Friday, April 30, 2010

The Curse of Carabosse?

. Friday, April 30, 2010

I hope that . . . there is no malicious fairy, no Carabosse, whom [we have] overlooked and forgotten to ask to the party. For if so, the curses which that bad fairy will pronounce will, I feel sure, run as follows:--“you two brats shall grow up politicians;. . . everything you determine shall not be for its own sake or on its own merits but because of something else.”

John M. Keynes, to the inaugural meeting of the International Monetary Fund’s Executive Directors in Savannah, Georgia 1946

The EU's response to the Greek crisis highlights a dimension of international financial cooperation that has not received much attention. When we observe crises of this nature, we are accustomed to thinking about how domestic politics in the crisis country shapes its adoption of stabilization measures. Accordingly, and as Vreeland has argued convincingly, the IMF is often a useful external scapegoat that enables a government to enact measures it recognizes it must but cannot implement given strident domestic opposition.

And although the Greek crisis displays many of these characteristics, it also displays a dynamic that the existence of the IMF has largely eradicated from international financial politics--the constraints that domestic politics in creditor countries impose on the provision of financial assistance. Indeed, what one sees in the contemporary EU reminds one of how domestic politics blocked financial cooperation during the 1920s and early 1930s.

In 1931, for example, French politics blocked an international attempt to save the Credit-Anstalt (and thereby Austria) in 1931:
"The substantial loan to Austria was not made because French internal politics entered the picture. At the beginning of his political carreer French Premier Pierre Laval had styled himself a politician of the left: the Clarence Darrow of France. But by the early 1930s he was shifting to the position of a strong nationalist. He blocked the proposed international support package for Austria, insisting that if France was to contribute France had to get something out of it."
The collapse of Creditanstalt reverberated throughout Europe, precipitating crises in Germany and London.

A major part of the motivation behind the creation of the IMF was to take domestic politics out of the provision of financial assistance to governments facing such crises. I suspect, though do not know for sure, that it was Laval's decision that led Keynes 15 years later to hope that the IMF would not grow up to become a politician that made loans not for their own sake but for some other purpose. And, although one cannot say that the IMF is a non-political organization, it has effectively decoupled the provision of emergency assistance from contemporaneous domestic political decisions. It has done so by moving the locus of these financial decisions out of national politics where they become the subject of domestic dispute and into an international arena where domestic interests cannot easily block action.

And so what is so interesting and unique about the Greek crisis is that it provides a modern opportunity to observe how difficult it is to provide financial rescue packages in a world without the IMF. By providing this opportunity, it helps us understand how the financial crises of the early 1930s escalated so quickly out of control. Because this particular benefit of the IMF is not often observed, it is a benefit that is not widely appreciated.

Question of the Day


Via Double-D (not the sandwich with no bread):

If you put Oliver Wendell Holmes ("the First Amendment does not protect the right to shout 'fire' in a crowded theatre") and JM Keynes (describing Treasury anti-inflation policy in the 30s as "crying 'fire, fire' in Noah's flood") together, does that mean that German politicians talking about the inflationary consequences of a Greek bailout are shouting "Fire!" in a flooded theatre?

To be semi-serious: No. Well, maybe. Alright, fine: yes.

But surely the biggest concern of German politicians and voters isn't inflation? Right now the front page of Der Spiegel has plenty on the situation in the eurozone, but no mention of inflation.

Oatley offers an answer:

But why would the Germans fear inflation from lending to Greece? The whole reason for the German/IMF-funded loan is because the Greeks can't monetize their debt via the ECB. Isn't it?

The issue with the Germans is whether the Greeks will pay them back or whether they will be left having to pay it back themselves along with their already substantial debt.

Revealed Preferences


From Steven Landsburg, who is certainly no fan of the immigration Pharisees:

Over half the text of the Arizona law is devoted to penalizing employers who hire [undocumented immigrants]. ...

The anti-immigration hysterics keep warning us that foreigners want to come over here and exploit our welfare system. The insincerity of that stance is exposed whenever, as in Arizona, its proponents set out to prevent those very same foreigners from coming here and working.

Bold in original. Preach it.

Wednesday, April 28, 2010

Greece, the Euro, and the IMF

. Wednesday, April 28, 2010

Emmanuel wonders whether the IMF can lend to Greece, because Greece faces a funding problem but not a balance of payments problem. Because the IMF exists to fund governments facing balance of payments problems, Greece doesn't or shouldn't qualify for IMF assistance.

Yet, Greece does have a balance of payments problem. Its current account deficit is about 6% of GDP. I can't imagine that it is not experiencing net capital outflows at present. The question is, then, from whom can Greece borrow to cover its twin deficits when markets are reluctant to lend at less than penalty rates?

Greek banks can't borrow from the ECB without limit. If Greece could borrow from the ECB without limit, it wouldn't be facing its current crisis. And the Germans wouldn't be wringing their hands and dragging their feet over the proposed extra-ordinary funding. If Greece could borrow without limit from the ECB, it would sell bonds to the ECB and use the euro to settle its current deficit. This is exactly the contingency that made the Germans reluctant to throw their lot in with the PIGs to begin with and makes them reluctant to support Greece now. The Germans are reluctant because this monetizes Greece's deficit and produces inflation.

The situation in Greece is therefore no different, fundamentally, than the Argentinian crisis or the bigger Latin American crisis of the 1980s. So of course the IMF is mandated to lend to Greece.



I've given Krugman a hard time the past few days for things he wrote about immigration, but I completely agree with this and was happy to see him write it:

Anti-immigration fever is deeply un-American — at least as I understand America.

I wish he'd spend more time reasoning through the implications for public policy of this belief, but at least this is a start.

Even More Against Immigration Pharisees


In comments to my previous post on immigration Pharisees, "Anonymous" keeps pushing me to admit that maybe, just maybe, Democrats really are emotionally anguished about immigration while Republicans are all cold-hearted bastards. A sample quote:

these are the bleeding-heart liberals. does the term have no meaning?

Yes, it has a meaning, but the meaning is pejorative.

This really doesn't matter, tho, because my original point still stands: Krugman's argument against a more open immigration policy is that it might erode the welfare state enjoyed by Americans. That is a nativist argument, full stop. The worst Republicans on their worst day can't top it, and how Krugman or anyone else feels about it is wholly immaterial.

Look, I'm not defending the GOP on this, as "Anonymous" seems to think. Nor am I claiming that those on the right and left are biased in the same way on this issue. All I'm claiming is that the median view in both parties is equally disgusting, but for different reasons, and Krugman is being disingenuous at best by not acknowledging that fact. In other words, I am arguing that the "bleeding heart" excuse is no excuse at all.

