The world of anti-austerians is abuzz (and maybe somewhat gleeful?) this afternoon about news that a paper by Carmen Reinhart and Kenneth Rogoff -- the paper for those policymakers looking for serious academic work to back up their proposals for debt-slashing cutbacks -- has some serious issues (Josh Keating summarizes those problems on his War of Ideas blog here)
Why is this causing such a stir? One of the conclusions of the paper is that when countries hit a debt-to-GDP ratio of 90 percent, they reach a tipping point after which they'll start experiencing serious growth slowdowns. It's a conclusion that many have found either important or useful, depending on your level of cynicism.
Take a look at some of the ways Reinhart and Rogoff -- and their conclusions -- have been marshaled in the austerity vs. Keynesianism debate that has dominated much of the post-financial crisis discussion about fiscal policy:
This House Budget Committee response to President Obama's budget proposal from just a few days ago cites R&R by name before going on:
Instead of taking steps to reduce the excessive burden of debt, the President's budget, even if fully implemented, never reduces gross federal debt below the important 90 percent threshold.
Olli Rehn, European Commission vice president on Economic and Monetary Affairs and the Euro (and noted austerity champion) pulls out the R&R 90-percent rule in this February call for continued "fiscal consolidation":
It is widely acknowledged, based on serious academic research, that when public debt levels rise above 90% they tend to have a negative impact on economic dynamism, which translates into low growth for many years.
Sen. Tom Coburn (R-OK), in this excerpt from his book, rhapsodizes about a briefing Reinhart and Rogoff gave before a group of forty senators:
"Reinhart echoed Conrad's point and explained that countries rarely pass the 90 percent debt-to-GDP tipping point precisely because it is dangerous to let that much debt accumulate. She said, "If it was not risky to hit the 90 percent threshold, we would expect a higher incidence."
"Thank you for your depressing presentation," Senator Dick Durbin, D-Ill., said in closing, to self-conscious laughter around the room."
These are just a few examples that turned up from a quick search in English -- who knows what a search in Italian, Greek, or German would yield.
We here at Foreign Policy had been preparing for the day Cyprus's banks reopened by collecting pictures of bank runs from around the world -- on the chance that this morning we'd wake up to long lines of frantic depositors.
But with headlines like "Euro Rises Amid Cyprus Calm" and "All Is Calm as Cyprus Banks Re-Open After 12 Days," that idea has sort of fizzled out. (Come back to this space next time there really is a bank run, though, for some great pictures!)
So instead, we present you with this: a Cyprus so calm that a man feels comfortable standing in front of a bank with a parrot on his head.
Yiannis Kourtoglou/AFP/Getty Images
Israeli Defense Minister and former Prime Minister Ehud Barak can now add another title to his resume: real estate mogul. On Sunday, it was reported that Barak had sold his notoriously luxurious Tel Aviv apartment in the Akirov Towers, a five-room compound on the 31st floor whose amenities include a gym, outdoor pool, spa, and breathtaking views, for $7 million. In 2003, he paid a mere $3.87 million for the 450-square-foot space.
Naturally, Barak took to Facebook to explain his decision:
"My wife Nili and I decided that the sale was inevitable faced with the recognition that this place of residence created a sense of alienation and detachment from vast sectors of the public."
In true Ehud Barak fashion, the apartment was sold to a foreign company. The veteran kibbutznik, who was raised in a 12-by-9 foot room with no running water or toilets and described his childhood as "happy" and "warm," entered the private sector after stepping down from a failed premiership in 2001. His business ventures included oil shale rock in Jordan, a stint as president of Satcom Systems, Ltd., a mobile communications company with ties to repressive African regimes, a post on the advisory board of venture capital firm Tamir Fishman & Co., and a network of parking lots in Istanbul (which failed). All of these expeditions, though, were peas and carrots compared to his passion for working with international hedge funds. According to son-in-law Zvi Lotenberg, "the bulk of Barak's activity takes place abroad, for a number of the world's largest hedge funds and investment firms, whose names he declined to reveal."
Barak may maintain that he has been transparent regarding his business transactions, and that he has paid his taxes, but in 2006 he put away some money in a favorite tax haven, using "an account of 38 million Japanese yen (the equivalent of $380,000) in the Cayman Islands branch of Mizrahi-Tefahot Bank as collateral to obtain a loan from the bank."
Compared with the corrupt financial escapades of Israeli leaders like former prime minister Ehud Olmert, this is pretty vanilla, but there are certainly more than enough former government officials with extensive tastes in the world. Prince Bandar bin Sultan, the former Saudi ambassador to the United States, built the 95-acre estate of Hala Ranch in 1991 just miles from Aspen, which was the "most expensive single-family residential property in the nation on the market" when it was listed for $135 million in 2007. Former British prime minister Tony Blair bought a house in London's posh and swanky Connaught Square for 3.5 million pounds. When Jacques Chirac stepped down from the French presidency in May 2007, he rented an apartment overlooking the Seine on Paris' Quai Voltaire. What makes Barak notable is that he's still on the government payroll.
So where will Barak end up next? Perhaps the David Promenade? Or maybe he'll downsize to this four-bedroom stunner on Atzuk Beach? Wherever he ends up, the next home for this cigar-chomping pol promises to be far from the kibbutz.
