Predictions about the potential effects on the global economy of a U.S. default have verged on the apocalyptic. This weekend, World Bank President Jim Yong Kim characterized the possibility as "disastrous" for both the developing world and developed economies, while International Monetary Fund Managing Director Christine Lagarde argued that a default "would mean massive disruption the world over." Financial leaders speculate that a failure to raise the debt ceiling could trigger higher interest rates, stalled growth, or even a global recession reminiscent of (or worse than) the one caused by the collapse of Lehman Brothers in 2008.
But not all economists are ready to jump on that bandwagon (which is not to say that they necessarily sympathize with the GOP's vocal camp of "default deniers"). Some maintain that a partial, or technical, default (meaning the government would pay some of its debts late) would be short-lived, if still potentially catastrophic. And others argue that the consequences of such a default would be much tamer than headlines suggest.
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Another day, another ballooning corruption scandal in southern Europe. On Monday, the former treasurer of Spain's ruling center-right Popular Party (PP), Luis Bárcenas, admitted in court to authoring handwritten ledgers detailing the secret flow of cash from private firms to top-level officials in the PP. Bárcenas also alleged, after months of speculation in the media, that Spanish Prime Minister Mariano Rajoy accepted regular payments from the illegal slush fund.
A day after Bárcenas's damning testimony, the opposition Socialist Party has threatened to call a vote of no-confidence against the prime minister -- a symbolic gesture given the PP's dominant parliamentary majority. And while it's unclear whether the scandal will bring down Rajoy's government, it has played into the common narrative these days about the connection between government corruption and economic stagnation in Europe's periphery. As the BBC notes, the revelations in Spain "have enraged a country in the depths of recession and record unemployment."
But just what is the relationship between malfeasance and economic performance? The answer might surprise you.
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For the fourth time in one month, a Bulgarian citizen has self-immolated in an apparent protest against economic hardship and political corruption. The BBC reports:
The man, 52, threw petrol over himself outside the presidential palace in Sofia, police said. Security guards extinguished the flames and he was taken to hospital with severe burns where an official said his life was in danger.
As austerity measures make life increasingly difficult in the beleaguered country, the extreme response from Bulgarians has left the country's leaders reeling, prompting the resignation of a mayor in the city of Varna and, before that, the fall of Prime Minister Boiko Borisov's center-right government.
As an act of political resistance, suicide protest is largely associated with Tibetan monks and Dalit women in India. But while the current outbreak of self-immolations in Bulgaria is shocking, it's not exactly surprising. The country has a history of grievance driven self-immolation -- more than many European countries.
According to a literature review of deliberate self-burning (DSB) over a 20-year period, conducted by Medecins Sans Frontiers in 2003, Bulgaria had an average of 7.4 cases per year (between 1983-2002) and a total number of cases that was only surpassed among European countries studied by the Netherlands. The report, which draws a distinction between psychiatric illness and political motivation as a causal factor, notes that Bulgaria had the lowest correlation to mental illness among European countries studied, with only a third of immolations stemming from clinical psychiatric disorders.
Eastern Europe more generally has a history of self-immolation as a form of political resistance, largely in opposition to Soviet rule. In 2011, Foreign Policy's Christian Caryl discussed the most famous case, when the Czech student Jan Palach set himself on fire in 1969 and caused "a profound 'moral shock' to the nation that haunted it for decades to come." The recent Bulgarian cases are similarly haunting, proving once again that self-immolation -- while harrowing -- is often an effective way of getting the government's attention.
As climate talks continue to grind along in Doha, food security would seem to be a major concern (especially as the U.N. issues warnings about the increasingly desperate food situation in Syria). However, the question of how farmers will feed the world's booming population while adjusting to changing weather patterns appears to have been sidelined even as this year's crippling drought in the U.S. sent grain prices to record highs.
