China's Growing Pains

Jon Western goes to China, and comes away impressed. Not impressed with China's improvements, although that too, but with its challenges. In a way, they are the same problems the US faces, but magnified:

1. ... In many ways, America's challenges with the future of Social Security pale in comparison to what China faces in the coming decades...

2. ... This has led to rising inequality in housing consumption as well as a new homeless population. Furthermore, while the financial industry is largely protected because of strict regulations and high downpayment requriements (a problem that ironically exacerbates the challenges to reduce domestic savings rates and jump start domestic consumption among young males), the housing prices -- especially in urban cities -- are at all-time speculative highs and many analysts now anticipate major price corrections that could well send significant shock waves through the economy. ...

3. Though China's domestic industry has grown more competitive throughout the world, there is some question about the degree and magnitude of technology upgrades in its domestic industries -- a key requirement for future development and growth. ...

For us IR scholars, we tend to focus on the data points that suggest American decline -- the US budget deficit, its military over-commitments, and the dysfunctional national politics and such. Yet, if we look closer at the internal issues within China, despite its impressive levels of economic growth over the past two decades, it's not at all clear that we are on the verge of some kind of global power transition -- at least not any time soon.

We've sounded similar notes before here, and I think it is important to remind people that growth is a long, uneven process. Over the past three decades China has shown a lot of resilience and agility, but the challenges continue to mount. I'm not a China doomsayer -- I think they'll continue to grow and modernize -- but it won't necessarily be at a linear pace. And in terms of global power, there is too much space, and too many intervening variables, to be talking in terms of "power transition" yet. China has quite a lot of maturing to do before then.

The International Forex Network, 1998-2010

This weekend I got bored of cleaning some BIS banking data, so decided to play around with their foreign exchange data while watching the Cardinals beat up on the Cubs. There's less of those data, so it was easy to quickly get it cleaned and loaded into R. From there, I made the above graphs. The BIS only collects these data every three years, so the above visualizations represent the last five surveys, covering 1998-2010 (data here)*. These are bilateral ties, e.g. the USD<->EUR ties represent the nominal dollar value of all transactions between those two currencies. The thickness of the tie represents the amount of those transactions, divided by a constant (75) for all periods to make the visualization better. The size of the nodes represents the percentage of total forex transactions involving that currency.

These are quick-and-dirty. I used a simple Fruchterman-Reingold layout to emphasize centrality. Some currencies didn't exist for the whole series -- the euro in 1998; in later periods the franc, mark, ECU (XEU), and "Other EMS" which were rolled into the euro -- but I just gave them zero ties rather than spend the time to remove the actual nodes. (Hey, it's a weekend blog post.) The non-existent currencies are easy to see, as they are disconnected from the rest of the network. Just pretend they aren't there. Also, as I type this I realize that node size for "Other currencies" (Oth) is wrong because I inadvertently left some minor ones out, but the ties are correct and the node size wouldn't change by much since those are all small currencies.

Still, there's some interesting stuff to see. Most immediately obvious, the amount of foreign exchange increased noticeably from 1998-2010, as evidenced by the increasing thickness of the ties across the period. There was a 20% jump just from 2007-2010, which the BIS attributes mostly to technological improvements that lowered transaction costs and high-frequency trading.

Perhaps more surprising is the fact that the shape of the network has changed very little over the past dozen years. The US was the most central node, and the largest in 1998. The increased activity in the intervening years hasn't changed that at all. In 1998, the US was involved in 86.8% of all foreign exchange transactions**. In 2010, the number was 84.9%. The US's centrality (by this measure) peaked in 2001, when 89.9% of forex transactions involved the dollar. Similarly, despite much fanfare the euro has not moved to an especially central position. In 1998 the German mark (30.5%) and French franc (5%) were involved in 35.5% of forex transactions; in 2010 the euro (which absorbed not only the mark and france but other currencies as well) was one of the currencies traded in 39.1% of transactions. The yen decreased very slightly from 1998-2010 (21.7% to 19%), and the pound sterling increased slightly (11% to 12.9%), but in general the network changed very little. The Chinese yuan increased its share by 900% from 2004-2010... but was still on one side of less than 1% of forex transactions in 2010 (from 0.1% to 0.9%). This is shocking: despite all their growth over the past dozen years, in which their GDP has nearly quintupled, the world's second largest economy (third if we consider the eurozone as a collective, as we should for these purposes) is involved in fewer than 1/200 foreign exchange transactions. Nothing else changed much either. There are more thick ties in 2010 than there was in 1998, but all of them include the USD.