Should an American lead the European Central Bank? That's what Sylvain Broyer proposes in the German newspaper Die Zeit. The original's in German, but I've translated a portion:
I believe that the best candidate to follow Jean-Claude Trichet would be an American. It's no doubt true that we have talented minds in Europe that have the necessary competence. But the challenges that await the future president of the European Central Bank demand a fundamental change in how we think about the essence of the monetary union...
The next ECB-President has to show the willingness to act as a lender of last resort for overly indebted member states...That recognition of the essence of a monetary union is rare in today's Europe, but belongs to the mainstream on the other side of the Atlantic.
Nice try, Sylvain. You might have a point about the ECB's philosophic mismatch for the current moment -- but in case you haven't noticed, we've got plenty of trouble trying to filling out the ranks of our own monetary institutions, what with the Senate filibuster holding things up. I know our out-of-work central bankers look like they're just standing around, but they're actually all under serious consideration for the three vacancies on at the Federal Reserve. (Except for Greenspan -- you can have Greenspan.)
A court case in India might could give a whole new meaning to the phrase "masters of the universe":
Can Hindu deities have demat accounts to enable them transact in shares and debentures on the stock market?
The Bombay High Court will decide the issue after a religious trust filed a petition challenging the decision of National Securities Depository Ltd (NSDL) to refuse it permission for opening demat accounts in the names of five Hindu deities.
The deities of the Sangli-based trust "Ganpati Panchayatam Sansthan" are Lord Ganesh, Chintamaneshwardev, Chintamaneshwaridevi, Suryanarayandev and Laxminarayandev. The trust, belonging to the Patwardhan family, the erstwhile royals of Sangli, had obtained PAN cards in the names of deities in 2008.
In Inida, a "demat account" is one in which shares are held in electronic form rather than in certificates, which seems appropriate for metaphysical beings. If Lord Ganesh and co. do win their case, I know the perfect banker for them.
Hat tip: Marginal Revolution
Germaphobic consumers can take heart here in the United States, where dollar bill circulation is fairly short-lived -- only about 20 months of wallet-hopping before the Federal Reserve pulls the plug , destroying on average about 7,000 tons of over-the-hill greenbacks each year. In Zimbabwe, however , where U.S bills are much preferred to the country's own collapsed currency, a day in the life of a dollar is not quite so hygienic. If you're thumbing through a wad of cash in Harare, chances are you won't be able to appreciate the satisfying sound or unmistakable scent of crisp, fresh-from-the-ATM bills: most U.S. bank notes continue changing hands in Zimbabwe for years on end, only slipping out of circulation once they've truly gone to pieces (when Scotch tape can no longer work its magic).
The delicacy of these "well-seasoned" bills isn't worst of Zimbabweans' concerns: their dirtiness is an even bigger problem. Indeed, among the country's poorest, underwear and shoes often serve as the most convenient "wallets." But Zimbabweans have found a simple way to combat the grime: they've started literally laundering their money. The most diligent cleaners recommend washing the flimsy bills by hand, then hanging them out to dry (bills are often pinned to clotheslines alongside more conventional linens). In a pinch, however, a time-saving machine wash will also do the trick. Experts do warn against giving bills high-class treatment: one trip to the drycleaner's and George Washington's face may well lose its authentic green pallor...
Alex Wong/Getty Images
As most of the attention has focused on Europe's PIIGS economies, debt-laden Hungary has, for a few weeks now, been the dark-horse candidate for the next European economy to collapse. This week, the country's new government seems to have been doing everything in its power to reinforce that view:
On Thursday, Lajos Kosa, deputy chairman of the governing Fidesz party, said Hungary was facing a Greece-like financial meltdown. And former Fidesz finance minister Mihaly Varga said the deficit could reach 7-7.5 percent of GDP, about twice as much as planned for 2010 by the previous government.
While Hungary isn't part of the euro, the default fears have weighed on on the euro, which fell to a four-year low of $1.20 today.
The Prime Minister's spokesman described Kosa's characterization as "no exaggeration," though added, not particularly convincingly that ""The government is ready to avoid the Greek path."
The thing is, the actual situation in Hungary doesn't seem quite as dire as the government's gloomy assessment:
Some analysts said the politicians' statements seemed exaggerated, as Hungary's public debt of 78 percent of GDP was high but well below Greek levels.
"Any comparison with the situation in Greece is a little misplaced," Capital Economic's Shearing said, noting that Hungary's short-term debts, those which needed to be repaid to foreign creditors within the next year, equaled just 2.4 percent of GDP.
Is it possible that that the Hungarian government is trying to make the economy sound worse that it is? They would certainly have the incentive. Promising tax cuts, Fidesz won parliamentary elections in a landslide in April, unseating a Socialist governing that had instituted painful austerity measures in order to restore investor confidence. FT's Alphaville notes:
Market observers are struggling with trying to determine the extent to which the announcements may be a result of political manuevering to back away from campaign pledges to reduce taxes all the way to concerns that there may be a similar credibility gap to Greece regarding past budget numbers.
It's certainly not out of the question that the Socialists were engaging in some creative accounting. Concealing the true state of the economy is becoming something of a tradition in Hungarian politics. In 2006, former Socialist Prime Minsiter Ferenc Gyurcsany was caght on tape telling members of his party that he had concealed the true state of the economy in order to win an election, saying, "Evidently, we lied throughout the last year-and-a-half, two years. It was totally clear that what we are saying is not true."