That doesn't mean, however, that the race for food security hasn't already begun. As the authors of the recently released book The Global Farms Race argue, cash-rich but resource-poor governments have been quietly making controversial bids for the arable fields of foreign lands to shore up their own food security. Since the 2008 global food crisis, these "land grabs" -- considered an economic lifeline by supporters and neocolonialism by critics -- have been booming. The editors of the book note a 2011 Oxfam study that claimed nearly 230 million hectares of land have been sold or leased since 2001, mostly after 2008 (that's about the size of Western Europe). In one of the most publicized deals, the South Korean company Daewoo Logistics leased 3.2 million acres in Madagascar in 2008 to grow corn and palm oil so that the company could "ensure our food security." The deal, which was eventually canceled, was so unpopular domestically that it contributed to an uprising that helped to oust Madagascar's President Marc Ravalomanana.
While that deal fell apart, countless others have gone through, sparking debates over the economic, environmental, and political implications of exporting crops from food-insecure countries. As Michael Kugelman, co-editor of the book with Susan L. Levenstein, said at a book launch event at the Wilson Center on Tuesday, this development marks "a new phase of the global food crisis" -- one that may help countries importing food, but has grave implications for the countries hosting the crops. One of the disaster scenarios of these large-scale investments is that they will recreate scenes straight out of the Irish Potato Famine, during which crops were shipped out of the starving nation to feed wealthy foreigners. But equally urgent are the day-to-day economic, environmental, and political ramifications of the deals, from the effects of clearing forest to make way for new farmland to the implications of replacing food crops with biofuels.
Defenders of this type of direct foreign investment often tout the willingness of investors to share technology -- such as seeds for drought-resistant plants and satellite monitoring for crops -- with the host nation. However, corrupt governments willing to offer deals that don't benefit their own populations compromise these promises of development. (Unlike the land-grabs of yore, host governments solicit many of these deals. According to Kugelman, Pakistan offered a 100,000-strong security detail to protect the property of foreign investors and other countries have offered "fire sales" on land in the form of tax write-offs).
As the book acknowledges, these deals are most likely here to stay, so the focus is on minimizing the potential conflict over the contentious real estate. Many of the policy recommendations provided by the book lean toward community supported agriculture programs: Wealthy nations contracting directly with small-scale farmers to meet food needs while also providing them with the technology and capital to improve their yields. While that's all well and good, the willingness and ability of foreign investors to abide by these recommendations seems doubtful, especially given the difficulty of enforcing even well-established international economic rules.
The inability of the current multilateral climate talks to make meaningful headway on even a single key issue highlights the inherent problem with these arrangements. "You can have all the rules and regulations for land rights," contributor Derek Byerlee, the World Bank's former Rural Strategy advisor, said on Tuesday, "But you have to be able to implement them."
Spain's King Juan Carlos is showing solidarity with his financially-distressed country by announcing salary cuts for the royal family today. As civil servants protest pay cuts and the government struggles to stabilize the precarious economy, the royals have decided that the king and prince will take a 7-percent reduction in their salary, according to Spanish news sources. This year, King Juan Carlos and his son Prince Felipe will have to live on approximately $350,000 and $160,000 respectively.
With nearly one-quarter of the workforce currently unemployed, Spain's austerity measures are hitting the public hard. But while Madrid burned (figuratively, thankfully) under peril of financial collapse, the royal family drew ire this spring when the King was injured on an elephant hunt in Botswana.
Calls for the end of the monarchy and return of the republic ensued. Of course, with an annual budget of only $10 million, doing away with the entire monarchy would amount to savings of about .008 percent of the cost of the deal to bail out Spain's banks.
According to El Pais, the cuts to the royal budget, which were decided upon in April, will affect only the protocol budget and 11 senior officials of the monarchy. Frustration with the royals had already compelled the government to release information about the King's finances in December of 2011.
The royal family's self-imposed austerity measure will also include a 7-percent cut to protocol funds, which cover the royal party costs, for the entire royal family. How the news will play among the financially distressed Spanish public remains unclear.
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Despite the heated rhetoric over inequality in the United States and elsewhere, today more people on average believe that the rich "deserve their wealth," according to a 23-country survey released by Globe Scan last week.