How does the right and left differ? In a conversation earlier this evening, some colleagues said that Democrats they knew based their view of ethics in politics on a vision of community based on proximity: those in our family, locality, region, and state deserve consideration before all else. Therefore, it's okay to discriminate against immigrants, in order to privilege those closest to us. I agree that this is a strong human impulse, but I'd contend that it's the exact impulse that motivates anti-immigration Republicans; it's just that most Republicans view "community" more narrowly than most Democrats do.

But when it boils down it is a distinction without a difference, and the proximity argument becomes nonsensical very quickly. At their root the conservative and liberal arguments against more open borders are exactly the same, which was my point all along. What do I mean? Take an example: I live in North Carolina. By what ethical standard should I regard the needs of a person born in El Paso more highly than a person born in Juarez? The two cities are equidistant from me, and divided only by a made-up national boundary. What ethical principle dictates that the citizen of El Paso is deserving of my consideration while the citizen of Juarez is not? There is none, except for nativism, which is just as ugly as any other form of bigotry.

At least many of those who oppose immigration from the right have no problem admitting they are nativist; indeed, many are proud of it. As infuriating as that is, at least it's honest and straightforward. The same cannot be said for the Pharisees on the left who seem to think that their illiberal sins are absolved simply by feeling bad about them, and that those feelings make actions unnecessary. No, all they have done is added arrogance to their nativism. They shouldn't be so proud.

Tuesday, April 27, 2010

. Tuesday, April 27, 2010

I'm passing this along without comment, except to say that this Serbian kid is pretty awesome.

(via Arta Osmanaj)

Monday, April 26, 2010

Against the Immigration Pharisees

. Monday, April 26, 2010

Pardon me, but this from Krugman is galling, self-serving, disingenuous pablum:

Just a quick note: my take on the politics of immigration is that it divides both parties, but in different ways.

Democrats are torn individually (a state I share). On one side, they favor helping those in need, which inclines them to look sympathetically on immigrants; plus they’re relatively open to a multicultural, multiracial society. I know that when I look at today’s Mexicans and Central Americans, they seem to me fundamentally the same as my grandparents seeking a better life in America.

On the other side, however, open immigration can’t coexist with a strong social safety net; if you’re going to assure health care and a decent income to everyone, you can’t make that offer global.

So Democrats have mixed feelings about immigration; in fact, it’s an agonizing issue.

Republicans, on the other hand, either love immigration or hate it. The business-friendly wing of the party likes inexpensive workers (and would really enjoy a huge guest-worker program that would both provide such workers and ensure that they can neither vote nor, in practice, unionize). But the cultural/nativist/tribal conservatives hate having these alien-looking, alien-sounding people on American soil.

So immigration is an issue that divides Republicans one from another, not within each individual’s heart.

So let me get this straight... Republicans that oppose immigration do so because they are nativist bigots, but Democrats that oppose immigration are doing it because they care about poor people? This is wrong on so many levels.

1. For every Republican-leaning business group that supports immigration there is a Democrat-leaning labor union that opposes it. And there is plenty of "Dey tirk er jerbbbssss" rhetoric emanating from both camps.

2. Republicans complain more than Democrats about immigrants draining resources from social welfare programs, tho not necessarily for the same reasons.

3. Even if Krugman's empirical claims were true, his justification for his own position is pathetic. It amounts to this: I am willing to redistribute my wealth (and the wealth of others) to poorer people, but only if -- through a cosmic accident -- they happen to have been born within the same imaginary boundaries as me.

How in the hell is this not nativism?

Suppose Krugman had come across a statement made by an American segregationist in the 1950s that went like this: "I would like to integrate African-Americans into American society, but I am not willing to sacrifice the social benefits that whites enjoy to do so." I am quite sure that Krugman would have no trouble recognizing this as the evil that it is. Yet this statement is equivalent to the one he has made after substituting "immigrants" for "African-Americans" and "Americans" for "whites".

By any reasonable standard, immigrant workers are much more deserving of aid and opportunity than those born in the richest country in history. If we were really concerned with inequality, or aggregate welfare, or charity, or any other similar ethical goods then we would orient policy away from domestic social welfare programs and toward immigration-friendly policies. If we really cared about universalist principles like equal access to life, liberty, and the pursuit of happiness then we would orient policy towards the maximization of those things. Of course, those are not our priorities. Our priority is to secure the rents bestowed to us from winning the birth lottery.

I'm not saying that this isn't a real ethical problem. To me, the question of how to determine who deserves our aid and who doesn't in a world of scarcity is the hardest problem in moral philosophy, and it's certainly open to debate. But for Krugman to claim that his side has a completely pure heart, while espousing the same nativist position that he demonizes others for, is despicable. He should be honest and admit that he privileges the needs of his fellow citizens over the (much greater) needs of non-citizens. If he was feeling ambitious he might even offer a rationale to go with it. But he's incapable of that, because he's a Pharisee.

Workers of the World, Divide!


In honor of May Day, I thought we could kickoff the week with a showcase of worker solidarity in the EU.

With more than 85% of the German electorate opposed to a Greek bailout - with many expressing the sentiment that German workers will end up working longer to pay for generous Greek pensions – Merkel's government has sent out strong signals that it is still undecided over whether it will respond to the pleas for aid.

What Do We Know About Terrorism?


Time constraints prevent me from commenting in depth, but I wanted to pass along this article in the New Yorker surveying some political science research on terrorism and counter-terrorism. I liked this part in particular:

Because terrorism is such an enormous problem—it takes place constantly, all over the world, in conflict zones and in big cities, in more and less developed countries—one can find an example of just about every anti-terrorist tactic working (or failing to). One of the most prolific contemporary terrorist groups, the Tamil Tigers, of Sri Lanka, appears to have been defeated by the Sinhalese Buddhist-dominated government, through a conventional, if unusually violent, military campaign, which ended last spring. In that instance, brutal repression seems to have been the key. But the Russians have tried that intermittently in Chechnya, without the same effect; the recent suicide bombing in the Moscow subway by Chechen terrorists prompted an Op-Ed piece in the Times by Robert Pape and two associates, arguing that the answer is for Russia to dial back its “indirect military occupation” of Chechnya.

The point of social science is to be careful, dispassionate, and analytical, to get beyond the lure of anecdote and see what the patterns really are. But in the case of counterterrorism the laboratory approach can’t be made to scan neatly, because there isn’t a logic that can be counted upon to apply in all cases. One could say that the way to reduce a group’s terrorist activity is by reaching a political compromise with it; Northern Ireland seems to be an example. But doing that can make terrorism more attractive to other groups—a particular risk for the United States, which operates in so many places around the world.

The article isn't without flaws, and most of it is ho-hum for IR folks, but considering the audience I think it's a decent piece. I also think the popular debate would benefit from more articles like it.

Saturday, April 24, 2010

More on the (Lack of an) Anti-Globalization Movement

. Saturday, April 24, 2010

Well. I type up a late-night blog post to give myself a temporary break from paper-writing, and wake up to find it the weekend topic du jour in the IPE blogosphere.