USD<->EUR transactions accounted for 28% of all transactions in 2010, close to its 2001 peak of 30%. USD<->JPY was second, with 14%. No other pair had more than 9%, and no pair that excluded USD had more than 3%. The extreme inequality in these relationships is shown by the fact that almost every currency in the network above is tied to the USD in all periods. Very few are tied to any others, short of EUR<->GBP and EUR<->JPY. China, in particular, is conspicuously weakly-tied considering the fact that it is the world's second-largest economy and it engages in so much trade.

There's been a lot of talk in recent years about a "post-American world", and the rise of a multilateral international monetary system to replace the US's "unipolar moment" in the 1990s. Several countries have spoken loudly about trying to displace the dollar as the world's reserve currency, replacing it with the IMF's SDRs or an international basket. These data indicate that such discussion may be premature. While it's possible that such a transition could happen in the future, there has been very little movement in that direction over the past dozen years. Given the fact that complex networks with an unequal topology have a habit of reinforcing themselves over time, we should qualify claims that the US dollar's role in international currency markets is in terminal decline.

*The BIS site says that there have been eight surveys, but the data I downloaded only had the five I present.

**Percentages in this paragraph, and this paragraph only, are out of 200% rather than 100% because each transaction involves a pair.

On Blanchard on Capital Flows and the IMF

Oliver Blanchard went to a IMF conference on capital flows, and wrote up some thoughts. It's well worth reading the whole (short) post, if only to see where the IMF's thinking on this is right now, but I want to highlight a few bits.

First, while the issue of capital controls is fraught with ideological overtones, it is fundamentally a technical one, indeed a highly technical one. Put simply, governments have five tools to adjust to capital flows: monetary policy, fiscal policy, foreign exchange intervention, prudential tools, and capital controls. The challenge is to find, for each case, the right combination.

Regular readers will guess that I disagree with this completely. The issue of capital controls is not just "fraught with ideological overtones", it is also fraught with distributionary consequences. If governments choose to restrict capital flows using one of the five tools Blanchard lists, then they will be benefitting some groups over others. Which of the five they employ will also involve winners and losers. From this perspective there is no "right" combination, only choices that advantage some members of (domestic and global) society and disadvantage others. The challenge for political leaders is to find the combination that will allow them to remain in office. The challenge for interest groups is to push for the combinations that will benefit them. But this is not a technocratic problem, or at least not just one.

Blanchard gets close to understanding this a bit later, when he writes:

The nature of specific investors must inform the policy choices. We often think of inflows and outflows as coming from primarily from decisions by foreign investors. The reality is that many of these inflows and outflows often come from decisions by domestic investors. When this is the case, targeting nonresidents is largely misguided.

Layna Mosley, one of my professors, has done a lot of very good work examining how, when, and to what extent international investors place pressures on domestic governments*. There is less work (that I know of) that seeks to explain how, when, and to what extent domestic political actors (including investors) pressure their governments for certain types of policies related to capital flows. But surely this is a political question that requires a political answer. To the extent that the IMF isn't thinking about those issues they are probably missing the boat.

It is not clear that the diversity of approaches we observe in practice comes from different circumstances, or from suboptimal responses. It was interesting to observe for example that Chile relies on foreign exchange intervention, not on capital controls, but India, instead, relies on capital controls, not on foreign exchange intervention. Are these corner solutions really optimal?

Again... what is meant by optimal? Different policies will benefit different actors. In many of the cases under discussion there is no reason to think that we're on the Pareto frontier, but even if we are the actual policy choices reflect distributional concerns. Instead of trying to figure out whether these policy choices are optimal, we should be thinking of them in terms of bargaining theory. And because these policies involve international as well as domestic actors, we need to complicate the model to include multiple levels of analysis. Blanchard seems to realize this towards his conclusion.

There were some issues that I would like to have seen explored more fully.

One was the multilateral angle. As my IMF colleague Min Zhu said in his opening remarks, “ensuring that countries reap the full benefits of capital flows is a shared responsibility between advanced and emerging market economies, between surplus and deficit countries, between capital-exporters and capital-importers.” The challenge is to translate this into practice. What is the actual responsibility of source countries? Should they take it into account in conducting monetary policy, and if so, how? Should we worry about the “beggar thy neighbor” effect of controls? Some of the evidence presented at the conference suggested that these spillovers across recipient countries were not very large. Theoretical and further empirical work is badly needed here.

