Category Archive
The following is a list of all entries from the economy category.
Who wants to be a millionaire?
A.D. 1125: In this year sent the King Henry, before Christmas, from Normandy to England, and bade that all the mint-men that were in England should be mutilated in their limbs; that was, that they should lose each of them the right hand, and their testicles beneath. This was because the man that had a pound could not lay out a penny at a market. And the Bishop Roger of Salisbury sent over all England, and bade them all that they should come to Winchester at Christmas. When they came thither, then were they taken one by one, and deprived each of the right hand and the testicles beneath. All this was done within the twelfth-night. And that was all in perfect justice, because that they had undone all the land with the great quantity of base coin that they all bought.
The Anglo-Saxon Chronicle, 1124-27
It may have come to some of your’s attention that, as of last week, yours truly is not an investment banker any more. And none too soon, it seems.
Yesterday, in anticipation of the approaching shopping season, UK minister of finance Alistair Darling launched, to quote the Epicurean Dealmaker, a scathing attack against “chalk stripe suits, Soho strip clubs, and London property values,” by announcing that all discretionary bonuses in the industry north of £25,000 stand to get taxed at non-deductible rate of 50% against the employer’s net income. And a day later, Nicolas Sarkozy tentatively agreed to join the ride with Obama summoning a meeting of top bankers in the White House on Monday with an ominous agenda of “discussing bonuses and the economy” (although it currently seems that the US caps are going to be much more lenient). Firing a warning shot over the heads of London’s banking community, HM Treasury has also ruled that loans to staff, deferred bonuses, share-based payments and temporary salary increases will all be caught. There seems to be some confusion as to whom precisely this modern-day castration applies. If it is indeed “businesses regulated under the Financial Services and Markets Act” rather than simply “banks” as most of the news agencies report, then we’re also talking of hedge fonds, advisory boutiques and independent asset management firms. The only thing that the ruling doesn’t cover seems to be “guaranteed bonuses”, as extending the tax claim to those would apparently had exposed the Treasury to a legal challenge under the Human Rights Act (sic!).
Expectedly, this all has London’s contemporary mint-men howling with rage.
It would, of course, be beyond naïve to expect that investment bankers now shed their bespoke suits for sackcloth and sprinkle ashes on top of their heads–and that the industry will subsequently adjust to the annual £25,000/pp bonus cap (which honestly is an insult when compared with present levels of renumeration in the City). It simply means that for accountants and tax lawyers Christmas has arrived early this year, and will probably run well into Q2 of 2010. The UK regulators have created a hydra that they will be very, very busy battling with for years to come.
And the reason why this fight is such a desperate one is because, while no doubt pleasing the torch and pitchfork crowd to no end, the current ruling deals with effects rather than causes. The bankers’ bonuses did not create the financial crisis. They were not helping, for sure, but neither were they the cause. The idea of investment bankers living for their year-end windfalls and not giving a dime about what happens after December 31 is a deeply flawed one–I will not get into this here, but if you’re interested then go and read this piece. It really is a case of a goose that lays golden eggs and every investment banker sleep-deprived analyst can explain you that it is a trivially easy choice to sacrifice a couple of those eggs (which is what Goldman’s executive board seems to have done this week) in order to keep the goose alive and in good health.
So, the reason why investment bankers make obscene amounts of money is because investment banks make it by boatloads, and that it simply happens to be a business where people matter a lot, and as long as there’s a lot of money to be distributed, it will, one way or another. Thus the proper way to curb those 7- and 8-figure bonuses is not to apply a tax from hell to payouts but to cap the profitability of the banks themselves. For this, however, I am not holding my breath. It is both a lot easier and probably also a lot more popular to wage a valiant battle with the hydra of bankers’ bonuses.
Have a good crisis!
