Friday, December 31, 2010

The Politics of Basel III [2/2]

. Friday, December 31, 2010

Yalman Onaran of Bloomberg has a very good rundown of the major issues that remain in the ongoing Basel III negotiations. The headline says "Banks Best Basel" and that's how the article begins, but the story is really about how national regulators can't agree on how to proceed:

The committee’s most significant achievement, members say, an agreement to increase the amount of capital banks need to hold, won’t go into full effect for eight years. Other measures that regulators had hoped would prevent future crises -- liquidity standards, a capital surcharge on the biggest lenders and a global resolution mechanism for failing firms -- were postponed, allowing banks to escape the toughest rules that would force them to change the way they do business.

“There will be changes, but not fundamental changes to the banking model,” said Sheila Bair, who as chairman of the U.S. Federal Deposit Insurance Corp. sits on the Basel committee’s top decision-making body. ...

Banks also reached out to their home regulators, arguing that some rules would disadvantage them more than other nations’ lenders. That helped draw the battle lines inside the Basel committee, according to an account pieced together from interviews with half a dozen members who asked not to be identified because the deliberations aren’t public. Germany, France and Japan led the push for softening rules proposed last December and stretching out their implementation. The U.S., U.K. and Switzerland opposed changes or delays. (bold added)

The bolded portion is a big part of what my dissertation is about*. Other than that, the first thing to note is that, as I've repeatedly said on this blog, major overhauls to the regulatory state are just not in the cards. Basel III is a tweaking of the rules already in place, and as we see below, national governments are under no legal obligation to implement, monitor, or enforce them in toto.

The second important point from this excerpt is that these negotiating coalitions have been in place since Basel I, and it -- once again -- highlights that the popular perception that the U.S. was the home of deregulation while other countries had tougher rules is wrong. Not only is finance (and banking in particular) one of the most regulated industries in the U.S., but U.S. regulations are some of the strictest in the industrialized world. We see that in the Basel negotiations, where the U.S. is pushing for tougher rules, while Germany, France, Japan, and others (sometimes including Canada) want to weaken the regime. Switzerland has already decided that the Basel requirements are too lax, and have unilaterally imposed stronger capital requirements for their banks. The U.S. did this before the financial crisis, under Basel II (which the U.S. -- and many other countries -- never fully implemented).

The U.S. has also had some (very weak) liquidity requirements on the books for decades, something Europe and Japan have not done and resist now:

In addition to pushing for a higher capital ratio, Bair also argued for a global leverage ratio that would cap banks’ borrowing -- something the U.S. has had on its books since the 1980s. In July, when the committee was debating how to define capital, the U.S. agreed to some easing in exchange for Germany and France accepting a leverage ratio, some members said.

Proponents of the leverage ratio, or equity as a percentage of liabilities, say it’s a more straightforward way to prevent lenders from becoming too indebted. Unlike capital ratios, which are based on risk-weighting and can be manipulated, the leverage ratio counts all assets regardless of their risk.

This actually conflates two issues: the liquidity requirements themselves, but more importantly how to define capital. Under Basel III definitions the entire Japanese banking sector is essentially insolvent. In this case the devil is very much in the details. Liquidity requirements are much cruder than many capital definitions, which can be quite complicated and even sketchy, which is why some governments may just refuse to comply:

The EU may exclude the leverage ratio when it converts Basel rules into law next year. Several member nations have advocated dropping the rule, people close to the discussions said last month. A majority of the 27 EU countries oppose adopting the ratio, these people said.

So Basel III is just like Basel I and Basel II: it's about distribution, which means that it's about politics, not technocracy.

*Or what I think it's going to be about. It's still very early days.

The Politics of Basel III [1/2]


Basel III has not been settled yet; the kinks are still being ironed out. And some observers, like Joseph Cotterill at Alphaville, aren't too happy about the goings-on:

Can we talk a bit more about the scandal of Basel III allowing banks to give government bonds a zero risk weighting on their books? This time regarding Basel’s liquidity rules.

Sure. Governments negotiating Basel will leave the provision in because they want banks to buy their debt at low prices. Giving them capital relief for doing so is one way of ensuring that continues to happen. Is that scandalous? Maybe. But it's basic political economy. It gets more complicated, and I encourage everyone to read Cotterill's very good summary post for the details, but the culmination is this:

This would present a difficult situation for banks to be sure. They’d be asked to take on exposure to assets they might not want otherwise, in return for regulatory certainty.

This gets right at what Jeffrey Friedman argues was a central cause of the crisis: banks were incentivized to hold assets -- particularly certain types of asset-backed securities -- because of the regulatory structure imposed on them, rather than for any rational investment reasons. Friedman originally proposed this explanation in a special issue of Critical Review (which he edits). His original chapter is here, and it has now been expanded into a book.

Anyway, it's not a surprise to see this continue in Basel III, but it means that the banking sector will continue to be susceptible to sovereign debt crises, and that governments will be able to get easier funding than they ought. Obviously this can lead to a vicious cycle. We've seen it already, but because Basel III tightens up capital and liquidity regulations the incentives to get capital relief by holding zero risk-weighted bonds will be even stronger. Not a recipe for public fiscal discipline and private financial stability, if you ask me.

2010 Best of the Blog, XIII


Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From May 28, "The World in Decession":

In The World in Depression, Charles Kindleberger argued that the hegemon must provide five public goods to the rest of the globe:

1. Purchaser of last resort for distress goods.
2. Lender of last resort for governments and provider of liquidity to the global system.
3. Maintain a stable system of exchange rates.
4. Ensure macroeconomic coordination.
5. Provider of countercyclical lending.

Arguably the U.S. has fulfilled #s 1, 2, & 4 pretty well, while #5 has been taken over by export-biased economies and #3 is less necessary in a system of flexible rates. But Brad DeLong argues that there is a sixth:

The hope is that, by Walras's Law which tells us that excess demands across all markets must sum to zero, that relieving excess demand for AAA assets will produce as a consequence the relief of excess supply and full-employment balance in the markets for goods, services, and labor as well. ...

[W]e are extremely far from cracking the U.S. government's status as the supplier of AAA assets to the global economy right now. When we see signs that further issues of Treasury bonds or loan guarantees by the U.S. government are starting to erode the AAA status of U.S. government debt, then will be the time to back off of expansionary U.S. fiscal, monetary, and banking policy. Then--not now.

This is similar to #2 in reverse: creating highly rated, largely liquid instruments when the demand for such assets outstrips supply, and selling them to soak up excess liquidity in the system. When might demand for AAA assets outstrip supply? I can think of two scenarios:

1. When there is a negative shock restricting the supply of AAA assets.
2. When financial markets are not functioning normally.

Obviously both of these have recently occurred. In the first case, many assets formerly thought to be safe and liquid -- Eurozone debt, mortgage-backed securities and other asset-back securities -- are no longer thought to be safe and liquid, so all of the money that was previously in those assets has to go somewhere; they have largely gone to U.S. Treasuries. In the second case, financial markets are still not functioning smoothly, so investors are still looking for quality. Right now, that means T-bills.