These are good questions, and they do need more work. But they are political questions, so economists are not very well suited to answer them. I understand that Blanchard's position within the IMF means that he has to focus on the technocratic rather than the political, but if he wishes the IMF to be an effective institutions in the future he should at least be thinking of the political implications of capital flows. This has been the IMF's weakness for decades; it's high time for them to get better on this score.

*I discussed this work briefly here, but interested folks are encouraged to read the actual research (linked in that post).

Basel Politics Nothing New

Felix Salmon:

One of the big successes of the Basel III process was that while there were serious disagreements along the way, the governments and central banks concerned were pretty good at keeping the discussions productive and confidential. But just as with Dodd-Frank, it seems, the real difficulty is going to be in implementation, and that’s where there’s a big risk of everything becoming very political.

In the short term, the biggest winners in any fight between regulatory authorities are always going to be the banks, who will happily arbitrage differing regional regulatory regimes and take advantage of their parents’ squabbles to stay out drinking all night. In the long term, however, even the banks would ultimately prefer a single global regulatory regime with clear ground rules and a level playing field — something which lets them concentrate on their main job, of banking, rather than expending enormous effort on lobbying and loopholes.

A few relatively minor quibbles:

1. I would stress that it makes little sense to frame this in terms of "big risk of everything becoming very political". Everything has already been political. The entire Basel negotiation process was political (see also here, here, and here). The time schedule for implementation was political. The terms of implementation (and definitions of implementation) remain political. The political nature of every step in the Basel process is not only in line with the Basel III history, but with previous Basel accords as well, as a paper (no math) Thomas and I co-wrote argues.

2. Saying that banks would prefer a level playing field neglects the very important point that not all level playing fields are the same. Banks in some countries would prefer one type of field, while banks in others would prefer a different field altogether. The battle is not over whether or not there should be a common set of broad standards; it's over what those standards will be. And on this point, not all banks have homogenous preferences. Large, well-established banks would prefer stricter regulations (in some areas at least), as those are likely to reinforce their market position and create barriers to entry. This is why this is a political battle.

3. This is not just an EU v. US battle. The EU is split along some important lines, as one of the FT articles Salmon links hints:

Mr Barnier’s comments were triggered by a Financial Times story based on an unpublished draft of the impending EU legislation, which indicated that there would be more flexibility for banks with insurance subsidiaries than proposed under the Basel III guidelines.

As with the debt crisis, what is good for German banks (say) might not be good for other EU banks. The UK butted heads with other EU members repeatedly during the Basel negotiations.

All to say, the political nature of Basel III has been present all along.

Actually, Let's Not Start a Trade War With China Just Now

(click for larger image)

Brad DeLong links to Jared Bernstein, who suggests some policies that Obama could pursue (without deficit spending) to help the U.S. employment malaise. Many of them are fine, but this one isn't:

Currency Management: this would be a very bad time to let up on countries who subsidize their exports by suppressing their currency values in foreign exchange markets, most notably China. I’d push the Levin bill on this. And it’s bipartisan: the darn thing got 99 R votes in the last Congress!

The Levin bill proposes slapping tariffs on goods coming from countries that manipulate their exchange rates to boost exports. Levin has proposed a variant of it for years (here's one from 2006), but finally got traction during the recession. Krugman agrees that this is a good idea, but I think there are a number of problems with it.

1. It's most likely illegal. If China is violating trade rules with its exchange rate policies, then the USTR should take them to the WTO. The fact that that hasn't been done at any point over the past decade, despite the fact that it would have been politically popular, indicates to me that the USTR believes it would lose such a case. There's a reason why exchange rate policy has been referred to the IMF (which conducts monitoring and surveillance but has no authority) rather than the WTO. It's also not clear that China is violating any WTO rules. For one thing, the WTO doesn't have a lot to say about which exchange rate regimes are legal and which aren't. And although using the exchange rate to subsidize exports could be illegal, there's a fairly high bar to clear. This (several years old) thread on the excellent International Economic Law and Policy blog describes the three simultaneous conditions under which currency manipulation could be WTO-illegal: 1. It must entail a "financial contribution"; 2. It must be specific; 3. It must confer a benefit on exporters. The comments to that post get into specifics, but according to IELP, "If [currency policy] is contingent in law or de facto upon export performance, it is then prohibited and deemed specific automatically".