George Soros who, by his own words, has been “having a very good crisis” is reportedly dishing out $50 million, with $150 million in matching funds to follow, to set up an institute (lining up four former Nobelists in economics), establish a journal and set aside money for research grants and conferences – all to foster a sea change in what he and many others consider a few decades worth of economic science dominated by “free-market fundamentalism”. While I don’t really doubt Soros’ motivations what makes this bit of news more than a little ironic is that his most famous and probably still the most profitable bet against the Bank of England was to effectively demonstrate that just as free markets work until they don’t, the same also applies to regulated ones. And, while it may be convenient to forget it, the billions that Bank of England lost in its titanic struggle against Quantum and other hedge funds in 1992 was “a taxpayers’ money” too, just like what was (and still is) thrown at 2009 crisis by governments and central banks all around the world.
Coming back to the initiative – the stated aim of the whole endeavor is currently a negative definition: it is apparently against the prevailing orthodoxy. It would be a lot more interesting instead to hear what will they all stand for. In the light of the recent events it has became very easy to cry wolf and denounce laissez-faire capitalism and free markets. It is a lot more difficult to come up with a serious alternative though. As the perceived center of problems seems to gravitate towards the past liberalization and de-regulation of financial markets, the obvious and understandable knee-jerk reaction has been to go in the opposite direction and call for more regulation. At a closer examination this will not look such a promising route, however.
In Stanford’s “Policy Review”, Arnold Kling makes a very convincing, if lengthy and a bit technical point that the failure to preempt the crisis was not due to not having a proper regulatory framework in place, or regulators not having enough power or proper tools in their hands to react to what they should have seen as pending problems. It was due to the lack of knowledge and understanding. And therefore the answer, the way to avoid the same thing happening in the future, is likely not to be found in having more regulation – for the regulation is going to fail the same way as markets did.
Happy now?
I happened to leaf through the Financial Times today and came across this very interesting piece of news. Apparently there has been a bunch of people working, led by Nobel laureates Joseph Stiglitz and Armatya Sen, trying to figure out a more meaningful way to measure and assess economic progress than this reflected by the all-important GDP growth. Of course, in many ways the flaw is an obvious and glaring one, and has been pointed at many times already. Gross Domestic Product that GDP stands for is a general and aggregate metric that simply reflects the monetary value of goods produced and services rendered within the borders of a nation. And while in general it is certainly true that there exists a positive correlation between high GDP value and high standard of living, the relationship is not a trivial nor a direct one. For one thing, GDP measure completely neglects the dimension of distribution of wealth and value created in the society, and while it may be tempting to claim that “rising tide lifts all the boats”, in practice it is a fact of life that some boats get lifted more than others. Another well known fact is that in terms our personal happiness, the absolute amount of money (or goods, or whatever) we happen to possess is quite a bit less important than the relative wealth compared to that of our immediate social circle, or society in general. And so, what Sarkozy was suggesting is that measuring the success or failure of economic policies based on GDP growth leads us astray – and therefore that measure should be dropped and replaced with a more meaningful one(s), that would take into account things like availability and quality of health care, or time available for leisure, etc.
This all reminded me immediately of my trip to Bhutan last year. Bhutan has long been famous for pursuing GNH instead of GDP. GNH, a shorthand for Gross National Happiness, is a complex metric that is meticulously traced and aims to reflect a wide range of different aspects of society and thus provide an overall view of human happiness instead of narrowly focusing on the creation of financial wealth – which from the Buddhist point of view is, if anything, detrimental to the project of being happy. Bhutanese holistic approach to being happy consists of 72 different components and includes things that would probably seem rather esoteric for most westerners, such as “Frequency of prayer recitation”, “Ability to understand lozey”, “Zorig chusum skills”, “Knowledge of mask and other dances performed in tshechus” and “Purchase of second hand clothes”. But in general, this all further underlines the point that being happy is something that is inevitably grounded in local circumstances and is difficult to directly convert into dollars or ngultrums – although it clearly seems to be the case that while being rich is no guarantee towards being happy, it is easier not to be unhappy if you have more money rather than less.