First, Drezner builds me up ("rising young blogger"... I'm not that young, and not rising that much either) before tearing me down:

Hmmm.... no, I don't think Winecoff is correct. Even if it's true that the kids today care more about environmental degradation than labor abuses, this shouldn't stop them from protesting at economic summits. Indeed, from the mid-nineties onwards, protests against labor and emvironmental abuses have gone together like racism/sexism/homophobia accusations.

Also, I would dispute the empirics of Winecoff's assertion. The protests didn't die out with the change in the decade -- they were pretty robust at G-8 summits in the first part of the naughties, as well as the 2003 Cancun WTO Ministerial and the 2005 Hong Kong Ministerial. This is a more recent phenomenon.

If I'd done a better job of anticipating criticisms I would have addressed Drezner's first point ahead of time. Of course I agree that protests against labor and environmental practices often go hand-in-hand, but that's because protestors often see both of those issues as symptoms of a bigger disease: globalization forces developing countries into a race-to-the-bottom that erodes labor and environmental standards (and erodes cultural diversity and norms of reciprocity, etc.).

(An aside: those sorts of protests have generally be focused at the WTO and G-8/20. The IMF doesn't have anything to do with environmental politics, and the proximate cause for this discussion is an IMF protest.)

However the focus of environmental activists in the recent past has not primarily been about how globalization leads to race-to-the-bottom dynamics in the developing world; instead, it's been about how to convince national governments and their citizens in the developed world to agree to reduce carbon consumption. The WTO doesn't have much to do with this, although it eventually could if nations start slapping carbon tariffs on each other. But a prerequisite to that is getting national governments to agree to meaningful cap-and-trade regimes or carbon taxes, so activism has shifted to the national level for the time being.

As to my "empirics"... I don't have any. It was just a casual observation, and I didn't mean to imply that there was a strict shift in protest activity from "Tons" to "None" around the turn of the millennium. Merely that anti-globalization protests have tapered off over the past decade as the institutions associated with globalization have been less active. I still think that correlation holds pretty well, and it's even pretty consistent with what Drezner says. I think he's completely wrong about his Business Cycle Theory of Economic Protests, however:

During boom times, antiglobalizers score political points by stoking fears of cultural debasement and environmental degradation. During leaner years, naked self-interest becomes the salient concern: in the current economic climate, American opponents of globalization talk less about its effect on the developing world and more about the offshore outsourcing of jobs.

First of all, there's nothing in that that suggests that overall protests against globalization should decline during lean years, only that the anti-globalizationists should be complaining about slightly different things. In fact, we've seen an uptick in protest activity in the U.S. since the financial crisis, as we should probably expect. It's just that they're not complaining about globalization because the IMF/WB/WTO are not perceived to have had much to do with the current crisis. Instead, focus has shifted to other issues like deficits, health care, and corporate welfare.

Simon Lester agrees with my earlier point that there are fewer globalization protestors because there is less to protest about: the WTO, IMF, and WB have been much less active in recent years than they were in the 1990s. He also suggests that some protestors may have switched from anti-globalization to anti-war, and Stephanie Carvin pops up in comments here to say something similar. This makes a lot of sense to me (although those protests have also mostly dried up too, in the States at least; Carvin suggests they are alive and well in Europe).

It also backs up what was my original point: protestors have one-track minds. If they're focused on the war in Iraq then they aren't focused on labor rights in Latin America. If they're focused on getting the U.S. government to institute a cap-and-trade regime then they pay less attention to the World Bank subsidizing undemocratic governments. And if the IMF hasn't done anything onerous in a decade, then there just isn't much to protest.

I don't think this is permanent. I think protest activity changes with events. If we end up getting a wave of sovereign debt crises, and the IMF imposes austerity as a condition of loans, then we'll likely see IMF protests pick back up. If Doha ever moves towards completion without environmental protections built in, then we'll likely see more anti-WTO protests. But right now those issues just aren't very pressing, so protestors have moved to other things.

Will the Last Anti-Globalizationist Turn Off the Lights?


Drezner points to this WaPo item, noting that IMF protests ain't what they used to be:

Opponents of the International Monetary Fund and the World Bank are protesting in the nation's capital.

About 20 activists gathered early Friday afternoon ahead of IMF and World Bank meetings this weekend in Washington. They say the international institutions favor banks and corporations and drive struggling economies into debt and poverty.

20 whole activists? Well blow me down. The G-20 protests in Pittsburgh last year weren't much more impressive. (The protest was at its largest when unaware Pitt students joined protestors and started chanting "Let's Go Pitt!") But this doesn't actually surprise me too much. In teaching over the past few semesters I've noticed that my students generally have no idea that the IMF, World Bank, and WTO are controversial organizations. Even fewer of them know why they're controversial. This is in stark contrast to my undergrad days, which coincided with the Battle in Seattle and other large protests. Then the anti-globalizationists were loud, proud, numerous, and armed to the teeth with a brainful of "Did you know?" statistics and the good humor of Adbusters (where the image above originated). Now nobody on campus seems to care too much.

I wonder why? I can think of a few possibilities. First, the protests were loudest in the 1990s because of NAFTA (1994), the establishment of the WTO to supplant the GATT (1995), the fairly brutal "Big Bang" liberalization of the post-Soviet economies throughout the 1990s, the harsh austerity measures that came with IMF aid following the East Asian financial crises (1997-8), and the accession of China to the WTO (2001). It was a pretty active decade for neoliberals, which means it was a fairly active decade for anti-capitalists and anti-globalizationists despite the collapse of the Soviet system a few years prior.

Since 2001? Not much has happened on the globalization front. Doha is stuck in limbo, even modest FTAs with small countries have been slow in progressing through Congress, and the IMF had basically nothing to do for nearly a decade. Now that the IMF has been pressed into action again it's largely taken a more accommodating line toward recipient states, and it's pretty difficult to argue that Greece, e.g., is a victim of Western economic imperialists. The globalization of the Naughties was a kindler, gentler, calmer globalization compared to the Brave New World Is Flat globalization of the 1990s.

But I think that's only part of it. I think a better explanation is that people in general, and college students in particular, only have attention for one cause at a time, and environmentalism has definitely become the sexy issue over the past 8-10 years. When I hear people complain about China's trade practices these days, the arguments are less about the use of sweatshop labor and more about environmental degradation. To me it seems that the one has simply supplanted the other as the most pressing issue for the socially conscious.

I don't have a good explanation for why the shift has occurred, and maybe my experience isn't representative. I'd love to hear views from others that either confirm or deny my impression. Then again, if only 20 bother to show up for an IMF protest in D.C., maybe there's something to it.

(UPDATE: Drezner responds, and I fire back here.)