This is policymaking-in-crisis, of course; as financial markets normalize and other safe/liquid investments return to markets supply will meet demand, the price of Treasuries will drop (i.e. interest payments will rise), and the U.S. will need to pull back its expansionist domestic policies. But until that day, the U.S. is not only helping itself by spending in deficit. It is helping foreign investors (including governments) as well.

The Vatican Gets Religion on FinReg


Or is this "IPE Everywhere: Even in the Church"? Passed along without comment, although Alex might have more to say:

The Vatican Bank will adapt to meet international standards on money-laundering and other illegal activities, Pope Benedict XVI decreed Thursday, after some of the bank's assets were ordered frozen in Italy. ...

Italian prosecutors in September froze Vatican Bank transactions for the first time after the bank failed to provide all the information required under Italian anti-money laundering rules. ...

Thursday's decree sees the Vatican adopting four new laws to bring its bank and other financial institutions up to international standards. The Vatican has been working on the laws with the European Union and European Central Bank. ...

The Vatican Bank is "the most secret bank in the world," according to Jeffrey Robinson, who wrote "The Laundrymen," a book about money laundering worldwide. The Vatican's sources of income include its vast real estate holdings, and there is no way to find out how much money the bank controls, Robinson said. ...

The Vatican Bank is subject to particularly stringent anti-money-laundering regulations because Italian law does not consider it to be operating within the European Union.

It must supply more detailed information about transactions than European Union banks have to give.

2010 Best of the Blog, XII


Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From May 25, "Is the Subprime Crisis a Transformative Event?":

The new issue of International Affairs is out, and is titled "Global economic governance in transition". That is obviously a topic that interests me, so I was happy to find it, and a contributors list including Paola Subbachi, Andrew Cooper, Alexander Payne, and others is more than enough to attract my attention.

I'm still working my way through the articles, but I did want to highlight Eric Helleiner's contribution, "A Bretton Woods moment? The 2007-2008 crisis and the future of global finance." (Ungated pdf here.) Helleiner argues that those expecting the 2007-2008 crisis (which did not end in 2008 and still has not) to be a transformative moment spawning a new global order to be disappointed. But this is not because the system is irredeemably controlled by bank lobbyists, or obstructionists in Congress, or Chinese planners, or recalcitrant Greeks. Rather, it's because Bretton Woods itself was not a moment, but a process:

The success of the Bretton Woods conference was a product of a remarkable combination of concentrated power in the state system, a transnational expert consensus and wartime conditions. The absence of a similar political environment today makes its accomplishments very difficult to replicate. Even more important, the significance of the Bretton Woods conference itself should not be overstated. Not only did the innovative aspects of the conference agreements have long historical roots, but the implementation of the agreements after the conference was a troubled and painstaking process. The creation of a new international financial system, in other words, was not a product of that single meeting but rather the outcome of a much more extended historical process. The importance of this analytical point is brought out even more clearly when we examine the successor to the Bretton Woods financial system—what I call the ‘neo-liberal globalized’ financial regime—which emerged through a process with no clear foundational moment.

Helleiner identifies four phases in the process of change of governance structures: a legitimacy crisis, an interregnum, a constitutive phase, and an implementation phase. He claims that the global economy is currently in the interregnum, and a new global order could yet emerge. Helleiner argues that the subprime meltdown and ensuing policy responses have destroyed the legitimacy of the 'neo-liberal globalized' financial regime based on the Anglo-American model. Interestingly, he argues that the legitimacy crisis did not arise because of the crisis itself, but rather the responses of governments to it:

The fact that US and British policy-makers have responded to the crisis in a much more interventionist way than they recommended to East Asian countries during the 1997–8 crisis has undermined their credibility abroad. Since this crisis originated in their own markets, US and British policy-makers can no longer offer up their own regulatory practices as a model. As one Chinese official recently put it, ‘We used to see the US as our teacher but now we realise that our teacher keeps making mistakes and we’ve decided to quit the class.’

I have heard this claim quite -- that the Anglo-American economies were more interventionist in 2008 than the Washington Consensus proscribed for East Asia in 1997 -- a lot in the past few years. (I recall Emmanuel making it, for example, tho I'm too lazy to dig up posts right now.) It's always struck me as completely wrong-headed in two ways: first, it assumes that the Anglo-American economies were anti-interventionist; second, it assumes that the East Asian crisis and the subprime crisis are similar events.

It doesn't more than two seconds of thought to realize how absurd these claims are. On the first point, as Joshua Green's recent profile of Timothy Geithner (discussed here) emphasizes, large intervention in financial crises has be the modus operandi of the U.S. for quite some time. Green emphasizes the experiences of Geithner and Summers in the Mexican crisis in 1994 and the Asian crisis in 1997 in formulating this instinct, but the pattern is more entrenched than that: the U.S. has not hesitated to intervene in financial markets during panics since the Great Depression.

Which brings us to the second point, which is that the Asian financial crisis and the subprime crisis are not remotely similar. The former was a currency/balance of payments crisis, while the latter was a banking crisis*. Asian countries in the late-1990s had very different economies than Atlantic countries in the late-2000s. Why in the world should we expect the same reaction to different types of crisis in different countries? And why in the world does divergent responses to these crises represent a loss of legitimacy? Wasn't the big criticism of the Washington Consensus its "one-size-fits-all" ideology? If the Asian crisis had been a banking crisis, and if Asian governments had responded by bailing out their banks, does anyone think the US/UK/IMF would have been critical of that policy?

In fact, the Atlantic economies have been very consistent in their policies: they intervene when necessary to support their financial firms, boost their economies, or protect their investments. The conditionality attached to IMF loans given to Asian countries didn't exist because the Atlantic economies wanted to be mean to Asian upstarts, but because they wanted their money back. And here's why this was necessary: because unlike the US and the UK, Asian economies could not borrow in their own currencies, nor could they borrow from private markets at less than pecuniary rates. More developed economies can do those things, and when they can't they face fairly significant austerity as well. Witness Greece.

So no, I don't think the subprime crisis represents the beginning of a transformative process, according to Helleiner's own typology: if there is no crisis of legitimacy, there can be no interregnum. Whether the EU crisis eventually does remains to be seen, and in my opinion it represents a much greater chance**. What the Atlantic economies have done in this crisis is combine the monetary lessons from Friedman with the fiscal lessons from Keynes in pretty much textbook fashion. I'd hardly call that a paradigm shift.

*The Asian crisis eventually led to the collapse of LTCM... which caused the U.S. government to intervene in financial markets. I.e., the US reacted the same then as it did now: it protected its firms when their collapse would have broad systemic consequences.

**I don't necessarily consider the subprime crisis and the EU sovereign debt crisis to be two separate events, but I do think they have very different implications for global governance.

2010 Best of the Blog, XI


Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From May 10, "Parsing the Euro Bailout":

Well. The much-anticipated Euro bailout plan has been revealed, and it's impressive: just short of $1tn, $625bn of which comes from Euro governments, and the rest from the IMF*. Why so large?

Officials are hoping the size of the program — a total of $957 billion — will signal a “shock and awe” commitment that will be viewed in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008.