The graph above shows the nominal dollar-yuan exchange rate over the past five years. Does it look like the exchange rate is contingent upon export performance? The yuan has appreciated against the dollar by nearly 25% over the past five years, and I'm not sure the trend clearly indicates responsiveness to changes in Chinese export performance.

2. There are growing concerns about inflation in the U.S. These concerns may be misguided, but they play well in Republican circles and among certain Governors at the Federal Reserve. Slapping an import tariff on China would cause immediate price spikes across a wide range of consumer goods, which would likely lead to increased calls for the Fed to tighten monetary policy. That, of course, would not be good for economic recovery. Nor would it be good for standards of living. A Chinese undervaluation of the yuan is equivalent to the Chinese giving us free money. Let me say that again: a Chinese undervaluation of the yuan is equivalent to them giving us free money. It's not clear to me that trading lower standards of living for more jobs is a net win. Jobs are certainly important, but they're not the only important thing.

Moreover, as we've discussed on this blog repeatedly, the nominal exchange rate is less significant than the real exchange rate, and the real exchange rate is shifting faster than the nominal rate as inflation in China out-paces inflation in the U.S.

3. It's not at all clear that a tariff targeted specifically at China's exchange rates would have any effect on U.S. jobs. Not only would importers suffer, but there is no reason to believe that manufacturing jobs would come back to the U.S. en masse. Manufacturing employment was collapsing before the recession (see also here), and even if China lost some jobs via a U.S. tariff those jobs would likely go to Vietnam and Taiwan and South Korea and any number of other places before coming back here. A tariff would make U.S.-produced goods cheaper relative to Chinese goods (in U.S. markets), but would not affect the price of Vietnamese goods at all. The magnitude of this shift, and the timing of it, isn't obvious to me, and to some extent it offsets #2 above, but the world is dynamic.

4. Those dynamics are not limited to economics; they also involve politics. The Chinese would not simply accept tariffs as the new cost of doing business. They would fight back. First, they would take the U.S. to the WTO. Second, they would likely enact retaliatory tariffs. The WTO cases would take years to be resolved (i.e. hopefully after the recovery from the recession), but the tariffs would immediately damage U.S. exporters. Obama's stated policy goal is to double American exports over the next several years. It's going to be hard to do that if you can't sell into the world's fastest-growing major market, now the second-largest economy on the globe.

5. The U.S. runs the risk of pot-meets-kettle reactions from the rest of the globe. The world already believes that U.S. monetary policy, with interest rates at 0% and two rounds of quantitative easing already conducted, constitute "currency manipulation" of a different sort. Putin called it "hooliganism", Brazil imposed capital controls, S. Korea has expressed concern about exchange rates at the G20, etc. I agree with Krugman and others that this criticism is over-blown; the U.S. is in a deep recession and should be using monetary expansion to help get out of it. But a round of tariffs targeting exchange rate policy will leave the U.S. open to a dose of its own medicine. Other countries are already wary of U.S. policy, and more aggressive measures could quickly lead to a cycle of more prevalent beggar-thy-neighbor policies. Right now it is critical that international economic cooperation move forward, not back. We've seen from the Japan crisis how badly economies are damaged when global supply chains are disrupted.

6. The U.S. needs to know its role. The global economy is still terribly damaged. 1937 isn't the worst analogue. Right now the U.S. needs to do everything it can to keep markets open, maintain international cooperation, provide liquidity into the global system, and maintain a market for goods. In other words, it needs to live up to Kindleberger's charge. That involves allowing some free-riding. It involves setting policy based on global, not domestic, circumstances. Myopically trying to get back every lost job as quickly as possible runs the risk of damaging global economic relations over the medium- and long-run, which could easily have adverse effects on growth and prosperity. Letting China sell us goods at below-market prices seems like a very small price to pay for averting a seriously negative outcome.

The Politics of Stealth Bailouts and Plausible Deniability in the Eurozone

My post yesterday on how the German banking sector can likely withstand a restructuring of Greek debt touched on, but did not dwell on, another important aspect of the Euro crisis: it's not just the banks in the Eurocore that own debt in the periphery, but also the governments. I wrote "The taxpayers have already loaned Greece a lot of money, either directly or via the ECB" and quoted a Der Spiegel report that said:

Taxpayers might need to step in, as might the savings banks that are owned by municipalities.