Friday, April 23, 2010

Anything Hugo Can Do, Evo Can Do Better

. Friday, April 23, 2010

The president of Bolivia brings the crazy again:

Evo Morales has claimed that both homosexuality and baldness can be caused by the humble chicken.

Speaking at an environmental conference on Tuesday, Morales said chicken producers injected fowl with female hormones and insisted that "when men eat those chickens they experience deviances in being men". ...

Morales's theories do not appear to have been immediately accepted by the scientific community, to put it mildly, and have been criticised by Spain's National Federation of Lesbians, Gays, Transsexuals and Bisexuals, which sent a letter of protest to the Bolivian embassy in Madrid describing the president's remarks as homophobic.

Seriously, what's with these guys? Is there some competition for best crazy talk by quasi-authoritarian that I'm not aware of? Chavez thinks the Haiti earthquake was purposefully caused by a U.S. military experiment and likens Twitter users to terrorists. Ahmadinejad thinks there are no homosexuals in Iran (what... they don't eat chicken there?), which of course inspired the classic video above.

Come on, guys. At least try to act sane.

Thursday, April 22, 2010

Happy Birthday, Vladimir Ilyich Lenin

. Thursday, April 22, 2010

Not really. You were not a good man, and made it possible for even worse men to succeed you. As with so many things, Churchill may have said it best (on the occasion of your death):

[Lenin] alone could have found the way back to the causeway . . . The Russian people were left floundering in the bog. Their worst misfortune was his birth . . . their next worst his death.

DeLong passes along this classic quote from the Bolshevik:

I know nothing that is greater than the Appassionata [by Beethoven]; I'd like to listen to it every day [Lenin said]. It is marvelous superhuman music. I always think with pride—perhaps it is naive of me—what marvelous things human beings can do!

But I can’t listen to music too often. It affects your nerves, makes you want to say stupid nice things, and stroke the heads of people who could create such beauty while living in this vile hell. And now you must not stroke anyone's head: you might get your hand bitten off. You have to strike them on the head, without any mercy, although our ideal is not to use force against anyone.

Hm, hm, our duty is infernally hard.

How much different might the 20th century have been if Vladimir Ilyich Lenin had stopped to listen to Beethoven every day?

Wednesday, April 21, 2010

What Can We Learn from Politicians' Reading Habits? Not Much, I Hope

. Wednesday, April 21, 2010

I'm always skeptical of fluff pieces about the reading habits of politicians. I find it hard to believe that just because a president read a biography of Teddy Roosevelt, say, he became more resolved to pursue some policy or other. So I draw in my breath sharply when I read that some politician learned some profound lesson from some history book that directly influenced his policy. Perhaps it's because I suspect it's just P.R. leaking through, perhaps it's because I give too much benefit of the doubt to politicians, so I don't expect them to base any policy on any one book. If "book X -> policy Y" then that would be too depressing, especially when the books most politicians are found reading are either biographies of other Great Men or pseudo-intellectual fluff (read: whatever book by a NYT columnist just got published). But maybe I'm just being too charitable.

(Aside: one of my least favorite famous quotes is Santayana's "Those who cannot learn from history are doomed to repeat it". There's no wisdom in that at all. I'd prefer "Those who confuse history with the present are doomed to catastrophe". Doesn't that nicely say a lot about the story of politics?)

So I met with some cynicism the most recent WaPo fluff piece on presidents' reading habits and how they influenced their policy agendas. Again, I'd certainly hope that presidents are not basing policy on one book, especially if that book is of the Great Man Overcomes Adversity Through Strength of Will variety. Then again, presidents put busts of Churchill and portraits of Lincoln in their offices so one of two things must be true: either politicians take books and history and legacies more seriously than they should, or they just use them as signals of their intelligence, seriousness, or intentions. I lean towards the latter, but there are still some interesting bits from the WaPo piece. Like Truman's incredible hubris:

Truman's support for establishing the country of Israel -- over the objections of his own State Department -- has been credited to his boyhood reading, both of the Bible (which he read at least a dozen times) and of the multivolume history "Great Men and Famous Women," edited by Charles F. Horne. The collection featured Cyrus the Great, the Persian king who let the Jews return to Jerusalem and rebuild their temple. Shortly after leaving the White House, Truman was introduced to a group of Jewish leaders as having "helped create" the state of Israel. "What do you mean 'helped create?' " Truman bristled. "I am Cyrus."

If that anecdote is true it's astounding. I've read the Bible more than a dozen times too, and I don't remember Cyrus pushing the big red atomic button, but whatever. Still, there's another anecdote in here I do believe:

[Bill] Clinton's reading affected his approach in the early 1990s to the crisis in the Balkans, a fierce and bloody struggle for control of Bosnian territory that had once been part of Yugoslavia. At the time, the president read Robert Kaplan's "Balkan Ghosts" and was struck by Kaplan's description of the region's long-standing ethnic hatreds. The book apparently set him against intervening in Bosnia. A panicky defense secretary, Les Aspin, told national security adviser Anthony Lake that Clinton was "not on board" with their proposals. Years later, journalist Laura Rozen wrote that "some can't hear the name Robert Kaplan without blaming him for the delay in U.S. intervention."

I believe this is at least partially true. I also believe that Clinton's foreign policy was the most brazenly cynical of any president in the post-war period, and did more damage to the U.S. and the burgeoning post-1989 liberal order than is popularly understood, so if Kaplan's transparently crap argument provided him with an excuse to continue to shirk a responsible foreign policy then he'd be happy to appropriate it. But maybe that's my bias.

Still, I can't help but be interested in these kinds of articles, despite myself. I already knew that Bush (claimed to) read Sartre, and that Reagan was a Milton Friedman fan despite enacting almost none of his policy prescriptions, but I did not know that Jefferson's book addiction drove him deep into debt but but later laid the groundwork for the Library of Congress. I did know that Clinton favored Maya Angelou, though I'm not quite sure why, but I didn't know that Obama carved out time for highbrow fiction.

Those anecdotes are interesting to me. I just won't read too much into them.

Monday, April 19, 2010

Why We Can't, and Shouldn't, Eliminate Bailout Guarantees

. Monday, April 19, 2010

Remember when I said the proposed $50bn wind-up fund for failing financial institutions was a bad idea? Well, apparently the Obama administration agrees. Kind of.

In a move aimed at jump-starting bipartisan negotiations on Wall Street reform, Obama administration officials have signaled that they want Democratic Sen. Christopher Dodd to remove a $50 billion bank liquidation fund from his financial regulation bill.

Republicans have pounced on the $50 billion provision, saying the legislation will lead to more government bailouts of large banks, effectively stalling progress on the bill.

"The ex-ante fund was not in our original proposal we announced almost a year ago, and we don't feel it is an essential part of final legislation," said one administration official late Friday. "The president will only sign a bill if it passes the test of putting an end to bailouts."