Yes, that's part of it. But the reason why TARP was so big was so that it wouldn't actually have to be. In other words, the U.S. government hoped that by making an enormous commitment to secure illiquid/insolvent institutions that were susceptible to runs, it would prevent those runs from even occurring, thus saving the actual financial commitment in the long run. To some extent this happened, as only about half of TARP's funds were ever disbursed (even after extending loans to non-financial firms, like the auto makers). I'm sure that Euro governments are hoping for the same thing; if the commitment is perceived as being sincere, then part of the follow-through may become unnecessary.

Euro governments aren't the only ones hoping to instill confidence:

Underscoring the urgency of the situation, President Obama spoke to the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, on Sunday about the need for decisive action to restore investor confidence. And in a sign of the spreading anxiety, the United States Federal Reserve, along with the European Central Bank and the central banks of Canada, Britain and Switzerland, announced the establishment of instruments known as swap lines. The swaps are intended to ease pressure on European banks and money markets by providing more liquidity. ...

The actions by the United States represented significant concern that the European crisis could spill over and hinder the American recovery.

Why might that be? Well, who owns all the sovereign debt of Greece and the other PIIGS? Already-weakened banks in the U.S. and Europe. U.S. banks are exposed to European banks to the tune of $3.5tn (yes, trillion), and if Greece or any other countries default, those European banks will go under and take U.S. banks with them. Obviously that can't be allowed to happen. The recent ratings downgrades of Greece's debt have already dealt a blow to banks' capital ratios. A default or restructuring would be devastating.

But this new bailout cash has only been pledged, not actually raised, so here's what I'm going to be watching over the coming days:

In a statement after their meeting, the ministers emphasized that the [funds] would expire after three years and that its use would be strictly dependent on “national constitutional requirements.”

The language most likely reflected the reservations of some governments to providing even more money than is available in bailout packages already approved.

Remember that TARP did not pass the House the first go-round. Europe now has to pass several of them in several different countries. There are strong domestic political pressures in some countries (notably Germany and Britain) to not bail out the PIIGS at all, and it might be very difficult to muster enough domestic support to actually procure this huge level of funds. Perhaps more distressing is the fact that Greece could end up defaulting anyway because of domestic politics there. A lot of national polities have to play ball in order for this to work the way it's supposed to work, and I'm not sure whether that will actually happen.

One thing is clear: one way or another, the eurozone will never again be as it was from 1999-2009. The mandate of the ECB is already shifting, the likelihood that one or more countries will leave the monetary union is still somewhat high, and the rise of economic nationalism throughout the zone indicates that there is less camaraderie than previously thought. Something's gotta give.

*Presumably the IMF funds will also be coming from Euro governments, although I'd be interested to see if that's actually the case. How will voters respond if the U.S. is spending $100bn to bail out Europe? Not well, I imagine.

Thursday, December 30, 2010

Germany's Rising Tea Party Movement

. Thursday, December 30, 2010

The Euro crisis has been a common theme on this blog, and we've been pretty emphatic in placing Germany, not the PIIGS, at the center of controversy. Germany is the largest economy in the region. It controls the eurozone's monetary policy. And it will be the one to pay the largest share of bailouts in the periphery of the monetary union. If the Euro is to survive beyond the crisis, it will require a lot of leadership and sacrifice from Germany, not just the countries enacting austerity.

At times we've wondered if Germany was up for it. A recent Der Spiegel article indicates that growing numbers of Germans are not:

In a survey conducted in early December by the polling firm Infratest dimap, 57 percent of respondents agreed with the statement that Germany would have been better off keeping the mark than introducing the euro. Germans, it seems, are gripped once again by their historic fear of inflation: According to the Forschungsgruppe Wahlen polling institute, 82 percent of the population is worried about the stability of their currency.

Of course, the fact that 57% of Germans think they'd be better off having never joined the EMU is not the same as wanting to leave it now. But the movement is growing, and there is now a constitutional challenge opposing fiscal transfers from Germany to Greece:

In the spring, [Rolf Hochhuth] joined a group led by Berlin-based professor Markus Kerber that has filed a constitutional complaint against the billions in aid to Greece and the establishment of the European stabilization fund, which was set up in May 2010. Hochhuth wants the deutsche mark back. "I don't know if this is possible. I only know that Germany lived very well with the mark."

The article also argues that a Tea Party-style movement may be brewing:

"The return of the mark? I can imagine that we could see the rise of a German Tea Party focusing on precisely this issue," says Thomas Mayer, chief economist at Deutsche Bank, referring to the conservative American political movement. ...

Pollsters like Matthias Jung from Forschungsgruppe Wahlen say that they can imagine the formation of a protest movement coalescing around euro-related fears. "The government has to prove that the bailouts for Greece and Ireland serve our own needs in Germany," says Jung. "If the billions in aid are not convincingly justified, it will lead to a legitimation crisis." ...

On a Thursday evening in early December, boisterous beer-drinking visitors were loudly enjoying themselves at Christmas parties throughout Munich's famous Paulaner Bräuhaus beer hall. Meanwhile, in a separate conference room, Schäffler was giving a dry presentation to the Hayek Society on the sins that led to the euro crisis.

The name of the society is very fitting. Friedrich August von Hayek, who received the Nobel Prize in Economics in 1974, was of the opinion that currencies should be a product like any other. Just as companies sell radios, private banks could circulate their own money -- the idea being that the most stable currency would rule out in the end.

The euro, as the presenter and audience quickly agreed, is bad money. It should be abolished. Since the introduction of the European common currency, Schäffler has counted over 70 violations of the Stability Pact, which limits the annual budget deficits of euro-zone countries to 3 percent of GDP. He has also vehemently criticized the European Central Bank, which has been purchasing government bonds from cash-strapped countries, even though EU rules forbid it from buying debt directly from governments. "We buy everything except animal feed," said the FDP politician to general applause.

I guess retrenchment following crisis is not a U.S.-only sentiment. Nor is rediscovering Hayak. Also like the U.S., this puts Germany's government in a difficult position:

German Chancellor Angela Merkel of the conservative Christian Democratic Union (CDU) faces a dilemma as to how to deal with ordinary Germans' concerns about the euro. If she takes their fears seriously, she will have to assume a hard-line stance toward countries that are drowning in debt like Greece and Portugal. But if she plays the iron chancellor, she will have no choice but to break with the Europe-friendly traditions of former CDU chancellors like Konrad Adenauer and Helmut Kohl.

It's more complicated than that, because a retrenchment from the Euro will have drastic consequences for both German exporters and the German banking sector:

Henkel has a mission: He wants to divide the euro. All of the "olive countries" -- as Henkel dubs the Greeks, the Italians and the French -- should pay in southern euros in the future, he says. The north -- in other words, primarily Germany -- would pay with the northern euro.

Economists oppose the idea: German exports would become more expensive and German banks would lose billions in southern Europe.

In other words, the choice isn't between bailouts or no bailouts. It's bail out the PIIGS -- thus saving the Euro, and German banks and exporters -- or scrap the Euro as currently constituted, bail out the banks, and let the German exporters suffer. The former is current policy, and I expect that to continue unless a critical mass of German citizens forces the government to change course. I don't expect that to happen, just as I don't expect the Tea Party in the U.S. to have any lasting effect on policy, but it's within the range of possibilities.