The survey, which asked over 12,000 people whether they agreed with the statement "most rich people in my country deserve their wealth," found that this year nearly 15 percent strongly agreed and 28 percent agreed versus 12 percent and 27 percent respectively in 2008. The slight increase was driven by improved perceptions of deserved wealth in Australia and Indonesia, with an eight and 11 percent increase of "agree" statements respectively. In the United States, ground zero for the Occupy movement, 58 percent believed the rich deserved their wealth.
The study found that in 6 of the 23 countries surveyed-- Australia, the United States, Canada, China, and Indonesia and India -- the majority of respondents believe that the rich deserve their wealth.
This group represents almost half of the world's population and includes the world's three largest democracies, India, the United States and Indonesia. Perhaps unsurprisingly, among the countries with pro-wealthy perceptions are the two largest economies, the U.S. and China, and countries in the upper tiers of fastest growing economies -- China, Indonesia, and India.
However, the countries in this group run the gamut in terms of prosperity levels: India and the United States occupy opposite ends of the GDP-per-capita spectrum. Also notable is the absence of any European or Latin American state in the pro-rich category. Six European states, five of which are in the OECD, and five Latin American countries all pooh-poohed their country's wealthy. The only African countries surveyed, Kenya and Ghana, showed unfavorable views of the rich and their wealth, though there was a significant jump in approval in Kenya from 2008.
Below is a side-by-side comparison between each country's GINI coefficients-a commonly-used measure of inequality-- and their attitudes towards the rich.
*CIA World Factbook Figures (higher numbers indicate greater inequality)
With Greece's national parliamentary election set for May 6, the crisis-ridden country may have a new threat to worry about: the extremist fringe vote. Due to popular frustration with the country's current economic situation, it is "thought likely" that left- and right-wing political fringe parties will make gains among voters at the expense of mainstream political parties like the conservative New Democracy party and the socialist Pasok party.
But as the New York Times reported yesterday, the Greek ultranationalist group Golden Dawn, a neo-Nazi group that has broadened its appeal by "capitalizing on fears that illegal immigration has grown out of control at a time when the economy is bleeding jobs," may very well receive more than the 3 percent of votes needed to enter Parliament. This is bad news for Greek society, which University of Athens political scientist Nicos Demertzis calls a "a laboratory of extreme-right-wing evolution." Though no Golden Party member has ever held national office, party leader Nikos Michaloliakos was elected to the Athens City Council in 2010.
Golden Dawn joins the ranks of dozens of nationalist-populist fringe parties all over Europe whose enflamed euroskeptic reactions to the "cuts to wages and pensions imposed in order to secure aid from the EU and the IMF" have resulted in political shakeups. The Dutch Party for Freedom (PVV) , led by Geert Wilders, won 24 of the 150 parliamentary seats in the 2010 general election, and came in second in the Netherlands in the 2009 European Parliament elections.
Golden Dawn also espouses a particularly anti-German sentiment:
''It's right to hate Germany, because it is still the leader of the banksters and the European Union,'' Mr. Michaloliakos, the group's leader, said, using a derogatory term for bankers.
Of course, Golden Dawn is still transitioning from a street-fighting group into a political party, but it remains to be seen whether it can become a well-oiled machine like France's National Front, whose leader, Marine Le Pen, is still campaigning for the presidency. Even so, its increasing popularity is evidence of a dangerous trend that only promises to worsen. At least we have Greek left-wing anarchist groups like the Cosnpiracy of Fire Nuclei, Nikola Tesla Commandos, and Immediate Intervention Hood-wearers to keep us properly entertained.
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If you've got a spare billion or so dollars lying around, and have ever dreamed of owning or operating a mid-size Mediterranean lottery system -- let's just say you may want to circle May 16 on your calendar.
That's when the Greek parliament, troubled by loads of sovereign debt and a stalled economy, is set to pass a radical new financial program, complete with an itemized list of state assets to be sold off at cut-rate prices. It's an audacious fire-sale, one that hopes to raise at least 15 billion euros over the next three years, and some 50 billion euros by 2015 - enough to get a new line of credit to pay off some of its existing creditors. The real goal is to prove to the country's European neighbors that it is making a good-faith effort to get its books in order -- the better to entice better terms on the next EU loan.