Democratic officials suggested the move is really an attempt to challenge Republicans on whether they will still oppose the reform bill even after the controversial provision is removed. That would play into the White House's efforts to portray the GOP as defenders of the status quo on Wall Street.

To me this move makes little sense if the plan is to force the GOP into a corner. At this point I think it's clear that they'll oppose anything that Obama supports as a matter of principal. In fact, it may be the GOP's only organizing principal right now. And despite denials from Democrats, the GOP actually is right that this rainy-day fund amounts to a bailout guarantee for TBTF institutions.

So dropping the fund makes sense as a matter of policy, and maybe politics too (although I can't imagine how an obscure provision of an arcane bill could possibly effect the midterms). But it also signals that the Obama administration doesn't have the stomach to enact the type of strict regulatory reform that many have called for. The cynical take on this is that the Obama administration, as well as legislators in Congress, have been effectively lobbied by industry groups. This may be true, since Democrats receive more contributions from the financial sector than Republicans (although that might be changing). A more charitable take is that it isn't clear what regulatory changes would have prevented the last financial crisis, and it's even less clear what is needed to prevent the next one. Exchange-traded derivatives? Higher capital requirements? Stricter leverage ratios? None of those on their own would have done much to stop the last crisis. Not only that, but I have not yet seen a convincing discussion describing what combination of those in what doses would actually improve system stability, and if enacted unilaterally they could actually destabilize the U.S. financial system by making it uncompetitive in globalized markets.

The Obama administration seems focused on eliminating bailout guarantees above all else. This is not only impossible, it is also unwise. At some point in the future some financial institutions will become illiquid. If the government makes a credible commitment to not provide funds to those distressed institutions, then the first sign of trouble will touch off a run on those firms. Bank runs are contagious, so even if only a single firm is affected initially, the trouble could sink the whole system. It's much better for the government to instill confidence in the system by guaranteeing that they will support illiquid firms than to guarantee that they won't.

Of course, the government also needs to be able to close insolvent firms in an orderly fashion, but the FDIC has done a pretty good job of that in this crisis, except for the botched liquidation of Lehman. Giving the FDIC more resources and broader authority is a good idea.

It's been a recurring theme of mine for nearly two years now that major financial regulatory reform is unlikely, and that this may even be a good thing: overhauling the system could possibly do more harm than good, especially when it's carried about by legislators with torches and pitchforks. I see no reason to change that tune now.

At the same time, there clearly needs to be more transparency in the system. If I were an advisor to the Obama administration I'd focus on shining light on the "shadow banking system", making the ratings agencies and internal risk assessments of financial firms more open, and forcing liabilities from SIVs onto balance sheets (and vigorously prosecuting firms that violate this rule). That sort of thing. This type of reform isn't likely to make headlines, but I think it can have the biggest effect on making the system more stable.

Saturday, April 17, 2010

Housing Policy and Labor Bargaining Power

. Saturday, April 17, 2010

I'm starting a new research project on how foreign direct investment affects the collective action problems labor faces in developing countries. So, of course my ears are tuned to anything related to centralized wage bargaining. Felix Salmon was on NPR this evening discussing a recent Fannie Mae housing survey on Americans' opinion on home ownership. Salmon's main point is that home ownership makes labor less mobile and that this is bad for efficient markets as well as for individuals' wages. This made me wonder if there has been much political science research on housing policy and centralized wage bargaining. A quick google search turned up nothing.

It would be interesting to see if:
1) Pro-home ownership policies decrease union power
2) Pro-business groups actually lobby for pro-home ownership policies to decrease the ability of workers to collectively bargain

Such a dynamic would be particularly interesting given the strong rhetorical connections between pro-labor social welfare programs and tax policy and government subsidies that favor home ownership. Of course, I could also buy the logic that when labor becomes less mobile due to home ownership, workers are better able to overcome collective action problems because they do not have the option of moving to where there are higher wages. Thus, immobile workers may be more willing to bear the costs associated with centralized wage bargaining.

Anyone out there with some references to work on this subject?

Complexity Is Not Evil


Mlada Bukovansky has the best conclusion to a blog post evah:

Actually I've now typed myself to the edge of a philosophical abyss but instead of deleting this post I'm just going to post it.

The abyss Bukovansky has approached is of her own making. She begins her post by describing her "fascination by the narratives of the financial crisis that basically cast it as a mass deception," and cites a couple of headlines indicating that some financial firms spent some effort trying to obfuscate some of their activities. She goes on to say that the postmodern financial system depends on complexity-cum-opacity in order to function, which she claims is a form of deceitfulness, and that this is "insidious". Her argument, in other words, is that the financial crisis occurred because finance is evil, and finance is evil because it's complicated. I don't think I'm exaggerating her view, since she goes on to imply that the financial system is founded on "socially constructed and accepted lies".

(Small quibble: Michael Lewis is not a sports writer who sometimes covers business, as Bukovansky claims; he's a bond salesman turned business writer who sometimes covers sports, and who rose to prominence with Liar's Poker, a book criticizing the Wall Street excesses of the 1980s.)

The point of setting things up this way is to carve out space for constructivist explanations of the crisis: how did these norms of insidious complexity develop? Why were they allowed to persist for so long? How do we distinguish between socially constructed lies and socially constructed truth? By the end of the paragraph she's standing on the edge of the abyss.

I find the argument that complexity=opacity=lies to be less than satisfying, and it's a strange one for a constructivist to make. Certainly some complex realities can also be true, yes? Bukovansky acknowledges as much when she wonders how we can distinguish social truth from lie (the abyss), but she discounts the possibility of truth entirely when talking about finance: it must be insidious because common people can't understand it. Even more bizarrely, she quotes a passage from Johnson and Kwak's book that makes the opposite assertion: the structure of finance was not a lie, they claim, because all of the principals believed it. Why she thinks this passage supports her core claim escapes me.

If I were a constructivist try to piece together a narrative of the crisis, which I'm not, I would not focus on mass deception, and I would certainly not describe a culture as "insidious" simply because it was complex. (After all, isn't one of the central claims of constructivists that all cultures are complex?) Instead, I would focus on mass delusion. As Johnson and Kwak demonstrate, and as been described in detail in dozens of other places (e.g. Sorkin's book), the financial industry and their regulators were surprised when the system melted down the way it did. Moreover, there appears to have been very few instances of outright fraud: even the recent charge against Goldman Sachs (which is yet to be proven, and seems iffy to me, but then I'm not a lawyer) refers to an isolated incident that was nowhere near large enough to have caused the crisis, or even contributed much to it. I think it's fair to say that the SEC has spent plenty of time searching from illegal acts, and nearly two years on they've found nearly nothing*. The most notable feature of the Wall Street culture was seemingly not fraud, but "irrational exuberance". The crisis itself was not caused by deceit, but by an unexpected 40% drop in home prices. That is, by an extreme tail event that had never before occurred in American history. That's not to say that culture of Wall Street didn't help fuel that bubble, but it's not at all clear that they did so in bad faith. If they did, then why were the banks caught holding long positions on bad bets?