I don't know anything about German constitutional law so I have no idea if the lawsuits have merit. I tend to doubt it. And I'm not sure how the German political climate will shift over the coming years. But I do know that further European political and economic integration -- which seemed inevitable only a few years ago -- is DOA for now, and maybe permanently.

IPE Everywhere: The Original Tea Party


It was less about principle than we often believe:

Indeed, for consumers, anger over the tea tax had never made much economic sense. For one thing, many drank Dutch-supplied tea, which was smuggled and therefore tax-free. Benjamin Woods Labaree, the most attentive scholar of the Colonial tea trade, estimates that three-quarters of the 1.2 million pounds of tea that Americans consumed each year was smuggled. Meanwhile, the tax on legal tea was largely offset by a tea-tax refund passed the same year. But in 1772 that tax refund shrank, making British tea more expensive and enhancing smugglers’ price advantage. Tea piled up in the British warehouses of the East India Company, which owed money to the British government and also needed to ask it for a loan. Someone had an idea: why not raise cash by dumping the company’s surplus tea on the American market? Parliament agreed to help by restoring the old refund in full and by allowing the company to export tea directly rather than through merchant middlemen. With the new measures, the price of legal tea was expected to halve. Consumers would save, Parliament needn’t lose quite so much on its bailout of the East India Company, and smugglers would be driven out of business.

Boston’s big businessmen felt threatened. Not only might smuggling cease to be profitable but, if the experiment of direct importation were to succeed, it might cut them out of the supply chains for other commodities as well.

The whole article is about how prominent businessmen -- who were often smugglers as well -- riled up the public to support their (the businessmen's) economic interests. Highly recommended.

Via Blattman

2010 Best of the Blog, X


Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From April 30, "The Curse of the Carabosse":

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.

2010 Best of the Blog, IX


Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From April 26, "Against the Immigration Pharisees":

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.

2010 Best of the Blog, VIII


Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From April 3, "In Favor of Bailout Guarantees":

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.

Wednesday, December 29, 2010

2010 Best of the Blog, VII

. Wednesday, December 29, 2010

Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From March 20, "Department of 'Brad DeLong, Please Elaborate''':

Brad DeLong writes:

Needless to say, Paul Krugman is right: if China saves less and spends more, its capital exports drop. As its capital exports drop, its savers' demand for dollars in exchange for renminbi fall--and the value of the dollar falls relative to the renminbi. A revaluation of the renminbi is not an alternative to an increase in Chinese spending but rather part of the process of making that increase in spending come about.

What I continue to struggle to understand is, if China spends more, won't this shift China's demand for dollars from capital account transactions (buying fewer Treasuries) to current account transactions (buying more Boeings)? In fact, isn't this exactly what Krugman and DeLong hope will happen? If so, then Chinese savers' demand for the dollar falls, but Chinese spenders' demand for the dollar rises. Why would the renminbi appreciate?

So is the argument that China's marginal propensity to buy dollar-invoiced goods is lower than its marginal propensity to buy dollar-denominated assets so that increasing spending and reducing saving causes China to spend less on all dollar-denominated things (Treasuries and Boeings)? And, although it spends less, it could still purchase more because the real exchange rate has strengthened. So, Boeing sells more jets to China. If this is the argument, is there any evidence that it is correct?

I know I can't expect Krugman to drop by to clarify this for me. But DeLong swings by on occasion to keep Will in line; perhaps he could take a moment to fill in the pieces for me. No snark at all.

2010 Best of the Blog, VII


Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From March 27, "Sanctions, Sovereign Borrowing and Financial Integration":

Over the last couple of months, Sarah, Will and I have been working on our MA theses, each hoping to make a sufficiently important contribution to the discipline (or at least show sufficient potential to some day contribute something) to warrant the department to continue funding us and let us start studying for comprehensive exams and work on our dissertation proposals. I'm writing my thesis on the intersection between economic sanctions and finance, specifically how financial integration and sovereign borrowing affects a target state's decision to acquiesce to sender demands in high politics cases.

Earlier this afternoon, I stumbled upon an article titled "Don't Sanction Dictators" by Jason McLure that was published in Foreign Policy last summer that has a bit in common with the argument I'm trying to advance. In the piece, McLure argues that sanctioning dictators is a futile policy choice for advanced countries and uses the threatened sanctions against Eritrea as he makes his case. McLure argues:
Sanctions are made to cut countries off from vital international exchange. The trouble is, Eritrea already trades less with the outside world than any country in Africa and places 210th out of all 226 countries and islands for global commerce.
He then discusses the specific case of Eritrea and how sanctions against dictators won't work because they won't respond to the coercive attempts of larger states and concludes:
These lessons apply to sanctions on dictators more broadly. How do you punish North Korea with sanctions when its trading partners are already limited to a handful of countries -- none of which are likely to pay heed to a harsher set of rules? How do you choke Zimbabwe's Robert Mugabe when his strongest rationale for staying in power is to save his country from the hands of countries who would (and do) impose sanctions? Perhaps it's no wonder that such countries' leaders not only survive sanctions, but use them to justify bad behavior.
I'm really happy to see McLure make this argument, and the beginning of his logic is similar to what I am arguing in my thesis. However, McLure stumbles in a couple of ways, specifically when he conflates "international exchange" with trade flows and makes a distinction between autocratic and democratic governments that I argue actually doesn't matter. Analyzing sanctions episodes using a political economy approach, specifically looking at the influences of trade and finance on sanctions success makes a lot of sense and should give our explanations greater traction (at least I hope it does). This is one way in which the extant literature on economic sanctions has been surprisingly weak.

I disagree with McLure and argue that it's not that dictators are better able to withstand the coercive pressure of larger powers simply because of the characteristics of dictatorships, it's the fact that most dictatorships are not intricately linked with the international financial system to the point where larger powers (i.e. the United States) can impose sufficient costs to induce them to cooperate. This characteristic can't be solely attributed to dictators. It's in fact possible for democratic states to have very little integration with global financial markets and thus hold the same financial characteristics that are common in certain autocracies, and you can also have an autocratic government (Singapore) that is heavily integrated with and dependent on financial markets. Furthermore, I object for an array of reasons with immediately relying on trade flows to make an argument for sanctions success without engaging the finance side (if you want to know why, I'll have my thesis up on my website sometime by late April).

Larger powers have very little bargaining leverage over states that are not integrated with and dependent on the international financial system. Why? Because the costs that matter (borrowing costs that are directly imposed on governments, rather than trade costs that are dispersed across the population) can't be unilaterally imposed by these states. They need the cooperation of financial markets, and more specifically institutional investors in order to impose costs on targets. These larger powers need to increase the risk associated with investing in a given country, which increases the borrowing costs of the target state as investors seek higher interest rates and/or decrease exposure to that market in order to compensate for the increased risk. A credible threat to act if a government does not change its policy coupled with the effects (or potential effects) of sanctions themselves are sufficient to induce an increase in a target government's risk profile.