It remains to be seen what comes out of this – and whether it is simply another knee-jerk reaction to the anniversary of the financial crisis (though it seems that Stiglitz’s workgroup got started already 18 months ago, therefore predating the onset of meltdown by about half a year). I for one remain skeptical to the demise of GDP as a measure of economic performance – we have had things like Human Development Index and so on for many years and while there is no serious doubt to their usefulness, they haven’t came to replace the hard and easy applicability of GDP. But I guess we’ll see, and I would be rather glad to be wrong on this account.
West coast here we come
So tonight we will leave Guatemala and fly first to San Salvador and then on to San Fransisco. Six days is not long enough time to do a country like Guatemala full justice, but we did manage to take a trip along the main gringo trail around the Guatemala City, taking in places like Antigua, Chichicastenanga and Panajachel. In addition it enabled us to skip the whole Bible and Jell-O Belt in favour of a very friendly and colourful country – all in all a good deal.
On the news front there was an interesting bit last week – in addition to recently overshooting their estimate on the cost of the UK bank bailout to the tune of £70 billion (missing the mark roughly by 50%), IMF was forced to aknowledge that their official figures on the Eastern European external debt levels were grossly overestimated. The ratio of external debt to foreign exchange reserves for the Czech Republic was adjusted from 236% to 89%, in the case of Estonia the respective cut was from initially reported 210% to somewhat more benign 132% – with more likely to follow. Unfortunately this doesn’t mean that all is well in the proverbial Kingdom of Denmark, and I for one wouldn’t expect investors rushing to buy CEE assets or setting up new factories now that they learned that the leverage is much lower than formerly thought. It does, however, mean that both the risk of a complete meltdown as well as the outcome, should it still happen, is a lot less drastic than it appeared before. With all that in mind, it is really interesting to note is how little attention did this news get. I suspect that had this thing been the other way around – i.e. IMF correcting the indebtness figures upward by about 2x – the whole thing would have been all over the place. I guess it simply goes to underline how scared everyone is – good news are treated as inconsequential as everybody knows that the situation is bad.
A whole new genre
This afternoon I went to see a screening of a recent documentary here at Emory, with a full title of I.O.U.S.A. – One Nation. Under Stress. In Debt. It’s a rather small budget simple movie that, much like The Blair Witch Project ten years ago, aims to scare the wits out of its American viewers. Quite like in the BWP where the good people of Burkitsville might or might not have heard stories about the child-stealing ghost of Elly Kedward, there are streetwalk-interviews in IOUSA with your average Americans, who in general are completely clueless and oblivious of what a budget or trade deficit might be and why precisely should it be a problem. There’s similarly shaky camerawork and instead of amateur actors of Blair Witch you’ve got Alan Greenspan, Paul Volcker, Robert Rubin and Warren Buffet telling you the similarly spooky things that are about to happen to USA very soon unless Americans mend their ways. Only that Greenspan and Buffet are no actors and they’re not reading a script. For an added dramatic effect the movie was presented (and followed up by a Q&A) by a former US State Comptroller from 1998 to 2008, David M. Walker, who was present in person.
Apparently the official national debt of the US is currently somewhere around $11 trillion. Again, in order to help lay people visualise what are we talking about – here is a helpful link in that regard. Of course, on its own 11*1018 expressed in dollars might be big amount of money or not so big – depending on what we compare it to. So how about that – according to the CIA Factbook, the US 2008 Gross Domestic Product was $14.33 trillion. Not too bad, the national debt is less than 80% of the annual output of the US economy. Somewhat worse news is that it is growing pretty fast – according to the current estimates, this year’s budget is in the red for another $1.8 trillion or thereabouts, while the GDP ain’t doing that hot either.