Or, if I were a constructivist, I might focus on the mass demonization and scapegoating that followed the crisis. Bankers weren't the only ones who bought into the "Wall Street is good" mentality, and bankers weren't the only ones who sought to profit from the housing bubble, yet they have received the full brunt of public ire despite the fact that little outright fraud has been uncovered. Wall Street was only one player in an event that the entire country bought into. Moreover, the bailouts of Wall Street will cost the public much less than the bailouts of Main Street (e.g. auto companies) and government firms (Fannie and Freddie). So why has all the public scorn been reserved for Wall Street? Does classist scapegoating classify as insidious?

Perhaps the most interesting theoretical explanations for the crisis have come from the Keynes-Minsky-Kindleberger tradition that emphasizes mass psychology and "animal spirits". If I were a constructivist seeking to construct a narrative of the crisis I'd focus on the role that ignorance played, rather than deceit.

*Which is not to say nothing is there. I'm sure some misrepresentation went on, and I'm sure there were plenty of miscellaneous shenanigans that may have crossed the line of legal propriety. But so far those instances appear to have been few, far between, and not nearly large enough to have caused the crisis.

Friday, April 16, 2010

Hard Problems in Social Science

. Friday, April 16, 2010

If you hadn't noticed already, The Division of Social Science at Harvard kicked off a global effort to identity the hardest social science problems. I had a couple observations.

1. Defining what is meant by "a problem in social science" is a necessary first step that the conveners appear unwilling to take. As a result, the participants in the Saturday convention held very different conceptions. Many seemed to drop "science" to focus on social problems, e.g., the gender gap in pay; the racial gap in educational achievement; inability to engage in effective state-building operations. These aren't problems of social science, these are social problems. Some went the other way and focused on the science to the neglect of the "social" (like the lone political scientist presenter who focused on post-treatment bias. Perhaps important, but a problem of method not of social science per se. Taleb focused on inability to estimate tiny probabilities. Again, clearly important, not obviously a problem of social science in particular.

2. If we wish to define a hard problem in social science as an intractable social problem, then I am stunned that none of the participants focused on the two fundamental problems of human society.
A. Half of the world's population lives in poverty.
B. According to published estimates, between 167 and 203 million people perished in the 20th century as a consequence of state-sanctioned killing; either inter-state war, civil war, or state-led murder of its own citizens.

In the scale of importance, I place these two problems just a teeny bit above the fact that women make 80% of a man's wage for the same job. Yes, I know, that's easy for me to say because I am a man. But I am also not extremely poor.

3. I don't think we should define hard problems as social problems. I think we should define them as theoretic challenges. So, here are what I take to be the two hardest problems in social science.
A. Aggregation
Across levels of analysis--micro to macro
Across space--society is not defined by national borders.
Across policy domains--Very little happens in isolation.
In short, constructing general equilibrium models based on the knowledge generated from the last thirty years of partial equilibrium research.
B. Endogenizing Change
Partial equilibrium models kind of rule this out. Thus, endogenizing change requires prior development of theoretical models that are not wedded to an equilibrium conception of politics.
These are very hard problems and require us to adhere to a very different metaphor: complex adaptive systems. Hence, the third hard problem is figuring out how to transform CAS from metaphor and computer modeling exercise to useful theoretical model that can inform research on real-world politics. That, it seems to me, is a set of hard problems in social science.

Wednesday, April 14, 2010

How Marx and Engels Got Politics Wrong

. Wednesday, April 14, 2010

Brad DeLong on one fatal miscalculation by Marx and Engels:

The workers are supposed to organize, lobby, vote, agitate, and strike for higher wages, better working conditions, more political voice, government regulation of industry, and an egalitarian distribution of income and wealth. The struggle will weld them into a single conscious movement. And they are supposed to lose. And when they lose--so Marx's and Engels's plan for world history went--they will recognize that the system cannot be successfully managed or changed or ameliorated but must be overthrown, be transformed, be superseded.

But what if they did not lose but won instead? And what if those victories did not strengthen but weakened working-class consciousness as a single group with common interests? And what if those victories convinced more and more peopke that the system could be worked within, and did not need to be overthrown? What then?

By the time you are thinking like Engels was thinking in the early 1890s you are well on the road to Lenin and Stalin...

There are extensive quotes at the link.

It's not their only miscalculation, of course. But it's a big one, perhaps even bigger than the miscalculation that the merchant class would join the proletariat in overthrowing the bourgeoisie, or that capitalism would rot from the inside out rather than rejuvenate itself through creative destruction. Their fundamental misunderstanding of democratic politics renders the rest of their political economy moot. And it's an under-discussed miscalculation: much attention is paid to the internal contradictions of collectivist economics, but less to those of collectivist politics.

As DeLong notes, the world was changing all around Marx and Engels in the 1880s and 1890s. But despite the fact that Marxism is praised as a dynamic theory, the dynamics are all wrong: the world was moving in a different direction, and they were unable to recognize it. Too bad.

Tuesday, April 13, 2010

Warning Signs in Europe

. Tuesday, April 13, 2010

Once, I apologize for the light posting. Hopefully things will pick up soon. And by "soon", I mean probably not until the end of the semester in early May. On the plus side... well, so far there is no plus side but hopefully about a month from now Sarah, Alex, and I will be able to add another degree under our names on our CVs.

I do want to take a break from paper writing to take note of what is going on in the eurozone. By now it's old news that Greece will receive a 30mn euro credit line from other euro economies, with perhaps another 10-15mn en route from the IMF. Boone and Johnson at Baseline Scenario argue, rightly I think, this is a temporary fix not a permanent one. But at this point the more interesting question to me is not what happens to Greece, but what happens to Europe. And by Europe I don't mean Europe-the-continent, but "Europe"-the-ideal. The frictions that have always existed between Germany and France on this point have come to quite a head, as this NYT article notes:

Germany, long the financier of the European Union, has made it clear that it will no longer pay for the mistakes and frauds of others.

France has put a much stronger emphasis on European unity and pride, trying to avoid involving multilateral institutions like the International Monetary Fund in the future of the euro, a prominent symbol of Europe’s challenge to the supremacy of the United States.

The problem is that while France is clear in what it wants, Germany can't seem to decide:

Germany always acted in its interests, Ms. Guérot said, but those were perceived as sublimated within the European Union and NATO, the two postwar multilateral institutions that both protected the new democratic Germany and kept its ambitions in check. Now Germany is turning more obviously to Russia for energy and commercial interests, she said, making its European and American partners uneasy.