Institutional investors can only impose costs on states that require foreign capital to continue to finance their international debt obligations, roll over their debt and fund their operations. Those that are not sufficiently integrated and not dependent on global markets for access to capital will have dramatically lower costs when engaging in sanctionable (risky) behavior because they don't have to worry about increases in borrowing costs when calculating the costs and benefits of a given policy bundle. It is not that states with one type of political regime or another are better able to withstand coercive pressure from advanced, industrial countries, it's the fact that those states that are dependent on external sources of financing have the most to lose from engaging in that activity and can't withstand the coercive pressure. Non-integrated and non-debt dependent states' individual cost-benefit analyses are not sufficiently altered by sanctions threats or impositions and thus the costs associated with defecting from the status quo are very low. Therefore, sanctions episode success should be based on two indicators: 1) a country's degree of financial integration and 2) it's external debt to GDP ratio. Or at least I hope it is so that my thesis committee will find it in their hearts to pass me!

2010 Best of the Blog, VI


Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From March 13, "Geithner Files":

Things I learned from Joshua Green's very long (but excellent) profile of Timothy Geithner:

1. Contrary to popular belief, Geithner was not only aware of the dangers of derivatives and off-balance sheet transactions, but he spoke out about them repeatedly over a number of years. His talk about "fat tails" sounds like it came straight from Nassim Taleb.

2. Bush was routinely lambasted for not properly vetting administration officials, as was McCain during the campaign, but Obama seems to have chosen Geithner based primarily on one hour-long interview. True, Geithner had great references, but given the context -- the height of the financial crisis and administration of the new TARP program -- it still is a bit odd.

3. The Geithner financial crisis plan was forged in the Tequila and Asian crises in the 1990s. The plan: get the muscle of the government involved early and often, or deeper and more costly intervention will be necessary later. No surprise there. But the price of government involvement might be: "shut down weak banks, bust up oligarchies, and clean up corruption. Then withdraw." This is not the popular view of the government bailouts, but I think it expresses the pattern of government involvement pretty well.

4. The entire orientation of the Geithner plan was to minimize government involvement. That's why the stress tests happened, why the banks weren't nationalized, why TARP was structured the way it was. The goal was to recapitalize the banking sector by maximizing private sector input, and thus save taxpayers hundreds of billions, if not trillions, in the process. It was a big gamble, but it seems to have paid off pretty well.

5. Criticisms of Geithner as being too friendly to Wall Street are spot on: he has systematically resisted punitive measures against banks, and has even argued against tight monitoring of how TARP funds are used. The interesting thing? Unlike almost anyone else in senior levels of any recent presidential administration, he's a career bureaucrat. He's never worked on Wall Street, and recently turned down the presidency of Citigroup.

6. Geithner is a pragmatist above all else: “In a crisis, you have to choose: Are you going to solve the problem, or are you going to teach people a lesson? They’re in direct conflict.” This is not good horse-race politics, but if it leads to better outcomes it may be the best political strategy possible.

7. As I've mentioned before, TARP is turning out to be an exceptional bargain. Here's some figures:

Geithner likes to point out that after a year on the job, he’s spent $7 billion recapitalizing financial firms while private investors have put up $140 billion. TARP money is being repaid faster than anyone imagined, and if Obama gets the $90 billion tax on big banks he proposed in January, it could eventually be recouped. It’s likely that the cost to taxpayers will be much less than the 5 to 10 percent of GDP that the Cleveland Fed says is typical for a crisis, and possibly as little as 2 to 4 percent—about the cost of the much smaller savings-and-loan crisis of the 1980s. A recent Treasury study indicates that it could be less than 1 percent. By any reasonable standard, this would be an impressive achievement, and it would owe a great deal to Geithner’s strategy.

Green has some criticisms too, but they are pretty boilerplate: regulatory reform hasn't been strict enough, etc. Still, the overall picture that emerges is that Geithner has helped saved US taxpayers quite a lot of pain, and quite a lot of money, by taking the actions he did.

RIP Denis Dutton


He was a philosopher, but I knew of him as founder of Arts and Letters Daily, one of my favorite aggregator websites. Here is one obit.

Tuesday, December 28, 2010

2010 Best of the Blog, V

. Tuesday, December 28, 2010

Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From February 25, "A Little Light Game Theory (Greek Sovereign Debt Edition)":

A few days ago I saw Jeffrey Friedman extend his "Basel thesis" -- in which the risk-weighting scheme in the Basel Accords created the incentive structure that led to the subprime financial crisis -- to Greece's debt crisis:

So why did the bursting of the asset bubble in housing cause a banking crisis, freezing interbank lending and then bank lending into the "real" economy?

Because, according to the Basel thesis, Basel I bank-capital regulations, enhanced in 2001 in the United States by the Recourse Rule, encouraged banks worldwide and especially in the United States to leverage into asset-backed securities, including mortgage-backed securities, that were either government guaranteed (by Fan or Fred) or were privately issued but had an AA or AAA rating. How did the Basel rules encourage this? By giving such securities a 20 percent risk weight.

Translation: An AAA-rated mortgage backed security worth $100 required only $2 in bank capital at the 8 percent Basel rate for adequately capitalized banks. $100 x .08 x .20 (the 20 percent risk weight assigned to asset-backed securities by the Recourse Rule) = $2. By contrast, a commercial loan of $100 required $8 of bank capital, because Basel gave such loans a 100 percent risk weight. $100 x 8 percent x 1.00 = $8. Similarly, a $100 whole mortgage retained by the bank required $4 of capital, because the Basel risk weight for unsecuritized mortgages was 50 percent. With these risk weightings, securitized mortgage-backed debt offered significant capital relief.

Today's FT brings the news that "European financial institutions have $235 billion worth of claims on Greek debt, most of which is thought to be in government bonds." Why do they hold so much Greek government debt? Because the only category of bank asset treated more kindly by the Basel rules than asset-backed securities is government debt, which has a zero risk weight. I.e., no bank capital need be used to buy a government bond.

So today I was interested to read that some major banks are fanning the flames engulfing Greece:

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin. ...

As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.

Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations. ...

A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.

How can we square this circle? If Friedman is right, then banks are highly leveraged in the sovereign debt of Greece (and other countries). Basel rules required a 0% right weight for any OECD sovereign debt, but not all sovereign debt paid the same yield. Some states, like Greece, are relatively more risky than others, like the U.S., but they all had the same risk weight. So banks looking for a bigger profit would plow funds into the riskier countries at a higher interest rate because yields were higher.

Why, then, would many of the same banks now do their best to increase the risk of a Greek default? If that happens, and Friedman is correct that many banks are leveraged to the hilt on Greek debt, then they lose a lot of money. They can't be trading on moral hazard, since if they believed that Greece will eventually be bailed out and their debts made whole they wouldn't waste money purchasing insurance (a.k.a. credit default swaps). So what's going on?

One explanation is that a need for hedging has created the equivalent of a bank run in CDS markets, and this is creating a self-fulfilling prophecy. Another is that this represents a classic Prisoner's Dilemma: in aggregate all banks would be better off if none of them bid up the prices of CDS on Greek debt and thus relaxed the credit constraints on Greece, but each individual bank is incentivized to defect and insure themselves against potential default. Banks in competition against each other cannot credibly commit to cooperate, so (Defect, Defect) is a dominant strategy for all banks exposed to Greek debt. This creates a run, which manifests itself in CDS markets, and leads to a sub-optimal outcome for all involved.