A recent Pew survey found that an astounding 77 percent of Hungarians describe themselves as "not satisfied" with democracy. That number's becoming a little easier to understand.
Goldman Sachs may have taken a lot of heat lately, but they may have done themselves a great favor by releasing their 2010 World Cup Research Report earlier this month. Running a little over 70 pages, it's a remarkably in-depth summary of each country in this year's finals, including football prowess, economic state, and political situation. Furthermore, it provides a primer on the potential hosts of the 2018 and 2022 World Cups, and, unsurprisingly but more than interesting, an examination of economic growth and decline vis-a-vis the international football teams of respective countries.
Some of the most noteworthy things to take away: like most of the speculation has focused on, the report predicts a European-hosted cup in 2018, and a return to the U.S. in 2022. (Also included are bid pitches from Russia, England, and the U.S.) Interestingly, this is what it says about the U.S. bid:
The sport has taken roots in the USA and the market is quickly becoming one of FIFA’s most important. They already pay one of the largest television rights fees to FIFA of any country. However, the perception is still otherwise.
For U.S. soccer fans, that perception is extremely frustrating. It is somewhat accurate: for a team that has qualified for the last six World Cups (granted, a Foreign Policy* staff team could probably qualify for the finals out of the Confederation of North, Central American, and Caribbean Association Football -- CONCACAF), interest would appear to be lower than warranted. (Six out of six is, by the way, quite impressive: England, France, and the Netherlands can't claim that streak.)
But that's changing. Go to many bars in the District on Saturday or Sunday morning, and you'll see European football -- usually the English Premier League -- on the TV. From my own observations (be wary of perception bias), the sport with the most jerseys worn on the streets of Northern Virginia and D.C. is soccer, by far. Moreover, 24.5 million Americans play football, the second most (behind China's 26.2 million) in the world. Since 1994, there has been a dramatic increase in the number of U.S. soccer fans, but among casual or non-fans, there still remains an idea that soccer is not an "American" sport. (It should also be noted that the U.S. Women's team is the dominant global powerhouse.)
UEFA's (Union of European Football Associations) selection of the 2012 Euro Cup host proved prescient, as well. Picking in 2007, Poland won the rights to host the tournament (OK, co-host with Ukraine, but since then UEFA has suggested Poland be the sole host, which the Poles have graciously declined to accept). Poland, however, was the only bid country that hasn't suffered economic decline since -- and yes, Greece was the first bid country eliminated.
Other notable findings: the Growth Environment Scores (a Goldman-devised figure of sustainable economic growth and productivity) of respective countries loosely correlate to soccer performance, but a much stronger connection exists between the improvement of economic conditions and national soccer teams. (Algeria, which did not qualify for the 2006 finals in Germany, posted the highest GES improvement among developing countries over the last four years.) The report also argues that success is partially dependent on the number of males aged 18-34 in countries, and provides a UN chart with predictions for 2050. If the claim is accurate, the Nigerian Super Eagles are going to be really, really good in a few decades.
Lastly, Goldman offers their own predictions of the semi-finals (I won't spoil, though I will say it's what my predictions are as well), and lists the probability (with their metrics) that each country will become World Cup champions.
It's lengthy, but an extremely interesting read, and provides the best rundown of the Cup to come that I've seen. Check it out.
*No matter what anyone says, I'd play right wing.
GIANLUIGI GUERCIA/AFP/Getty Images
Granted, this is the Guardian, quoting, El Pais, quoting anonymous sources, quoting Jose Luis Rodriguez Zapatero, quoting Nicolas Sarkozy, but it still has to raise some eybrows at the European Central Bank:
The startling threat was made at a Brussels summit of EU leaders last Friday, at which the deal to bail out Greece was agreed, according to a report in El País newspaper quoting Spanish Prime Minister José Luis Rodríguez Zapatero. Zapatero revealed details of the French threat at a closed-doors meeting of leaders from his Spanish Socialist Party on Wednesday.
Sarkozy demanded "a compromise from everyone to support Greece ... or France would reconsider its position in the euro," according to one source cited by El País. "Sarkozy went as far as banging his fist on the table and threatening to leave the euro," said one unnamed Socialist leader who was at the meeting with Zapatero. "That obliged Angela Merkel to bend and reach an agreement."
A different source who was at the meeting with Zapatero told El País that "France, Italy and Spain formed a common front against Germany, and Sarkozy threatened Merkel with a break in the traditional Franco-German axis."
El País also quotes Sarkozy as having said, according to another of those who met Zapatero, that "if at time like this, with all that is happening, Europe is not capable of a united response, then the euro makes no sense".
The euro fell to an 18-month low against the dollar today.
It seems like just yesterday that we were asking ourselves if the United States was Rome. In light of the financial collapse in the other great cradle of Mediterranean civilization, the New York Times' David Leonhardt poses the inevitable follow-up question:
It’s easy to look at the protesters and the politicians in Greece -- and at the other European countries with huge debts -- and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that. Only benefit cuts or tax increases can.
Yet in the back of your mind comes a nagging question: how different, really, is the United States?
The U.S.'s national debt, Leonhardt notes, is projected to rise to 140 percent of GDP within the next twenty years -- Greece's is 115 percent today.