In addition, the European Central Bank (ECB) has bought up tens of billions of euros of Greek sovereign bonds. Because the Bundesbank, Germany's central bank, holds more than a quarter of the ECB's capital, it would have to take its share of losses accordingly.

This latter point is the subject of this Martin Wolf column that has made the rounds of the blogosphere (Salmon, McArdle, Krugman) and yielded the above graphs. Wolf's column is provocative -- he begins with "The eurozone, as designed, has failed." -- but makes a very important point about the centrality of the European banking system to the broader regional economy:

The role of banks is central. Almost all of the money in a contemporary economy consists of the liabilities of financial institutions. In the eurozone, for example, currency in circulation is just 9 per cent of broad money (M3). If this is a true currency union, a deposit in any eurozone bank must be the equivalent of a deposit in any other bank. But what happens if the banks in a given country are on the verge of collapse? The answer is that this presumption of equal value no longer holds. A euro in a Greek bank is today no longer the same as a euro in a German bank. In this situation, there is not only the risk of a run on a bank but also the risk of a run on a national banking system. This is, of course, what the federal government has prevented in the US.

The ECB doesn't technically have legal authority as a lender of last resort (although it's taken on part of that function since 2007), so domestic central banks as well as the US Federal Reserve have had to fill that role. The upshot? Central banks in the Eurocore, such as the German Bundesbank, are now heavily exposed to debt from the periphery. At current rates of lending they're likely to run out of cash by 2013, and unlike the US Fed, they can't just print more. This is becoming a slow-moving liquidity crisis, in other words, and as London Banker wrote a few days ago, liquidity crises (such as occurred in the Fall of 2008) are really nasty. As Wolf notes, this is serious business:

Government insolvencies would now also threaten the solvency of debtor country central banks. This would then impose large losses on creditor country central banks, which national taxpayers would have to make good. This would be a fiscal transfer by the back door.

In a sense this is already a fiscal transfer, since debtor countries are spending the funds on financing the state, and the creditor central banks don't have a printing press. So why, given that a fiscal transfer was needed, was it done in a way that risks the solvency and credibility of Eurocore central banks? Because they are unelected. Such a large transfer plan on top of the EFSF is unlikely to have been approved by voters in the Eurocore, as my post from yesterday indicates. And as Hans-Warner Sinn notes (via Henry Farrell's Twitter), the size of these hidden transfers "dwarfs the parliament-approved bailouts extended to Greece, Ireland and Portugal." It's easy to see why European leaders would opt for a bailout mechanism that was less transparent, and that involved non-elected actors pulling the strings: it allows bailout financing to continue, but with plausible deniability.

Sinn draws an analogy between the situation in the Europeriphery and Britain in 1992, when Soros sank the pound by selling it off. Eventually, the British Treasury ran out of marks and francs to exchange for pounds, and was forced to devalue. Soon, writes Sinn, there won't be enough funds in Bundesbank to cover the borrowing in the periphery. At that point, the Euro will collapse like the pound. If Sinn is right, then the Euro has two years. I've been saying for awhile now that 2013 was key to the Euro's future. 2013 is officially when haircuts begin, and when new bailout lending ends. It's also when the "stealth bailout", through the central banking system in the EU, can no longer sustain itself. At that point, either the peripheral economies have righted the ship by balancing the budget and/or regaining access to private credit markets, or they exit the Euro.

So right now it's a waiting game. The Eurocore doesn't want a restructuring, which would cost taxpayers (and banks) billions, if it can avoid it. The Europeriphery doesn't want the economic collapse that would accompany a Euro-exit. But both of them want the other to pick up more of the tab. But there's not much more the periphery can pick up, with unemployment above 11% in Portugal, 14% in each of Greece and Ireland, and 20% in Spain. And there's not much more the core can pick up without risky the solvency of their domestic central banks. More direct fiscal funding mechanisms look to be politically impossible. Maybe one of those things changes by 2013, but I wouldn't bet on it.

The World's Central Banker

More information (via Felix Salmon) about how the Fed acted as the lender of last resort for foreign firms during the 2008 crisis:

File under “things you never knew the Fed did during the financial crisis”: an $80 billion loan scheme known as ST OMO, which was so obscure that even Barney Frank had no idea it existed when he required the Fed to turn over its lending data in his Dodd-Frank bill. ...