If this is the appropriate model, then there would seemingly be a role for outside players to influence the game. Germany, or the ECB, or the IMF, or even the US could step in and provide financing for Greece to roll over their debt, meet counterparty obligations, and loosen the constraints that Greece faces in credit markets. But this simply raises another Prisoner's Dilemma: how could a third party guarantor be sure that Greece will not defect from that agreement and continue in its fiscal profligacy? Again, the dominant strategy seems to be (Defect, Defect) unless Greece can somehow credibly commit to austerity in order to meet its obligations. Unfortunately, it doesn't appear that they can.

Maybe the EMU should play a Grim Trigger strategy: they'll provide financing for Greece in exchange for austerity. If Greece defects, then the EMU boots Greece out of the monetary union and they're on their own. That threat might be significant enough to escape the Prisoner's Dilemma if it's perceived as being credible.

Or maybe not. It's a mess. As Carlo Bastasin says over at Baseline Scenario: "You cannot imagine really solving the Greek imbalance without – at least somewhat – correcting the German imbalance." Germany does not want to correct its imbalance. So Greece is probably screwed.

(edited for correct attribution, 8:41)

UPDATE: Felix Salmon sees this as a simple hedge. He's probably right.

2010 Best of the Blog, IV


Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From February 21, "Transparency and Missing Data"

Will may be done blogging about ISA, but I have one more post I'd like to get in. One of the most interesting session I went to (both in terms of academic as well as entertainment value) included a presentation by Peter Rosendorff and Jim Vreeland. R&V try to find a causal mechanism for a widely held assumption that democracies are more transparent than autocracies. Their argument is that governments facing reelection have incentives to reveal information about unemployment and inflation because doing so broadcasts economic success in good times and at least makes voters believe their government is honest in bad economic times. Governments not facing reelection don't have this same incentive.

Of particular interest is how they code their dependent variable, "transparency." They go to the World Development Indicators database and count the number of missing data points; missing data indicates opacity. This is a very clever way to get at a notoriously difficult concept to measure, but the project raises a few questions that I, along with others, posed in the Q&A:

1) Once countries start reporting they rarely stop. So, it may be that "bad-ass" (to borrow from other Rosendorff work and from Vreeland's concise explanation of it) dictators just refuse to report their data. But it also might be that leaders find ways to fudge the numbers (and if you think that the WDI has a good vetting process, look at their economic indicators for Greece over the past few years). That, combined with other reasons why states don't report (mainly issues of capacity) and the path-dependent nature of the decision to report, makes me wonder if we can really use missing data as a proxy for "transparency."

2) The much larger issue here stems from the authors conclusions in which they argue that their use of missing data indicates that political scientists should use multiple imputation to correct for biases created by missing data. But, this depends on your dependent variable. Actually, if their empirics hold up, this means in many situations we will have non-ignorable missingness and multiple imputation won't be able to help us. More specifically, if the probability of data (being used as an IV) being missing depends on the dependent variable, then multiple imputation will systematically bias created values. So, the moral is, multiple imputation can work in some situations but not in others.

Overall, though, a very entertaining and intellectually interesting project and presentation. Here's a link to Vreeland's blog as well.

2010 Best of the Blog, III


Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From February 16, "Damn Greeks (or Why Germany Never Wanted EMU in the First Place)"

With Apologies to Emmanuel. But this is the point of your no comment policy, right?

Otmar Issing explains why the EU cannot afford to give Greece a helping hand: "Participation in Emu brings huge advantages. The benefits of joining a stable economic area are greatest for countries that were unable to deliver such conditions before. Thanks to the euro, Greece has enjoyed long-term interest rates at a record low. But instead of delivering on its commitment at the time of entry to reduce public debt levels, the country has wasted potential savings in a spending frenzy. The crisis with which it is now confronted is not the result of an “external shock” such as an earthquake, but the result of bad policies pursued over many years. Bailing out Greece would reward such behaviour and create moral hazard of a dimension hardly seen before.

Damn Greeks. When I wrote my book on EU monetary politics, I argued that serious conflict of this sort was the inevitable consequence of EMU. Or maybe I took that out of the conclusion because everybody thought I was nuts. I did publish a paper that no one has ever read which nicely explains why German monetary authorities hated EMU as well as how they tried very hard to prevent it or at least limit membership to the right countries. It is the only game theoretic model I have ever published. Turns out it is spectacularly correct.

Postscript: This post looks even better now than it did in February. See, e.g., this article from yesterday's Der Spiegel online. Also interestingly, during the fall semester Dr. Oatley was introduced at a conference series as having written a book on EU monetary politics "that was very good, even though it wasn't relevant anymore". Oops.

Monday, December 27, 2010

Bizarre Geopolitical Analogy of the Day

. Monday, December 27, 2010

Philadelphia got a foot of snow over the weekend. The mayor declared a state of emergency. The NFL responded by postponing Sunday's scheduled game until Tuesday. Pennsylvania Governor Ed Rendell didn't agree with that decision:

"It goes against everything that football is all about," Rendell said Monday on radio station 97.5 The Fanatic in Philadelphia. ...

"My biggest beef is that this is part of what's happened in this country," Rendell said. "I think we've become wussies."

"We've become a nation of wusses. The Chinese are kicking our butt in everything," Rendell added. "If this was in China do you think the Chinese would have called off the game? People would have been marching down to the stadium, they would have walked and they would have been doing calculus on the way down." ...

"What do you think [Hall of Fame coach Vince] Lombardi would say?" Rendell asked Monday. "He would say that we've become a nation of wusses."

To which the citizens of Pennsylvania (should have) responded:

Actually, governor, if this was in China it would have been in a state-of-the-art, heated, dome. Of course, that wouldn't matter because they just would have geo-engineered the weather so there wasn't a foot of snow in the first place. There would have been high-speed rail that picked us up at our houses and dropped us off in our seats. They wouldn't be doing calculus because they've invented a new form of math that is even better, and then they invented computers (that only speak Chinese) to do the calculations for them. Basically, if this was China the government wouldn't suck so much.

The Grade Inflation Prisoner's Dilemma


A UNC professor that I spoke to this semester explained it thus:

"On the one hand, I don't want to give students high grades when they don't really deserve it. On the other, I don't want to punish students just for taking my class when they'd get a higher grade from another professor."

On our campus, the political science department has a reputation of being fairly tough with grades, although there is variation across professors. Sometimes students complain about low grades, and say that they would be higher in other departments. We respond that the only way to distinguish our best students is to have a fairly spread out distribution. If we give everyone higher grades, we help the mediocre students and hurt the best students. Which doesn't make sense.

As students of the prisoner's dilemma know, one way to alter the equilibrium of the game is through outside intervention. Some at UNC are trying to use administration to do just that. The thinking is that grade inflation will be less prevalent, or at least less pernicious, if grades are placed in context. A 'B' grade in a physics class with a median grade of 'C+' is more impressive than an 'A' in a humanities class with a median grade of 'A', so publishing class medians with grades changes what those grades actually mean.

As a closing aside, it seems like every semester the NY Times publishes a "state of college education" article that prominently features UNC.