Elsewhere at the Times, Paul Krugman questions the credibility of that long-range projection and argues that the U.S. shouldn't worry:
Basically, the United States can expect economic recovery to bring the deficit down substantially; Greece, which has a larger structural deficit and also faces a grinding adjustment to overvaluation with the eurozone, can’t.
About that eurozone: in a phenomenally awkward bit of timing, Estonia happened to be trying to join it today, and succeeded. Other countries like Poland and Bulgaria, however, are having second thoughts. Greece's current predicament, and the looming crises in Spain, Portugal, and elsewhere, have offered a cautionary tale. The Associated Press looks at the divergent experiences of Hungary and Romania, which are members of the European Union but not the eurozone, and Greece, which is in both: When the IMF bailed out Hungary and Romania in 2009, the countries were able to make the necessary adjustments quickly, if painfully, by letting their currencies fall. Greece, however, can't, and is now looking at far harsher, more drawn-out austerity measures attached to its 110 billion euro bailout.
What's a girl to do when she's not a living goddess anymore? Apparently aim for a career in finance:
Chanira Bajracharya, 15, has been the Kumari or “living goddess” of Patan, an ancient town south of Kathmandu, for nine years, blessing devotees at the temple and riding in decorated chariots 18 times a year during Hindu and Buddhist festivals.
Now, with her time as living goddess drawing to a close — the young virgin deities retire on reaching puberty — Bajracharya is contemplating a career in banking if she makes grades good enough to study commerce or accounting.
Last week she became the first living goddess ever to take the school leaving certificate examination, which was administered to her in her temple, which is housed in her home.
“I want to study commerce or accounting and be engaged in the banking sector,” she told Reuters in a rare interview, dressed in her ceremonial costumes, her eyes rimmed in black kohl and a third eye painted in the middle of her forehead.
Despite the attention, being a goddess doesn't sound like much fun. Bajracharya isn't allowed to attend school or mingle with other children and says she has no friends her age. She receives only about $20 a month for her services. A Nepalese Supreme Court order in 2008 forced the temple to provide the Kumaris with education and medical care.
Hopefully Bajracharya makes it through school and into the career of her choice. She's certainly earned it and the global banking sector could use a little divine intervention these days.
PRAKASH MATHEMA/AFP/Getty Images
Bad news from the World Trade Organization: Global trade crashed a whopping 12 percent last year, around 20 percent more than anticipated and the most since the end of World War II.
Pascal Lamy, the head of the WTO, used the occasion to call for the resumption of the Doha trade talks, which fell apart in 2008 and which he described as "imperative." Just yesterday, U.S. President Barack Obama promised to complete them, with unnamed officials saying the White House wants it to happen this year. But then again, Doha would need to be approved by these guys...
Two weeks ago, European leaders tapped Germany to lead a bailout of Greece. Since then -- sturm und drang and chaos. Germans are infuriated over everything from Greece's hiring of Wall Street firms to hide its debt to the country's retirement age (in Germany, 67, in Greece, 61). In turn, Greeks have accused German papers of racism and western European leaders of paternalism.
Yesterday, a 60,000-person strike shut down Athens and turned violent, Theodoros Pangalos, the deputy prime minister of Greece, brought history into it. In an interview with BBC radio, he invoked the 1941 Nazi invasion of Greece, which caused an estimated 300,000 deaths:
[The Nazis] took away the Greek gold that was at the Bank of Greece, they took away the Greek money and they never gave it back. This is an issue that has to be faced sometime in the future. I don't say they have to give back the money necessarily but they have at least to say "thanks."And they shouldn't complain so much about stealing and not being very specific about economic dealings.
All in all, I can't see anyone benefiting from this diplomatic low blow. The Greeks don't want German help, and the Germans don't want to have to give it to them. But, the alternative is mass unemployment and emigration, deep cuts to social services, and a prolonged depression. As I understand it, even moderate austerity measures combined with very high taxes on the rich, the Greek populist proposal, simply will not work. And, just as an aside, I'll go ahead and guess that Angela Merkel saying "Thanks for the gold!" would not go down well in Athens at all.
Milos Bicanski/Getty Images
If I weren't Annie in Washington, but were, say, Anthea in Athens, I'd consider moving right about now. The Greek economy is cratering. Unemployment is skyrocketing. Taxes are rising. Social services are being slashed. Greece's participation in the European Union means that I can move and get a job anywhere in it, without a visa. So, I'd figure -- I'm young, childless, and college-educated. I'll try my prospects in Strasbourg for a couple years.
The problem is: I'm useful to the Greek economy. I work hard and pay taxes, but don't use much in the way of social services like healthcare. I do spend plenty of my income on things like clothes and food, though, and might even open a business if given the chance. Alas, it seems, I am leaving Greece by the thousands.
I used Eurostat to make this chart of the growth changes in the Greek population, broken down by age group. Blue bands are growing and red are shrinking. Eurostat only had data up until 2009, but I imagine we will see trends accelerate in 2010, with a veritable exodus of young members of the work force. On one hand, this might leave jobs for other workers and therefore lower unemployment somewhat. On the other, the trend just does not bode well for the Greek economy.
This weekend, the New York Times reported that Greece, in the midst of a massive economic crisis, had none other than Wall Street giant Goldman Sachs help it keep its books in the black with some creative financial maneuvers, such as selling away the rights to future lottery earnings.