Why was the Fed so reluctant to discuss this program? After all, Fed spokesman Jeffrey Smith had nothing but great stuff to say about it to Ivry, gushing about how it “helped alleviate strains in financial markets and support the flow of credit to U.S. households and businesses”. You’d think if it was so great, the Fed wouldn’t be so quiet about it.

One possible reason is hinted at in the charts above. They cover four banks: Credit Suisse, Deutsche Bank, BofA, and RBS. (RBS is still referred to, quaintly, under its old name of Greenwich Capital, the shop bought by NatWest before NatWest was bought by RBS.) The three European banks all borrowed 11-figure sums from the facility, while the one American bank barely used it. ...

But it does seem that the governments of Switzerland, Germany, France, and the UK should all be sending thank-you letters to 33 Liberty Street if they haven’t already done so: it’s entirely possible that the New York Fed bailed out their banks without those governments even knowing about it. That’s just how generous we are, in this country.

I've written about similar actions here and here. The Fed has been criticized for not doing more to stimulate the economy since 2008, but the actions it took to stabilize the international financial system would make Kindleberger smile.

Euro Developments

First, the ECB is quarreling with Berlin:

The cold war between Berlin and Frankfurt reached a new high last week. Should Germany implement its plans, the ECB would have to cut off funding for Greece, the monetary watchdogs warned. The consequences for Europe's banks and the Greek economy would be devastating.

The mere suggestion of what the Financial Times called the " central bank equivalent of nuclear deterrence" was enough to prompt German Finance Minister Wolfgang Schäuble to withdraw the German proposal immediately. A debt restructuring, Schäuble admitted sheepishly, could lead to a repeat of the events triggered by the bankruptcy of Lehman Brothers in September 2008.

In addition to revealing how serious the euro's problems are, the slugfest proves how much of its reputation the Frankfurt-based ECB has lost in the euro zone's strongest economy.

In the past, the central bank was seen as the undisputed economic authority in Germany. Anyone who opposed the monetary policy experts was quickly marginalized. Today, however, the central bank must threaten with the most drastic of measures just to force the German government to toe the line. A majority of German economic politicians and economists see the ECB's crisis strategy as unrealistic and contradictory.

But would a Greek restructuring really be so devastating for Germany? It would have some costs, but at this point these would be manageable:

A debt reduction -- known as a "haircut" -- of as much as 50 percent would be an expensive proposition for Greece's creditors. With around €330 billion ($467 billion) in loans, that would mean cutting as much as €165 billion. Most of Greece's debt is with foreign creditors, and so foreign banks and governments would have to take massive hits over the loans Athens is unable to repay in full.

But what would this mean in reality for Germany? ...

The answer to all of these questions is reassuring -- at least at first glance. The consequences of a debt write-off against the government in Athens would be manageable for Germany. At the moment, some €25 billion in Greek debt is held by Germany's commercial banks and the so-called "bad banks" set up to take on toxic assets. This debt takes the form of either Greek sovereign bonds in their portfolios or loans made to the Greek government. ...

With a 50-percent haircut, the two bad [government-backed] banks would lose around €4.4 billion in total. Taxpayers would end up indirectly footing the bill. ...

Of mild comfort is the fact that the state would probably not have to come to the rescue of any private institutions. Commerzbank, Deutsche Bank and the DZ Bank, which acts as the central bank for Germany's roughly 1,200 partly state-owned co-operative banks, are (once again) in a position to be able to cope with possible shortfalls by themselves.

But that's just the banks. The taxpayers have already loaned Greece a lot of money, either directly or via the ECB:

But the situation looks different for the German government and the federal states. At the very least, the large exposure of KfW and the bad banks of Hypo Real Estate and WestLB could end up being expensive. Taxpayers might need to step in, as might the savings banks that are owned by municipalities.

In addition, the European Central Bank (ECB) has bought up tens of billions of euros of Greek sovereign bonds. Because the Bundesbank, Germany's central bank, holds more than a quarter of the ECB's capital, it would have to take its share of losses accordingly.

However the Irish and Portuguese banking sectors are still exposed to Greece, and are much weaker than Germany's banking sector. Still, the fact that the Germany financial system has largely healed since 2008, and has already taken many steps to lessen their exposure to Greece, gives Germany a lot of negotiating leverage in the EU. And, as EU Monetary Affairs Commissioner Ollie Rehn says, political will for continued aid is running low in northern Europe.