Of course, the Greek government is aware that even mass privatization doesn't amount to a long-term solution for the troubled country: The IMF estimates that even if the privatization plans proceed according to the most optimistic scenario (which is a very optimistic scenario), that would only reduce the country's debt to 134 percent of GDP -- hardly enough to alter the country's junk-bond status.
But, that shouldn't deter anyone from attending Greece's state auction after combing his couch cushions for stray billion dollar bank notes. Indeed, there's plenty on offer.
If real estate's your thing, you might consider purchasing newly-available government land near the Rio-Antirio bridge near the port city of Patras; or a stretch on the island of Rhodes that the government hopes can be turned into a golf course. The government is also looking for buyers for the stadiums it built for the 2004 Olympics -- arenas that have since gone unused.
But most of the assets come in the way of state-held companies. The national electricity and sewage utilities are up for sale, as is the Greek railway, its postal service, its sole racetrack and horse-racing corporation, and the national lottery system. There are also a number of airports, ports, and marinas up for grabs, as well as the state nickel mining industry, and something called the "Hellenic Football Prognostics Organization". A more comprehensive list can be found here.
In the abstract, the Greek public supports the privatization plans, with 74% of the country saying that the measures are "probably" necessary. But the question is how Greeks will respond when the measures begin to affect them personally. There, the signs are less auspicious. Locals have already vowed to block efforts by the Qatari government to build a new financial district on the site of an abandoned airport on the outskirts of Athens; the mayor says he wants to open a public park instead.
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.
Greece's latest deficit-cutting measures may help the country escape its debt crisis, but higher taxes and wage cuts will be a hardship for many Greek citizens, who already are the most likely in Europe to report problems paying their bills.
Fully fifty-seven percent of Greeks answered that they are "Constantly struggling and have fallen behind with some/many bills." This number is twelve percent higher than the three runners-up, Latvia, Bulgaria, and Cyprus. Furthermore, forty-three percent of Greeks claimed that though they had no problems paying bills in 2008, they had begun having problems in 2009 and expected them to continue in 2010 -- a number also twelve percent higher than the E.U. average of 31 percent.
It looks like this big, fat Greek economic collapse will last well into the future.
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.
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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.
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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.
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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.
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Today, the International Energy Agency said that global carbon emissions shrank 3 percent in 2009, due to the Great Recession. The Guardian reports that for only the fourth time in the past 50 years, the world emitted less of the greenhouse gas than it had done the year before, because of declining industrial production.
Which means, alas, that the world will likely be back to increasing emissions soon. Indeed, the IEA report notes that to avoid climate change and all the catastrophes it promises, countries don't have to shrink their economies, but do have to "[build] more than 350 new nuclear plants and 350,000 wind turbines in the next 20 years. [It] also estimates that by 2020, three-fifths of cars will need to use alternatives to the traditional internal combustion engine."
The IEA report reminded me of a fascinating study out of the London School of Economics, released last month. It found that promoting contraceptive use could be a lynchpin to combating climate change: fewer babies means fewer carbon-emitters, and fewer carbon-emitters means less climate change.
That, in turn, reminds me of this. Oh dear.
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."
Devastating hurricanes have left the state-run company that produces the country's supply, without the raw materials necessary to keep up with demand. In addition to which, President Raul Castro recently announced a 20 percent cut in imports, meaning a lot less goods on state-run store shelves. Cuban officials are saying they may not have sufficient TP supplies until the end of the year.
Worldwide, toilet paper is a booming business, especially in the United States where consumers use up to 50 million pounds of TP a year. It seems American bottoms have a "soft-tissue" fetish, one that's not only costly, but harmful to the environment. In order to get the fluffiest tissue, suppliers take from the world's rainforests. Earlier this year Greenpeace released a toilet-paper guide listing the more planet-friendly products.
One penny-saving option for Cuba would be to use recycled lavatory paper, a much cheaper alternative on the whole. Indeed, many countries are already using the eco-friendly alternative, even if it is a little ... rough.
For Cuba, this could be an opportunity to take that initiative one seriously brave step further to becoming a leader to an "greener" planet: Go cloth.