[Greece] engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels. Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November...a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills.
The story is a bit less fantastic than it seems at first blush. First, Felix Salmon notes, the world has known about the investment banks' advising the Greek government for the better part of a decade. In 2003, Nick Dunbar of Risk Magazine published a long piece on the giant swap deals Goldman was engineering for Athens.
Second, Greece is hardly alone in papering over or effectively doctoring its stats. The New York Times article notes that Italy partakes in similar banker-confabulated deals and implies that others do too. France pulled a similar 9 billion euro debt maneuver, revealed in 2006. China cooks its books to boost its GDP numbers. Name any of a dozen developing nations (Zimbabwe springs to mind) and someone will have plausibly accused it of lying with statistics.
But, of course, Greece is no Zimbabwe. The ousted Greek government knew better than to amp up the creative accounting as its economy was tanking. It made a bad situation worse, imperiled Greek livelihoods, hurt its partners in the eurozone, and possibly even destabilized the euro itself.
What I can't figure out is how much the Eurocrats and eurozone finance ministers knew about these deals. The European Monetary Union has bureaucrats aplenty to keep track of the eurozone economies and prudential measures to prevent countries from over-extending themselves, debt-wise. Is the issue that they didn't know enough -- or that they didn't act?
At the Financial Times, Harvard professor Martin Feldstein argues for letting Greece take a holiday from the euro, allowing it to devalue its currency and ease its severe economic woes. It's a nice idea, but a bit pie in the sky. Barry Eichengreen explains why:
The insurmountable obstacle to exit [is] procedural. Reintroducing the national currency would require essentially all contracts -- including those governing wages, bank deposits, bonds, mortgages, taxes, and most everything else - to be redenominated in the domestic currency. The legislature could pass a law requiring banks, firms, households and governments to redenominate their contracts in this manner. But in a democracy this decision would have to be preceded by very extensive discussion.
And for it to be executed smoothly, it would have to be accompanied by detailed planning. Computers will have to be reprogrammed. Vending machines will have to be modified. Payment machines will have to be serviced to prevent motorists from being trapped in subterranean parking garages. Notes and coins will have to be positioned around the country. One need only recall the extensive planning that preceded the introduction of the physical euro.
The introduction of the euro did require extensive planning -- and extensive costs, costs Greece might not want to pay for. Let's do a bit of back of the envelope math. When the eurozone adopted the physical currency, in 2002, the French bank BNC Paribas calculated the price tag for the switch at 160 to 180 billion euros -- 188 to 212 billion euros today. Greece is about 2.5 percent of the eurozone economy -- so the government might be looking at something like a 4.7 to 5.3 billion euro cost.
That is not much. In fact, it is so little Greece might be able to afford it; the government already needs to borrow 53 billion euros to service its debt this year. But that doesn't include the dramatic cost to businesses, individuals, and banks, or the political and plenary trouble of executing such a maneuver. Alas, Feldstein's is a nice idea, but not one I see working.
ARIS MESSINIS/AFP/Getty Images
Barack Obama is catching some heat for saying that he doesn't "begrudge" the bonuses paid to Goldman Sachs CEO Lloyd Blankfein and JPMorgan Chase chief Jamie Dimon ($9 and $17 million, respectively). I don't see what the fuss is all about. It's fairly simple: Good executives deserve to be well compensated for their work, while bad ones -- like Stanley O'Neal, who scored himself a $160 million golden parachute even as his firm, Merrill Lynch, was putting up huge losses -- do not. Obama might consider clarifying his remarks by borrowing from some old speeches of his: "I'm not against all bonus. Just dumb ones."
The key to encouraging good banker behavior is putting in place a compensation system that doesn't reward CEOs for taking dangerous risks to the financial system as a whole. Tying executive pay to long-term performance, not short-term stock boosts, would be a good start. Requiring so-called clawback provisions that put CEOs on the hook for losses, and not just gains, would be another wise move. And it would greatly help matters if CEOs of big financial firms were no longer able to stock their boards with cronies who let them do whatever they want.
To my mind, though, the most important reform would be to raise the amount of capital that banks are required to keep on their books. The reason "Wall Street CEOs gone wild" became such a huge problem, requiring massive government intervention, was that their institutions were too highly leveraged and couldn't cover their losses. If you get this reform right, many of the smaller problems -- including CEO pay -- become less dangerous to the economy as a whole.
UPDATE: Wow, I see that the blogosphere has now gone crazy reacting to the original Obama interview, and the White House is trying to walk it back. Even Paul Krugman is unloading on the prez. Twice. Krugman's chief complaint is that Obama said, "like most of the American people, [I] don’t begrudge people success or wealth. That’s part of the free market system." Krugman: "but this wasn’t about free markets, this is an industry that survives only thanks to taxpayer backing." Fair enough, but I think what Obama meant is pretty clear: Blankfein and Dimon are the best of the lot, and they came out of this mess big winners.
Via FP contributor Ashby Monk, here's an interesting story from Bloomberg News that hasn't gotten much attention. It seems that Russia tried to use its vast financial holdings and conspire with China to create "economic disruptions" in the United States in 2008. An astonishing scoop, if true.
The source of the tale is Hank Paulson, the former U.S. Treasury secretary whose memoir, On the Brink, is coming out soon.