“We sublimated hegemony,” said Ms. Guérot, a German who is working on a paper called “Germany Unbound.” “But we’re dropping the sublimation now.” She laughed, then said: “Of course, this doesn’t sound nice to others.”

If it's true that Germany wishes to ascend to regional hegemony, then abandoning the rest of Europe in its time of need is not the way to go about it. In fact, Germany is acting in the opposite way that a hegemon would:

Germany also reacted angrily and defensively to a modest French suggestion by Finance Minister Christine Lagarde that the German export model had to change in the interests of other, less competitive euro zone countries, and that Germans should spend more buying the goods of their less fortunate neighbors.

Germans, who have already undergone a wrenching structural reform and paid a huge bill to integrate the former eastern Germany, say they feel that “they’re paying a significant personal price,” Mr. Klau said. “Poverty has increased considerably in Germany and is now a social reality. And it makes Germany more inward-looking than the old West Germany, and a more defensive country.” ...

Germans feel they have paid both their reparations and their dues, “and many times over,” said Ms. Stelzenmüller, especially in an uncertain time of globalization and financial crisis. “People want to be normal, in the sense that other people don’t come to us first and say, ‘You have to pay.’ And it doesn’t have much to do with political orientation. All of us are huddling with our backs against the storm.”

No hyperbole intended, but using Kindleberger's typology of hegemony this sort of inward-focus in the midst of an international economic crisis has many more parallels with the refusal of the U.S. to assume international leadership during the interwar period than its postwar acceptance of it. So I think the NYT has the general framing of this issue all wrong. In fact, there is one paragraph in it that gives the game up:

At the heart of the dispute is the euro. The French see it as the currency of a new, united Europe; the Germans see it as the direct descendant of the mark, and the European Central Bank as retaining the DNA of the Bundesbank, whose main task was to keep inflation down. The French favor a kind of European economic government, with easier rules on deficits; the Germans have no intention of giving up economic sovereignty to anyone, let alone to the French.

Ah, so it is the French who seek to preserve their regional influence, but they can't do it alone. Germany wants to minimize its exposure to Europe -- especially the low-income countries, and the less-trustworthy PIIGS -- and it always has. There is much more that could be said, but this is getting long already. I'll try to revisit this soon, but I am not optimistic about Europe: the bailout arrangement for Greece indicates that Germany's tolerance for bailouts is weak and weakening, without Germany there is no Europe, and the other PIIGS are on deck.

Sunday, April 11, 2010

Sunday Morning Talk Shows

. Sunday, April 11, 2010

In The Know: Should The Government Stop Dumping Money Into A Giant Hole?

Saturday, April 10, 2010


. Saturday, April 10, 2010

This is usually The Monkey Cage's purview, but I wanted to call readers' attention to some international election coverage. First, a student of mine called to my attention the fact that Hungary is having elections tomorrow. (Full disclosure: he is the English-language translator for the web site of one of the parties, the LMP.) I know nothing at all about Hungarian politics, but here is how the LMP, tagline "Politics can be different", is describing the issues:

In April of this year, The Republic of Hungary will hold its Parliamentary Elections. The center left party (MSZP) is likely to lose its governing position, while the center right party (FIDESZ) could gain a two-thirds supermajority. Over the past couple of years FIDESZ has been slowly gaining support. Most recent polls have placed FIDESZ at around 60%. Concurrently, a radical right and semi-racist party called “Jobbik” started exhibiting terrifying results in these polls. It is entirely within the roam of possibility that Jobbik will obtain over ten percent of the votes this year. Jobbik is promising to fight “gypsy crime”, openly opposes many of the ideals and basic structures of the European Union, and some of the Jobbik leaders' policies could exasperate tensions between Hungary and neighboring countries. The party commonly uses racial slurs against the Roma and Jews. It is not uncommon to encounter "Árpád sávos" flags at their rallies, the same flag that was used by the Hungarian fascists during the 1940's.

The LMP promises to fight corruption and extreme nationalism, and emphasizes environmental and social justice goals on their site, where the election results can be followed as they develop.

Meanwhile, Stephanie Carvin has a good post at the Duck on the just-declared UK election. Notably absent from the campaign: foreign policy. As she writes, “By Jove! It’s the Economy, Chaps!” that everyone's talking about. Well, that and the usual: corruption, health care, and the sclerosis of the Labour Party.

Thursday, April 8, 2010

Walk On

. Thursday, April 8, 2010

Fellow IPE blogger Emmanuel and IPE@UNC have a strong rapport (I hope), forged from disagreeing about nearly everything, but he has sunk to a new low in his hatred of everything American: bashing the Glazer family, American owners of venerated English soccer team Manchester United:

Loyal Manchester United fans and Britons in general abhor the Glazers for being ugly Americans and, worse yet, debt-laden ugly Americans [is that redundant?] seemingly hellbent on ruining the finances of such a storied team. There has been a strong grassroots movement via the Manchester United Supporters Trust (MUST) to throw out these Yankee bums.

Now, look. I'm a huge Liverpool supporter in the EPL. Huge. My wife has learned no to speak to me for at least a half hour after Liverpool has lost. My only sports passion stronger than Liverpool is St. Louis Cardinals baseball. (Full disclosure: This blog is divided: Alex is an Arsenal supporter. As far as I know, Dr. Oatley and Sarah have no affiliation.)

Liverpool and Manchester United are heated rivals, so I'm about to do something that I should never do: sing the praises of Manchester United. A Liverpool fan praising the Glazers is like a Red Sox fan saying good things about George Steinbrenner, and I truly hate doing it. But Emmanuel has brought out the nationalism in me -- which is very hard to do, I might add -- and I feel compelled to defend the American Glazers against his attacks. I've previously poked fun at the fact that Manchester United are now sponsored by the U.S. government (via AIG), but here's the thing: since the Glazers took over, debt or no debt, Manchester United has been remarkably successful. Here is Manchester United's list of accomplishments since the Glazer family took charge in 2005:

2005-06: FA Cup winners
2006-07: EPL winners
2007-08: EPL winners, UEFA Champions' League winners
2008-09: FIFA Club World Cup winners, Carling Cup winners, EPL winners, UEFA Champions' League runners-up
2009-10 (in progress): Carling Cup winners, possible EPL winners

Now I'd say that's a helluva record, considering that in the previous 5 years their total silverware was one FA Cup (2004) and one EPL championship (2002-03). Hmm... maybe all that American cash, even if serviced, has done some good for the team. Emmanuel decries the sale of Cristiano Ronaldo to Real Madrid, but ManU made a healthy sum on the deal: he was bought for £12.24mn, and sold for £80mn. I'd say a 650% profit, plus a closet-full of silverware in the meantime, is a good bit of business, wouldn't you?