Chip Somodevilla/Getty Images
This past week, Vitaliy Katsenelson wrote a great Foreign Policy web feature on the big old asset-price bubble developing in the Chinese economy, called "The China Bubble's Coming -- But Not the One You Think."
Recent news seems to bear the theory out.
The Financial Times reports:
Chinese regulators on Monday ordered banks to ensure unprecedented volumes of new loans are channelled into the real economy and not diverted into equity or real estate markets where officials say fresh asset bubbles are forming.
The new policy requires banks to monitor how their loans are spent and comes amid warnings that banks ignored basic lending standards in the first half of this year as they rushed to extend [around $1 trillion] in new loans, more than twice the amount lent in the same period a year earlier.
I feel a bit strange saying this.
But, over the past year, in the midst of the worst economic crisis since the Great Depression, I've really come to admire the Chinese central bank.
This fall, it recognized the need for massive stimulus -- and did it. Then it realized it was pushing too much money into the economy, creating bubbles and distorting the lending market -- and so it stopped. The central bank will raise reserve requirements for lenders. And presto, they'll stop lending so much. The bubble will ease, rather than popping.
Of course, I'm wary of my own oversimplification here. The Chinese economy has some very trying issues ahead of it, particularly as related to its currency, its U.S. reserves, and the quality of its economic growth. Plus, the impact of the lending spree (and its halting) obviously won't be clear for some time.
But, for the moment, this move just seems really prudent. Another way of thinking of it? Being a command economy has its advantages when there's need for a whole lot of emergency economic commands.
Elizabeth II has joined the ranks of the credit crunched.
Recent figures reveal that the Queen's estate, the Duchy of Lancaster, has lost £75 million as a result of the recession. Her private portfolio of land and property assets lost a fifth of its value and is now down to a paltry £322 million.
This is further bad news for her Highness, who has had her many, many requests for increases to the royal budget rejected by parliament in the last year. The monarchy's annual expenses currently run at £41.5 million, excluding an estimated £50 million in security costs. Nonetheless, Palace officials continue to engage in talks with the Treasury to elicit more funding for the Crown for, amongst others, planned household refurbishment and the 2012 diamond jubilee celebrations.
The Queen recently dipped into her now-dwindling private funds to pay for a few royal expenses, including Prince Harry's latest trip to New York.
Chris Jackson/Getty images
At a large Yaskawa Electric factory on the southern Japanese island of Kyushu, where robots once churned out more robots, a lone robotic worker with steely arms twisted and turned, testing its motors for the day new orders return. Its immobile co-workers stood silent in rows, many with arms frozen in midair...Across the industry, shipments of industrial robots fell 33 percent in the last quarter of 2008, and 59 percent in the first quarter of 2009, according to the Japan Robot Association.
Even non-industrial robots are taking a hit. Ugoba, "maker of the cute green Pleo dinosaur robot with a wiggly tail" has filed for bankruptcy, the NYT says, despite selling 100,000 of its creations.
However, there is still hope for the robot industry, or at least baby dinosaur robots. "Pleo is alive and in good hands!" its official website declares. The company has been acquired by the Hong Kong based Jetta Group and will be "re-launched" soon.
YOSHIKAZU TSUNO/AFP/Getty Images
Here's one nice consequence of the Great Recession, the global terror network is low on funds:
Al-Qaida's top commander in Afghanistan urged Turkish Muslims in a new audio message to send money to militants fighting coalition troops in the country, saying they are low on funds.
Mustafa Abu al-Yazeed said many militants in Afghanistan are unable to fight because they lack the necessary equipment.
"And we, here in Afghanistan, are needy of money," al-Yazeed said in the message released Wednesday. "And the reason for the weakness of the operations here is the inadequacy of equipment."
U.S.-led efforts to disrupt terrorist financing deserve some credit, but it's not much of a stretch to think that some AQ donors may have been cleaned out during the Persian Gulf's ongoing economoic slump.
New U.S. employment numbers out this morning indicate things are getting worse at a less-breakneck pace. A mere 345,000 Americans lost their jobs in the month of May.