The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities.
China rejected the idea, according to Paulson, and the Russians are denying the story. Monk, an expert on sovereign wealth funds, comments:
If true, it would appear that Russia was plotting economic warfare against the US during the summer of 2008; I don’t really know what else to call it. Their intention was to use their sovereign wealth to purposely weaken and damage the US economy. The fact that all this apparently occurred around the same time that Russia was engaged in a traditional war with Georgia, a US ally, lends some credibility to the idea.
I thought that calendar 2009 was a good year for my thinking activities; taking stock I thought I had satisfied my new year commitment to not be late once, satisfied my ancient Mediterranean avoidance of vulgar work (called "laziness" in modern days by philistines and modern slaves), brought down my "work" activities to under 3 hours a week, while (of course) increasing my income, reduced boring exercise while increasing my fitness, never uttered the word "I am busy" (meaning I was in control of my life), drank good wine, etc. I had spent minimal time with philistines and businessmen, blew away a few heads of state and ministers of finance because I despise bureaucrats & journalists & find them both boring and intellectually inferior to my friends Dupire, Douady, the philosophers & philosophasters, etc. You know you are free when you prefer to turn down invitations by the glorious to accepting them --the first step towards withdrawal and seclusion. I did more raw thinking, pure abstract thinking than ever before, except perhaps in childhood as I had no soccer mum so I could lounge and meditate. I figured out mathematically why nature could not have an animal larger than an elephant, why size is a handicap in complex systems, the "too big WILL fail", etc. but all these seemed childplay. For I never thought that I would see in front of me the result of my life with disastrous consequences for LOGIC, EPISTEMOLOGY, DECISION THEORY, STATISTICAL INFERENCE. Thanks to my friend Raphael Douady who lets me borrow his brain, his intelligence, and his mathematical erudition --he has more mathematical culture than anyone in modern times, except perhaps for his late father Adrien Douady. 16 years of conversations with Raphael ... Only he could bring up cylindrical (even spherical) Brownian motion, Sobolev space, etc. into normally bland discourses. All it took is a long conversation in Raphael's kitchen last November. Now I feel I did something deep.
(Hat tip: Paul Kedrosky)
Sean Gallup/Getty Images for Burda Media
P.T. Barnum, the great American circus showman, may or may not have actually said of his customers, "there's a sucker born every minute," but it's a maxim that could just as well have applied to the recent financial crisis.
I'm reminded of the apocryphal quote after reading Gretchen Morgenson and Louise Story's somewhat convoluted, but nonetheless interesting report in today's New York Times on how the investment bank Goldman Sachs allegedly played both sides of the market for mortgage-backed securities and is now being scrutinized by various regulators looking to determine whether any laws or industry rules were broken:
While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.
One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.
Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created.
I'm no lawyer, but my take is that it's not Goldman's fault if its customers were suckers; the bank correctly saw that the U.S. housing sector was headed south and adjusted accordingly, while less prudent financial institutions were still making big bucks on complex securities tied to mortgages and couldn't wean themselves away in time to save themselves from disaster. As the firm's spokesman says in the story, it's not like these customers, pension funds and insurance companies, were rubes who didn't know what they were getting into. They were sophisticated financial players looking for high returns and willing to take risks.
Still, Goldman stands accused of some breathtakingly cyncial behavior here: selling products it didn't believe were worthy investments and then betting against them. It's as if McDonald's were caught investing in defibrillators and plus-size clothing companies. Nobody can deny, however, that Goldman made very smart moves and has come out far ahead of its competitors.
One thing I'm struck by in recent accounts of the financial crisis is the extent of "Goldman envy" among other Wall Street firms. Executives at J.P. Morgan, Lehman Brothers, Merrill Lynch, Bear Stearns, Morgan Stanley, and other big banks were obsessed with emulating Goldman's huge profits and resented its employees' reputation for being the smartest, boldest players on Wall Street. In some cases, the interfirm jealously was kind of like that of the character Jan on The Brady Bunch; just replace "Marsha, Marsha, Marsha!" with "Goldman, Goldman, Goldman!"
Yet somehow, with the possible exception of J.P. Morgan, which avoided the worst of the mortgage junk thanks to smart risk management by CEO Jamie Dimon, the other banks didn't follow Goldman's lead when in December 2006 the firm turned bearish on the mortgage sector. Why didn't they catch on?
UPDATE: Be sure to read Felix Salmon's informed analysis. Money quote:
The real lesson here isn’t that Goldman did anything scandalous. It’s just that if you’re making a bet and Goldman is your bookmaker, don’t be surprised if you end up losing.
Spencer Platt/Getty Images
Today, as over the weekend, markets shuddered at the news that Dubai World, a state-controlled investment company, has delayed some debt payments. Investors feared that Dubai World might default or collapse, hurting its counterparties (especially fragile British banks) and perhaps even tipping the world back into recession.
But, as many commentators have noted, even if Dubai World went totally belly up, it wouldn't have anything close to systemic effects. Why? It just isn't big enough. Here's a chart of the debt on its books, in comparison with Lehman Brothers, when it declared bankruptcy.
A "scurrilous idea" -- better known as the Tobin tax, a levy on foreign-exchange transactions -- seems to be taking on a life of its own.