Emmanuel wants to say that Barcelona is better-run. That may be. But Barcelona is also the best team in the world, an extreme outlier in every sense. You can't copy their model simply by booting the Americans out. It's just a touch more complicated than that.

There Are Idiots


Ezra loves Michael Lewis' The Big Short because it offers a simple explanation for the financial crisis: There are idiots. It is true, there are idiots. Idiots believe that you can explain variation (shift from no crisis to crisis) with a constant (the fact that "idiots" work in finance). Idiots also believe, in spite of all evidence to the contrary, that "government" is not run by "idiots" and thus can and will enact regulation that "anticipates...inevitable failure and limits the damage it can do."

Although I admit that it is fun to pick on Ezra, my point is broader. We are not going to address our current problems by attributing the crisis to idiocy and believing that government is capable of (much less interested in) rescuing us from it. I wish our public intellectuals were less, well, idiotic.

Wednesday, April 7, 2010

Monetary Policy Is Not Magic

. Wednesday, April 7, 2010

Felix Salmon says something that makes no sense:

Shahien talks to former Fed governor Laurence Meyer, who reads this as a protective move by the Fed: the regional Fed banks, in particular, would have a much harder time justifying their existence as large institutions if they lost their supervisory role. And Meyer is surely right. Yes, information from bank supervisors can be used in FOMC meetings — but the Fed could have people supervising any sector of the economy and then use that information in its meetings. The point of supervising banks is to supervise banks, not to set monetary policy.
(emphasis added)

What's wrong with this? It doesn't think about how monetary policy works, or the mechanisms by which the Fed influences the economy. So how does it work? When the central bank raises (lowers) interest rates on funds available to banks they are effectively reducing (increasing) the supply of funds into the banking sector; banks respond by demanding fewer (more) funds, which means they have fewer (more) funds to loan out to borrowers; a leftward shift in the supply curve raises (lowers) the price of funds, when means raising (lowering) the interest rates charged to borrowers and paid to depositors. If interest rates rise (fall), demand for funds will fall (rise), so the money supply increases (decreases) through interest rate management. If the money supply increases (decreases), then economic activity also increases (decreases).

But all of that depends on the banking sector. In order for interest rate management to influence the broader economy, the banking sector must be healthy enough to issue new loans when interest rates are low and survive when interest rates are raised. If the banking sector isn't healthy, then the central bank has no traction over the economy: it can pump cash into the banking sector during downturns, but if banks just hoard it then it won't help get the economy moving again. In fact, we've seen a lot of this occurring since 2008; monetary policy has actually been contractionary, since banks have just hoarded the cash the Fed is trying to move through the system:

Indeed, one of the most notable features of the present crisis has been the explosion of banks simply keeping their money on deposit at the Fed. During 2008, these deposits increased by a factor of more than 40: from $21 billion to $860 billion.

All to say, the central bank really does need to know what's going on in the banking sector in order to set monetary policy, for reasons that have nothing to do with regulation. (Although that's also related, and I may blog more on that point soon.)

Note that this is not the same thing as being in a liquidity trap; I didn't mention the "zero bound" at all above.

Monday, April 5, 2010

Research at UNC

. Monday, April 5, 2010

The new issue of The Journal of Politics is out, and UNC Assistant Prof Stephen Gent has an article in it (with Megan Shannon). The abstract:

Scholars and policymakers argue that the bias of a third party affects its ability to resolve conflicts. In an investigation of international territorial claims, however, we find that the conflict management technique is much more important for ending disputes than a third party’s level of bias. Binding third-party mechanisms (arbitration and adjudication) more effectively end territorial claims than other conflict management techniques because they provide legality, increased reputation costs, and domestic political cover. The characteristics of the third party, on the other hand, have no effect on the success of a settlement attempt. Bias plays only an indirect role in conflict resolution, as territorial rivals generally turn to unbiased intermediaries to broker binding negotiations. We conclude that impartial third-party conflict management does not directly lead to successful negotiations. Rather, disputants favor unbiased third parties to broker the types of talks most likely to end international disputes.

This isn't really my area of expertise, so I have no substantive comment, but I did want to highlight Stephen's work which is always excellent. I don't see an ungated version (Stephen, if you're out there put something up so I can link to it!), but here is a Washington Post article on some of his previous research.

Saturday, April 3, 2010

In Favor of Bailout Guarantees

. Saturday, April 3, 2010

Sorry for the light posting, but between grading a giant stack of midterms and frantically revising theses and working on seminar papers we're all pretty slammed around here. But I did want to highlight something that Krugman wrote that I completely agree with:

This is the Republican strategy for beating back effective regulation: just claim that what we’re really doing is telling big banks, sternly, that there will be no more bailouts — they’re not too big to fail.

And then, when the next financial crisis arrives — well, it will play just like 2008. President Palin or whoever will find themselves staring into the abyss — and conclude that they have to bail out the financial sector anyway.

In a crisis, the financial system will be bailed out. That’s just a fact of life. So what we have to do is regulate the system to reduce the chances of crisis and the taxpayer costs when the bailout occurs.

Emphasis in original. This is not only entirely correct, it is a good thing: in a financial crisis the biggest problem is a lack of confidence in the financial sector, which leads to runs on financial institutions. This becomes a self-fulfilling prophecy, where even solvent-but-illiquid firms can become insolvent overnight. Gary Gorton's new book argues that the recent financial crisis was an old-fashioned bank run.

How do escape the vicious cycle of bank runs? The government intervenes by guaranteeing the funds of depositors. This intervention may be costly, but is much less costly than continuing to let a panic eat the financial system from the inside out. Nevermind the fact that the government cannot make a credible commitment to not bailout systemically-important financial institutions: it would be a bad thing if they could! Such a commitment would lessen confidence in the financial system and thus make runs more likely, not less.

This is the case for regulation, and simply making banks smaller won't have an appreciable effect. The problem, from the perspective of regulators, is that it is impossible to accurately measure how safe banks are with much precision. The shorthand that regulators and investors have often used -- bank capital and leverage ratios -- are not only easily manipulated but they may be impossible to accurately calculate in the first place.

It isn't easy to create meaningful prudential regulatory standards, and I don't think Krugman's Roman v. Greek analogy works all that well. "Dumb" rules like those in the first Basel Accord are easily manipulated and may even incentivize riskier behavior. Which is why we got a second Basel Accord and are on our way to a third. These safeguards will inevitably fail, and we have to be prepared for that. Not by refusing to intervene, but by guaranteeing that we will do so, quickly and decisively, in ways that reduce panic but punish insolvent firms (and no, restricting CEO pay isn't the best way to do this). It's a fine line, but it's the one we walk.

Regulatory reform should be focused on how we're going to intervene in a panic, not trying to make sure we won't when everyone knows that we will.

International Political Economy at the University of North Carolina: April 2010




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