However, the scary point of the movie is that this is only part of the story, and a small part at that. In addition to direct public ($6.3tr) and intergovermental ($4.3tr) debt, the US government has apparently a total of about $43 trillion in unfunded liabilities mostly in Social Security and Medicare, on top of a few more trillion here and there. You can get the whole breakdown here. Of course, I’m really not in a position to assess what part of this is going to be unavoidable and what can be simply cut – and something certainly will have to be. And while this doesn’t necessarily have to mean that the USA will be bankrupt in a decade or so (although quite obviously this kind of a thing is no longer a realm of science fiction for an increasing number of people in the US), it does mean that the current levels of spending and saving are not sustainable.
The movie doesn’t even get into the issues of private debt which has, if anything, ballooned even faster. Or discuss the fact that the savings rate that has now steeply rebounded from the negative levels of last few years is a bit of a mixed blessing currently, as every penny saved also means penny not spent – and that will further add into the contraction of the economy.
The movie has apparently caused a bit of a stir, ranking #5 in amazon.com among documentaries. And it seems that there will be a rich field of inspiration to draw upon, as well as a wide market of viewers to cater to, for other similarly minded practicioners of the economic horror documentary genre, both in America as well as in Europe.
Millal maksan…
Kirjutasin just ühe pikema hirmu- ja õudusloo koduse banaani ponzi-vabariigi majanduse teemal Memokraati. Nõrganärvilistele ei soovita.
Lucky number
Anyone remember when precisely did Beijing Olympics start? The right answer is August 8, 2008 at 8 seconds and 8 minutes past 8pm. The reason being that 8 (pronounced ‘bā’) is a very auspicious number in Chinese tradition as it sounds very close to the word for “prosperity” (发财, pronounced ‘fā’).
Now, the fun thing is that last month Premier Wen Jiabao announced that the Party will set a target for China’s 2009 GDP growth at – you guessed it – 8%. You can read this article for more thorough discussion of China’s long history with 8% GDP growth target, and in the past it has substantially underestimated the actual performance. However, aiming for auspicious 8% this year is nothing short of lunacy (here are some charts to put things in perspective – pay attention to the industrial production one in center). Or it simply goes to illustrate a principle for estimating the economic performance on the grounds of political wishful thinking – an approach that is by no means confined to Chinese politics, although probably honed to perfection there.
Avanti popolo
I think I’m gonna lay low tomorrow, sneak into the library, lock the study door and draw the blinds. In the US, public demonstrations and rallies are nothing out of ordinary. However, this particular one is different – tomorrow, on April 11, there are rallies scheduled to take place all over the United States against… the bankers. That’s right, the bankers. And take a look at the rhetoric: “We must break up the banks and never again let them get so big that they distort our politics and take down the economy.” Or: “Dismantle the power of the financial elite and make policies that keep a new crop from springing up. We want our economy and politics restored for the public.” For someone who grew up in the USSR this thing has déjà vu written all over it.
This used to be the country of Gordon “The Greed is Good” Gekko. This used to be the country that celebrated a person’s right to strike it rich and then enjoy it without having to excuse himself. Of course, America has a long tradition of individual crucifications of former star bankers such as Michael Milken or Nick Leeson, but those were considered simply bad apples in an otherwise good, if not entirely moral, lot. Not this time.
The US has a long history of rallies and popular dissent against racial oppression, but the differences of class (which have always been an important part of public consciousness in Europe, particularly in France) have been viewed as something quite natural and, above all, justified. After all your success is up to you in America and the traditional wisdom has always been that if you ended up on top then you’ve apparently earned it.
It will be interesting to see how many people will actually show up tomorrow. I’m sure that for most of the people who do it will be more of an occasion for venting their anger “against those who got us into this mess yadda-yadda” rather than asking for a genuine change in society – so one shouldn’t really read too much into it. But the mere fact that this thing is taking place is already telling. James Kwak finished his post on baselinescenario.com with a line “And don’t forget your pitchfork. (Just kidding.)”. I wonder how long will it remain just a joke, as many people seem to be kidding along the similar lines recently:
Bad weather ahead
This was initially meant as a response to the point that came up in comments to my previous post – but then I thought it would be worth giving the topic a more prominent airing, as it relates to many opinions that I have voiced here in the past, and will probably be voicing in the future. In his comment, a friend of mine referred to an interview with Ken Moelis in Financial Times. There is one particular place in the beginning of interview where Moelis says “I don’t believe the economy is fixable, just like the weather. We don’t send anybody out to fix the weather. We put on a raincoat.”