This week U.S. Rep. Peter DeFazio is expected to propose a tax on all financial transactions (like stock purchases -- excluding those connected to health, education, and pensions). The idea of funding job creation in this way has the backing of a variety of groups, including the NAACP, AFL-CIO, and the National Council of La Raza.
Although the idea of a financial transactions tax has been floating around since Nobel economics prize winner James Tobin proposed it in the 1970s (to stabilize currencies), it has gained recent traction since Britain's Prime Minister Gordon Brown brought it up at a meeting of G20 finance ministers meeting earlier this month. He discussed using some form of a tax on all financial transactions, to stabilize whole markets.
Much of the debate focuses on justice, the idea seems to be to tax the bad guys and use the money for any number of just causes. It's hard to argue with that sort of logic. As Brown pointed out, the banks should have to bear some of the costs of the massive bailouts they received.
It cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us."
At the request of the G-20, the IMF is preparing a report on the tax -- despite opposition by IMF Managing Director Dominique Strauss-Kahn. Opponents avoid philosophy and stick to economics, arguing that countries instituting such levies might risk pushing financial operations into friendlier markets and that it would be technically difficult to implement.
In the meantime, Brazil has unilaterally implemented a tax on currency transactions, intended to stabilize the real by reducing speculation.
Jonathan Ernst/Getty Images
Last week, the Hurun Report released the top two on its 2009 China rich list, a ranking of the wealthiest people on the mainland: Wang Chuanfu at $5.1 billion, whose company makes electric cars and batteries, and Zhang Yin at $4.9 billion, whose company produces recycled paper products. The rest of the list comes out this month.
A few things about these two titans and the rich list and its older versions interested me. First, as the United States' billionaires are getting fewer and poorer, China's are getting more plentiful and richer. There are now 131 dollar billionaires in China -- compared with around 350 in the United States.
Second, an exceedingly obvious point but one to marvel at: Rich people in China own companies which make things. The country remains the organ that produces the world's stuff -- batteries, cars, paper, widgets, tires, you name it. And these companies remain relatively undiversified, vertically, not horizontally. One member of the rich list, for instance, owns a company that produces pig feed. 20 years from now, he might own a conglomerate that makes pig feed, feeds it to pigs, slaughters them, and sells the meat. Then, 20 years from then, he might own a holding company which subcontracts out all of those functions to workers and producers in cheaper markets.
In contrast, the 10 richest people in the United States (in descending order: Bill Gates, Warren Buffet, Larry Ellison, assorted Waltons, Michael Bloomberg, and Charles and David Koch) run diversified companies which trade in finance, technology, information, and real estate.
I also took a bit of interest in the producer of the Hurun Report -- one Rupert Hoogewerf. He's a Luxembourgian alumnus of the accounting firm Arthur Andersen who produced Forbes' China rich list between 1999 and 2003. At that point, it seems that Forbes fired him, possibly due to "public doubts and questions of the accuracy and authority of the wealth ranking year after year," according to state paper China Daily. It added: "It is understood that he received no compensation settlement from Forbes."
The official line is that Forbes simply decided to have a Shanghai editor manage the production of the list. But I like the idea of list-maker Hoogewerf going rogue. Does make you wonder about the accuracy of those lists, though...
European leaders are starting to follow suit; Britain's five largest banks have agreed to publish the pay of their key staff members, and will spread bonus payments over three years. French president Sarkozy has announced a set of even tougher and more broadly applied regulations.
Of course, not everyone thinks that bonus reforms are the way to go. Nobel prize-winning conomist Robert F. Engle III says
We shouldn't ban bonuses, but restructure the way they're paid so they're more commensurate with the risk the company is taking....What's important is we give the banking system the right incentives to figure this out. When companies get too big and too complex to fail, they would face a higher tax rate, which would go into a rescue fund. The banks are not excited about it, they would rather go back to business as usual."
The increasingly friendly relationship between Iran and Venezuela is hardly a secret. Just yesterday, Venezuela announced that it will begin exporting 20,000 barrels of gasoline per day to the Islamic Republic. This followed a meeting on Saturday between Presidents Ahmadinejad and Chavez during which the two leaders promised to stand together to defeat imperialist foes.
Legendary New York District Attorney Robert Morganthau explained his concerns about the link in a talk at the Brookings Institution today, sponsored by the the American Interest magazine and Global Financial Integrity. According to Morganthau, some of the most dangerous aspects of the relationship take place far from the cameras, in the shadowy world of illicit finance:
The ostensible reason the the Iranian owned Banco International de Desarrollo (BID) was opened in Caracas was to expand economic ties with Venezuela. Our sources and experiences lead me to suspet an ulterior motive. A foothold into the Venezuelan banking system is a perfect "sanctions-busting" method -- the main motivator for Iran in its banking relationship with Venezuela. Despite being designated by OFAC we believe that BID has several correspondent banking relationships with both Venezuelan banks and banks in Panama, anation with a long-standing reputation as a money laundering safe-haven.
This scheme is known as "nesting." Nested accounts occur when a foreign financial institution gains access to the U.S. financial system by operating through a U.S. correspondent account belonging to another foreign financial institution. For example, BID who is prohibited from establishing a relationship with a U.S. bank could instead establish a relationship with a Venezuelan or Panamanian bank that has a relationship with a U.S. bank. If the U.S. bank is unaware that its foreign correspondent financial institution customer is providing such access to a sanctioned third-party foreign financial institution, this third-party financial institution can effectively gain anonymous access to the U.S. financial system. [...]
