs. “It wasn’t a Q&A,” says Moses. “The guy was giving a speech. He sees Steve’s hand and says, ‘Yes?’” “Would you say that 5 percent is a probability or a possibility?” Eisman asked. A probability, said the C.E.O., and he continued his speech. Eisman had his hand up in the air again, waving it around. Oh, no, Moses thought. “The one thing Steve always says,” Daniel explains, “is you must assume they are lying to you. They will always lie to you.” Moses and Daniel both knew what Eisman thought of these subprime lenders but didn’t see the need for him to express it here in this manner. For Eisman wasn’t raising his hand to ask a question. He had his thumb and index finger in a big circle. He was using his fingers to speak on his behalf. Zero! they said. “Yes?” the C.E.O. said, obviously irritated. “Is that another question?” “No,” said Eisman. “It’s a zero. There is zero probability that your default rate will be 5 percent.” The losses on subprime loans would be much, much greater. Before the guy could reply, Eisman’s cell phone rang. Instead of shutting it off, Eisman reached into his pocket and answered it. “Excuse me,” he said, standing up. “But I need to take this call.” And with that, he walked out.Eisman was right, but his behavior here suggests why he was such a lonely prophet. Furthermore, based on that kind of behavior, one could be orgiven for thinking that Eisman was merely the latest in a long line of obnoxious market analysts. It's not enough to be right -- it's also important to have the emotional intelligence necessary to persuade others that you are right.
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.