2010 Best of the Blog, II


Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From January 23, "Chavez: U.S. Purposefully Caused Haiti Earthquake (and a lesson in overcoming bias)":

No joke:

Venezuelan leader Hugo Chavez Wednesday accused the United States of causing the destruction in Haiti by testing a 'tectonic weapon' to induce the catastrophic earthquake that hit the country last week.

President Chavez said the US was "playing God" by testing devices capable of creating eco-type catastrophes, the Spanish newspaper ABC quoted him as saying.

Evo Morales was only slightly more sane, calling US relief efforts a "gringo military occupation":

President Evo Morales said Wednesday that Bolivia would seek U.N. condemnation of what he called the U.S. military occupation of earthquake-stricken Haiti. "The United States cannot use a natural disaster to militarily occupy Haiti," he told reporters at the presidential palace.

"Haiti doesn't need more blood," Morales added, implying that the militarized U.S. humanitarian mission could lead to bloodshed. His criticism echoed that of fellow leftist, Venezuelan President Hugo Chavez, who said Sunday that "it appears the gringos are militarily occupying Haiti."

Robert Farley adds comment:

Now, I'm going to go out on a limb here and argue that Chavez' comment is substantially stupider than Pat Robertson's, if only because I suspect that God actually could cause an earthquake in Haiti if He so desired. I suppose we could debate the point, but I also find God's motivation (get back at the Haitians for their Satanic proclivities) considerably more plausible than that which Chavez and Morales attribute to the United States; the single last thing that anyone in the Pentagon wants to do right now is devote more troops and treasure to Haiti...

I'm with him, even though I'm an unbeliever. Robertson's quip is eminently more sensible than Chavez's (although I can understand Morales' skepticism of the U.S.'s intentions given our history in Haiti).

Chavez, Morales, and Robertson are interpreting current events through their ideological prisms. Their presuppositions are absurd, so this predictably leads to bias, and these biases lead to borderline-insane statements. Farley is right to poke fun at their expense.

Unfortunately, Farley's co-blogger Charli Carpenter recently made a similar -- though much less egregious -- mistake when she referred to the Haiti earthquake as a "climate disaster". I took umbrage in comments to that post, and she responded by posting this link as evidence that the Haiti disaster could have been related to climate change. But what does the author of that post conclude about the likelihood that the Haiti earthquake was caused by climate change?

Who knows.

I don't mean to pick on Carpenter, who is one of my favorite bloggers and who provides a unique and vital voice to the blogosphere generally and the IR blogging community specifically. I know that I regularly make the same mistakes in bigger ways. And her broader point -- that the U.S. and international community don't have a coherent disaster-response program, much less standards for infrastructure development -- is certainly well-taken.

But framing matters, and framing crises like the one in Haiti as a climate disaster can be counter-productive. Even people who acknowledge the reality of global warming can be skeptical that every natural disaster is a result of these processes, so claiming any particular crisis is a result of climate change can come across as opportunistic. That turns people off, as it did when similarly dubious claims were made about Hurricane Katrina. The fact is that no one can know, nor could they prove, that the Haitian earthquake or Hurricane Katrina was caused by climate change, and such needless spinning-of-wheels distracts from what's really important: improving and institutionalizing emergency responses to disasters, and improving global infrastructure so that the effects of disasters are not as extreme.

If it's counter-productive when Chavez or Morales or Robertson do it, it's no more productive when we do it. So let's not.

UPDATE: I can't believe it, but Chavez has just jumped his own shark:

In a recent speech against capitalism (South Americans must never get tired of them) Venezuelan President Hugo Chavez lambasted Playstation videogames because they encouraged violence, which is, uncoincidentally, just what capitalism wants. According to the babelfish translation of the spanish language article, Chavez warned that:

In those electronic warlike games “cities are bombed, pumps are thrown”, and are promoted by “Capitalism” to seed the culture of the “violence” that, is saying, guarantees that soon it can “sell arms”.

I’m going to assume that “pumps are thrown” is not a mistranslation, but rather some strange Venezuelan violence phenomenon. The best part of the article though is the picture juxtaposing it

Click the link for the pic; it's well worth it. When Hugo Chavez and Tipper Gore agree on something, you know it's wrong.

2010 Best of the Blog, I


Readers: Over the next week or so we'll be re-posting some of our favorite posts from IPE@UNC from this year, interspersed with new content. Partially because blogging is so ephemeral, and some of our posts are worth revisiting. Partially because it's winter break and we've got eating, sleeping, and catching up on research to do. Nominations welcome.

From January 19, "True or False?":

1. "Private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.”

2. "If a small-enough-to-fail bank takes too many risks and fails, the systemic consequences are manageable. If a TBTF bank takes too many risks and fails, it can drag down the entire economy."

Both come from here. The first is Alan Greenspan in 2005, but he has since recanted. The second is Felix Salmon, arguing that we should chop down too-big-to-fail banks until they are small enough to fail.

#1 is interesting to me, because Salmon seems to think that it is an obviously false statement; even its originator disagrees with it now. But I'm not necessarily convinced. First of all, what does Salmon mean by "government regulation"? Well, according to this post he means the Federal Reserve. Is it true that the Federal Reserve has proved better than market discipline at constraining excessive risk-taking by banks? I believe that's an open question. That doesn't mean that markets are perfect; but surely regulators aren't either. Is it obviously the case that regulators are less flawed than markets? Neither performed well in this crisis.

When you have systemic collapses, it's because you have systemic failures in risk-pricing. That means both markets and regulators get it wrong. But look statement #1 again: I think there is a strong case to be made that in general markets do a better job of disciplining banks than governments do, even if I accept that markets did worse in this particular case.

Now, about #2. Is it really the case that small banks can't cause systemic collapses? Well I guess you can do what Salmon does and make the answer tautological. If a bank collapses and sets off a broader collapse, then it was ipso facto TBTF. But Salmon is talking about chopping up TBTF banks until they are a manageable size. But how big is too big? Bank Herstatt wasn't very large, but it caused quite a bit of damage. The Great Depression was not caused/exacerbated by the collapse of one or two TBTF institutions, but rather by the spread of panic throughout the entire system. Smaller community banks failed first, touching off a panic that led to bank runs that caused other banks to fail. It's simply not true that we're protected from a systemic banking crisis if we limit the size of financial institutions.

Suppose we all do as as Salmon and others are asking, and move our money from large TBTF banks to smaller community banks. What happens the next time a panic enters financial markets? If we can isolate a handful of very large institutions, we can stabilize the system by stabilizing those few institutions. But if market power is much more diffuse, then containing the contagion is much more difficult: counterparty obligations can still have cascading effects, but it's more difficult to see how, when, where, and why. You may end up having to bailout or nationalize the entire banking system rather than just a handful of institutions.

In other words, perhaps TBTF is actually the best scenario. It allows us to focus recovery efforts where they can do the most good.

UPDATE: I should say that I'm not actually persuaded that any of this is actually right. Just thinking out loud.

Sunday, December 26, 2010

What I've Been Reading...

. Sunday, December 26, 2010

I wanted to pass along a couple of interesting works I've been reading over break as some of you may have extra free time over the holidays to check out some new stuff.