There is little reason to doubt Venezuela's support for Ahmadinejad's most important agenda, the development of a nuclear program and long-range missiles, and the destabilization of the region. For Iran, the lifeblood of their nuclear and weapons programs is the ability to use the international banking system and to make payments for banned missile and nuclear materials. The opening of Venezuela's banks to the Iranians guarantees the continued development of nuclear technology and long-range missiles.
Morganthau's office recently prosecuted British bank Lloyds for helping Iran move money through the U.S. financial system by stripping identifying information from wire transfers. He believes the cozy Chavez-Ahmadinejad relationship will only make such operations easier for the Iranians.
Morganthau stopped short of announcing specific prosecutions, but from the sound of it, some new revelations may be forthcoming.
Photo by David Shankbone. Used under Creative Commons license.
Chancellor Angela Merkel and her Finance Minister Peer Steinbrück have been at the forefront of the international campaign to crack down on tax havens like Luxembourg and Switzerland. But they may be overlooking a problem much closer to home, according to Beat Balzli and Michaela Schiessl:
[T]he minister's rage against tax havens risks obscuring a much bigger problem: A completely legal tax avoidance industry is flourishing right at home in Germany. It is an industry that thrives on the mistakes made by ministries and the parliament in drawing up tax legislation. And hardly any other industry is as successful, irrespective of the current economic situation, or operates as efficiently.
While ordinary German workers are at the mercy of the tax authorities, millionaires and corporations use aggressive tax models to make themselves appear to be artificially poor -- and it's completely legal. In fact, seminars on "International Tax Structuring" are even tax-deductible in Germany as professional training.
What the national treasury loses in the process is far from insignificant. The German Institute for Economic Research (DIW) has calculated that there is a gap of €100 billion between the demonstrated profits of corporations and partnerships and the profits they have reported for purposes of taxation. "This points to tax breaks and structuring options with which companies can lower their taxable profits or shift them abroad," writes the DIW.
In fact, German corporations structure their international subsidiaries in such a way that the most profitable ones are located in the countries with the lowest tax rates. Corporate tax paid by corporations makes up only 2.8 percent of the government's total tax revenues of €561 billion. Germany's army of wage-earners contributes the largest share.
"Germany is a tax haven for large companies," says Wiesbaden-based economist Lorenz Jarass. "People with normal incomes are being robbed."
We want to be different from other African countries. We want to show the world that the money given to us will be going to where they want it, to be used in a transparent way.
Remember U.S. Treasury Secretary Timothy Geithner's plan to ease the credit crunch, the byzantine "Legacy Loans" program released to much hand-wringing this winter? It was, perhaps, the most ambitious, most confusing, most surprising governmental response to the Great Recession.
The idea was to help price and start a market for mortgage-backed assets on the banks' books. The government would assess and tranch the assets to sell at auctions to public-private investment partnerships; the government would eat the losses if the assets went sour.
Remember hearing about it recently? No?
That's because it's dead in the water, the New York Times reports.
The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets.
In a move that confirmed the suspicions of many analysts, the agency called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets and eventually sell off hundreds of billions of dollars worth of troubled mortgages and other loans.
Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.
Part of me thinks: goodness, isn't this the best of all worlds for everyone? The banks will be forced to mop up their own mess, and mark down the proper (low but existant) value of these assets at some point. (The i-banks' counterproductive and unethical desire to mismark and misprice concerns me a lot on this point, to be fair.) But if they want to wait for the assets to mature rather than moving them now, spreading their losses out over several years -- that's fine with me.
The government won't have to cajole hedge funds into participating, promising them some oversight concessions in return. That means hedge funds and the like can use their free capital, hopefully, on more productive investments. The government also won't have to subsidize the banks' losses on these assets, leaving those precious funds for other better purposes.
Plus, if the Geithner plan was always in part a confidence thing -- born of the perceived need to reassure banks that the government would not let them fail and would help ease the credit crunch -- this part of the plan seems to have worked. And without costing anything.
Here's looking forward to the other pieces, though.
Writing in The Nation, David Cay Johnston takes liberal interventionism to a new level with this modest proposal:
President Obama proposed on May 4 to crack down on offshore tax cheating; that proposal does not go nearly far enough. Instead of settling for a dime on the dollar, as Obama's plan would do, let's get serious about offshore tax cheating, both legalized and criminal. Let's do what we did to halt the imagined threats of communists in Grenada, depose a drug-dealing president in Panama and find those imaginary weapons of mass destruction in Iraq. Let's invade the Caymans!
The islands, which belong to Britain, have no military and just 300 or so police. An invasion force composed of tax lawyers, forensic auditors and a handful of computer technicians could execute a hostile takeover without firing a shot.
The Caymans are not really a country; they are a law firm posing as one. More than 12,000 "companies" operate out of a single building known as Ugland House, home to the law firm Maples & Calder.... There is $1.9 trillion in bank deposits in the Caymans--money actually invested in the United States and other countries but invisible to the IRS.
I could certainly think of less pleasant places to invade. Though if we head down this path, the U.S. should probably start preparing for EU forces to make an amphibious assault on Delaware.
David Rogers/Getty Images
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