The New York Times sunnily reports that the numbers are "a welcome sign that the decline in the job market would not continue forever."
People will say this means the recession is bottoming out. They will call it a green shoot. They will glass-half-full it. Pollyannaism is Pollyannaism.
But the report is dismal: that graph on the front web page of the New York Times shows change, not the absolute unemployment. The employment-to-population ratio is under 60 percent, the underemployment number is 16.4 percent, and unemployment is worse than the provisional numbers used the stress tests.
Plus, a Deutsche Bank report notes, "the length of the workweek declined by 0.1 hour to 33.1 hours, which is the aggregate hour equivalent of an additional loss of about 350k jobs" -- making May look much more like April.
Still, there are signs that even if the employment numbers in the U.S. are really bad, things worse elsewhere. Here's a fascinating graph from Stratfor:
The chart is missing a few key countries, most notably China. (Stratfor says it did not include China because its economy is too different to compare. Fair point.) Stratfor argues the recession is hitting the U.S. much more softly because "the American system is far more stable, durable and flexible than most of the other global economies, in large part thanks to the country’s geography."
It makes some sense: each country's economy grows to take advantage of its geography. Russia, with its massive oil and gas reserves, benefited from the massive surge in commodity prices through 2008; it has been hit hard since because the economy is highly dependent on that one industry. The U.S. economy is much more resource- and industry-diverse.
I wonder what Robert D. Kaplan would have to say about all of this...which countries' have advantageous geographies for downturns? Is this why Australia seems to be doing relatively well?
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.
Despite a recession dramatically affecting some of the biggest and most robust economies in the world, Australia has managed to have an economic improvement. In the fourth quarter, not only did the GDP creep up 0.4 percent while others stalled or fell, but stocks rose and the value of the Australian dollar increased to 82.40 U.S. cents, the highest it's been in several months, thanks to generous government cash handouts intended to stimulate spending.
Craig James, the chief equities economist at Commonwealth Bank of Australia explained:
"Rumors of the death of the Australian economy have been highly exaggerated... Much of the credit for Australia's resilience must be given to the swift actions of the Reserve Bank and government in stimulating our economy."
So even though China is on the verge of buying out a huge portion of the country's natural resources, and its soldiers are the world's pickiest eaters, Australia does seem to be doing something right.
In some countries, notably Iceland, the financial crisis and its political fallout has proved an unexpected boon for women's rights.
Other countries do this sort of thing:
The global economic crisis has hit the Baltic state of Latvia particularly hard and left the population feeling blue. But one group of Latvian women has taken a novel approach to fighting the pervasive feeling of doom and gloom.
On Sunday, a procession of more than 500 blondes paraded through the capital Riga wearing pink and white. Many were escorted by lap dogs wearing the same cheerful hues. Their goal: to use their beauty to shine a little light into the dark mood caused by the global downturn.
The march was organized by the Latvian Blondes Association. I have to wonder what sort of issues this group addresses during normal times.
ILMARS ZNOTINS/AFP/Getty Images
Unfortunately, it makes perfect sense: as the world struggles to rebound from the global financial downturn, human rights have taken a backseat. As Amnesty International launches its annual report today, the organization worries: "human rights problems have been relegated to the backseat as political and business leaders grapple with the economic crisis."
So if getting delinquent countries to fix their human rights records was arduous before, now it's downright grueling. There's neither money nor time for addressing the scourge -- even as recession leaves unemployment, cut wages, and even hunger in its path.
It's not hard to imagine what they're talking about -- and here are a few hypothetical examples:
As the unity government in Zimbabwe tries to get on its own feet, it has been applying for aid to supplement increasingly sparse government revenues. With foreign donors feeling rattled by domestic conditions, it will be that much harder to get help.
In Nigeria, where falling oil prices are drying up government revenues hard and fast, the country's army has responded full force to put down insurrection in the country's oil-producing Niger Delta -- to the detriment of thousands displaced.
Or take South Africa, just recently hit by its first real economic downturn in a decade. Xenophobia (particularly against an influx of Zimbabweans looking for work) was already a problem last year, when times were (relatively) good. This year could be even trickier.
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