Nineteenth Street NW by Rex Ghosh - This is the first novel by international economist Rex Ghosh who has taught at Georgetown and Princeton and worked for the IMF as the Chief of Policy Review and Research. The book is a financial thriller about terror in the global financial markets. I've been hooked line since I started it this morning. I highly recommend it.

The recently released Quadrennial Diplomacy and Development Review (QDDR) by the US State Department. They have some really interesting sections on 21st century statecraft, economic sanctions, terrorist financing and financial terrorism.

Interesting piece by Carolyn Johnson in the Boston Globe on new research about group IQ and what makes one team of people smarter than another.

Imperial By Design by John Mearsheimer in the National Interest.

Companies granted licenses and exemptions to sanctions legislation by OFAC and allowed to do business within Iran, North Korea, Cuba and others.

I just finished Michael Lewis' Liar's Poker which for some reason had never read.

Also, I can't wait til this comes out on March 8: Homefront.

Friday, December 24, 2010

Johann Hari's People of 2010

. Friday, December 24, 2010

I don't have my own, so I'll just comment on his. It's a pretty short list, but then it's been a pretty bad year:

Under-Appreciated Person One: Bradley Manning. While we were all fixated on Julian Assange, the story of the young American soldier who actually leaked the classified documents passed almost unnoticed. ...

Here’s what really happened. Manning signed up when he was just 18 believing him would be protecting and defending his country and the cause of freedom. He soon found himself sent to Iraq, where he was ordered to round up and hand over Iraqi civilians to America’s new Iraqi allies, who he could see were then torturing them with electrical drills and other implements. ...

Manning had to choose between being complicit in these atrocities, or not. At the age of 21, he made a brave choice – to put human rights before his own interests. He found the classified military documents revealing the US was covering up the deaths of 15,000 Iraqis and had a de facto policy of allowing the Iraqis they had installed in power to carry out torture – and he decided he had a moral obligation to show them to the American people. ...

Under-Appreciated Person Two: Ellen Johnson-Sirleaf. The only African leader who appears with any regularity on our TV screens is the snarling psychopath Robert Mugabe, spreading his message of dysfunction and despair. We rarely hear about his polar opposite. In 2005, the women of Liberia strapped their babies to their backs and moved en masse to elect Africa’s first ever elected female President. Ellen Johnson-Sirleaf was a 62 year old grandmother who had been thrown in prison by the country’s dictators simply for demanding democracy. She emerged blinking into a country trashed by 14 years of civil war and pillaged by dictators – but she said she would, at last, ensure the Liberian state obeyed the will of its people.

In the face of a chorus of cynics, she did it. She restored electricity for the first time since 1992. She got the number of children in school up by 40 percent. She introduced prison terms for rapists for the first time. Now she is running for re-election in a fully open and contested ballot. ...

Under-appreciated Person Three: Senator Bernie Sanders. In 2010, the hijacking of American democracy by corporations and the super-rich became almost complete. ...

But one American politician, more than any other, showed there can still be a different, democratic way of doing politics in America. Bernie Sanders was elected as the independent socialist senator for Vermont with 65 percent of the vote in 2006, in a fight against the richest man in the state. ...

He won over even very conservative parts of his state to a self-described socialist agenda ... This is what democracy looks like. ...

Under-Appreciated People Four: The Saudi Arabian women who are fighting back. Women like Wajeha Al-Huwaider are struggling against a tyranny that bans them from driving, showing their face in public, or even getting medical treatment without permission from their male “guardian”. The streets are policed by black-clad men who enforce sharia law and whip women who express any free will. Saudi women are being treated just as horrifically as Iranian women – but because their oppressors are our governments’ allies, rather than our governments’ enemies, you hear almost nothing about them. Al-Huwaider points out that her sisters are fighting back and being beaten and whipped for it, and asks: “Why isn't the cry of these millions of women heard, and why isn't it answered by anyone, anywhere in the world?”

Under-Appreciated People Five: The real N’avi. The people of Kalahandi, India, saw the film Avatar and recognized it as their story. The land they had lived in peacefully for thousands of years – and they considered sacred – was being destroyed and pillaged for by a Western bauxite mining corporation called Vedanta, whose majority owner lives in luxury in Mayfair. The local protesters were terrorized – for example, in one case documented by Amnesty International, they were abducted by local gunmen and tortured. But they didn’t give up. They appealed for international solidarity, so Vedanta meetings in London were besieged by people dressed as N’avi. The Indian government finally responded to co-ordinated democratic pressure and agreed the corporation had acted “in total contempt of the law.”

I'll respond thus:

1. Bradley Manning could have resigned in protest. He could have gotten himself dishonorably discharged. He could have made a public fuss about why he was refusing to obey orders. He did not. He acted in secret and in illegal ways, and engaged in acts that were immature and probably counter-productive. Somewhat ironically, he may have even strengthened the U.S. security state and intelligence apparatus. All of these things have been covered in great detail elsewhere, so i don't feel the need to chase down links. Suffice to say, Manning's actions were silly, stupid, and most likely at cross-purposes to his desired ends.

His treatment since his arrest has been absolutely horrendous, I agree. I wish it wasn't the case, and I don't think it should be so. But when you sign up for the military you give up your constitutional rights. He knew that. The U.S. government is itching to make an example out of him and I think that's wrong and excessive... but (as far as I can see) he has no legal claim. WTF was he thinking? I feel sorry for him on a personal level, but he did something that was very stupid, very illegal, and very dangerous. In my opinion, that does not make a hero.

Would the world be better if there were more Bradley Mannings? Well, has the world improved as a result of the first one?

2. I've heard of Johnson-Sirleaf, but know little about her. Everything I've heard has been good. Sadly, it wouldn't take much to be a major improvement over the past. The U.S. has a shameful record of neglect of Liberia, its cousin country. Hopefully that can be remedied in the future.

3. I love Bernie Sanders, even though I'm not from Vermont nor am I a socialist. I just appreciate when people argue honestly rather than disingenuously, even if/when I disagree with them. And every day I find the libertarian slice of my brain matching up more and more with the Marxist slice of my brain... they meet when statists and capitalists collude, where regulatory capture becomes real and oppressive. There's been a lot of that sort of collusion over the past two-three years, and it worries me. I'm glad Sanders is around to call "shenanigans" on the whole thing, and if the Tea Party had any intellectual sense they'd line up as his allies, not his enemies, on many issues. I might not agree with him on the solutions -- in fact, I definitely wouldn't -- but I'm glad he's pointing to the problems. Nobody else is.

4. Strong regards to the Saudi women who seek emancipation and those who support them. This is the (global) cause I embrace above any other. Unfortunately, beyond offering solidarity I'm not sure what can be done from this end. So for now I offer meager solidarity, and welcome other suggestions.

5. I have not seen Avatar (on purpose) and I know nothing about the people of Kalahandi. I will say that I support the rule of law and the correction of negative externalities, and oppose corporate bullying. I do not care about "sacred" sites, and generally think that foreign capital can (and should be!) be used to help under-developed regions improve their standards of living. So I support protections against corporate abuses that violate the law, but I worry that this will be a Pyrrhic victory: win the battle (no corporate oppression), lose the war (no capital inflow).

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




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