In Brussels, we Finns are referred to as "English-speaking Germans," because we pursue the same economic policy principles: stability, sustainable growth and fiscal responsibility. The Germans aren't the only ones who are concerned. There is a certain aid fatigue in all of northern Europe. And we are experiencing a certain reform fatigue in southern Europe. As monetary commissioner, I feel this schizophrenia every day. We must try to build a bridge between these two camps.

Put it all together? Time is running out for Greece.

Is American Political Science Ignored?

In American academic circles, there is often much weeping and gnashing of teeth about how government and academic political science are separated. Few policymakers read academic research, complain academics. Few academics do anything substantively important or intellectually accessible, complain policymakers. So I found it interesting to read this, from a profile of Joe Nye in the UK Independent:

The advantages of the revolving door between academia and government, as it works in the United States, however, are indisputable. It gives academics an opportunity to test their ideas in practice and it gives politicians the benefit of specialist advice. Mid-career, Joseph Nye spent two years as a security official specialising in nuclear non-proliferation in the administration of Jimmy Carter. Fifteen years later, he joined the Clinton administration as assistant secretary for defence, and then became chairman of the National Intelligence Council, a body that coordinates intelligence estimates for the President. Had John Kerry won the 2004 election, Nye was seen as the natural choice to be National Security Adviser. When the Republicans were in power, Nye returned to Harvard.

Such a career would be unusual, not to say impossible, in Britain. Despite hints by Tony Blair, among others, that he would favour academics, business people and others moving in and out of government, the structures are not there and no-one – not the professional politicians, not the civil servants – has a real interest in fostering change. When it does happen, it is the exception and the beneficiaries – Admiral Lord West, for example – have tended to be more accident-prone than other ministers. Sharing a platform with Nye during his sojourn in London, Mark Malloch-Brown – former Deputy General Secretary of the UN and Foreign Office minister under Labour – lamented Britain's single track with more than a touch of envy. At very least, serving in government can be said to lend a practical aspect to the various branches of political science at America's leading universities.

Nye's direct experience of academia and politics – two worlds which in Britain tend to be seen as alien to each other, if not inimical – is the rule rather than the exception for senior US scholars and it ensures that their ideas are given a hearing on both sides of the fence. It allows the two worlds to feed off each other to mutual benefit and those who excel in both become a particular kind of superstar, guaranteed a global audience and needing to feel beholden to no-one.

Clearly Nye is an exceptional case, but the article makes a more general argument. I don't know much about the reporter, Mary Dejevsky, so I'm not sure what cred she's got. I just found it interesting that for all the hand-wringing American academics do over the fact that policymakers don't pay enough attention to us, one view from across the Pond is very different.

The Political Appeal of Financialization

From Orgtheory's ongoing book forum on Krippner's Capitalizing on Crisis:

Ralph Nader, of course, wasn’t the only consumer activist who supported reform of Regulation Q. As Fabio described in his post, the regulation of credit was contested by a variety of interest groups, but it was the support of consumer activists like Nader that gave legislators the political cover to make these changes. Once credit markets were deregulated, the process of financialization could begin. Politicians learned from this experience that deregulation was a great way to win electoral support while also relieving them from accountability over the economy. Politicians learned their lesson and began applying it in other realms as well. The result was a gradual “depoliticization of the economy,” which Krippner describes as “the reorganization of the boundary between the political and the economic so as to allow policymakers to govern the economy ‘at one remove’” (145).

This is set in an electoral context where politicians rely on constituent approval to remain in office. The financialization of the economy, in Krippner's account, was a political winner:

On its surface this seemed like a win-win for everyone. Deregulating interest rates would expand credit availability, while also allowing banks to get more creative in their offerings to potential borrowers. In retrospect we know that this deregulation also accelerated inflation and suppressed production. This had the effect of pushing more of the economy into financial markets and fueling asset price bubbles.

What politician wouldn't love a policy that both Wall Street and Ralph Nader would support?

My first thought on reading this was to ask a comparative question: which countries financialized their economies in this way? What were the domestic and international causes of such a shift? Were the consequences similar in countries that financialized similar or dissimilar?

Any pointers to research that directly addresses these questions would be welcomed.