We live in times where our needs have come to include such things as italian sports cars, luxury condos with a sea view and adjacent golf course, paintings by modernist masters and a three piece suite on hire purchase in a range of fucking fabrics. By the same token, our economy has grown incredibly complex and is covering not only the exchange but also the production and provision of goods and services, allocation of capital and other resources, and is dictating the operation of areas like education and culture. The weather metaphor is certainly useful in depicting the level of complexity of our current economical establishment – as there is a huge number of different forces and influences shaping both our meteorological and economic environments.
However, I think it is important not to lose track of the fact that economy, at its’ core, is a system of reciprocity: we do stuff for other people and they do other things for us. Economy is meant to facilitate that kind of a reciprocal exchange, to provide with an infrastructure and proper incentives. This infrastructure and incentives are not a given – they are designed, reproduced, legitimised and maintained the way they are only because we have collectively, either implicitly or explicitly, agreed so. This is a fundamental difference between economy and the weather (where it rains or shines quite independently of what we mutually agree) – and meaning that not only we can, but also that we should change them, once the system currently in use fails to serve the broader objectives of the society, rather than just “look for the raincoat”.
There is of course a wide array of opinions what precisely should those “broader objectives” be and what exactly constitutes a fair reciprocal exchange – and this is all fine. However, it is important not to confuse means for ends and start thinking, that economy is something transcendent, that there exists an ideal, pure form of it (which usually tends to mean “free market” in its unfettered best). There quite simply is no such thing – market is a human invention and not a discovery. Of course, some systems of reciprocal exchange work better than others and of course, we can’t agree on anything that comes into our collective mind and simply wish it to working. There are rules in economy that are almost as stringent as laws of physics but, unlike in physics, the reality that laws of economics deal with is 100% man made. As far as we do realise this it is very hard to justify the point of view that as we do happen to have a certain kind of an economic system it should follow that we simply have to accept the outcomes the way we have to accept the rain or cold.
Servants of the Universe
Simon Johnson, currently a professor in MIT Sloan School of Management and formerly the chief economist of the IMF has published a long but very accessible and interesting overview of the financial crisis from a somewhat unusual viewpoint – namely what would IMF tell the US government if it could tell them anything. Johnson, by the virtue of having worked for the said organisation and having seen the unfolding of several crises in different countries up close and personal, is very disillusioned over how easy it is going to be to deal with deeper reasons and implications of this particular one. Now that the US should take the same medicine that the IMF has long been advocating in different places all over the (mostly Third) world, we will likely see how difficult it is going to be to administer it.
The main point of the article is that, just like in places like Indonesia, Ukraine, Philippines or Argentina before, the US has a similar (if somewhat more subtle and not as obvious) oligarchy that has a huge vested interest in dealing with the crisis in a particular way that would preserve the structure of the economy and society at large. The problem is, of course, that this particular way is not compatible with necessary structural adjustments and, instead of writing off losses where they originated, aims to distribute them over all the economic and social strata. And the relative subtleness of American oligarchy (which I think applies to the Western capitalist societies in general) compared to, say Russian or Indonesian one, makes it both much harder to see as well as to deal with – it relies on cultural rather than financial or economical foundations. Its rise to dominance is actually relatively recent development. This is illustrated by two particularly telling charts in the article.
Despite not being overly optimistic on how easy they would be to put into practice, Johnson does offer some solutions. Like Paul Krugman Kenneth Rogoff, he believes that the financial system needs to be recapitalised to a much larger extent that it currently is, and has previously maintained that doing that without also taking control (i.e. nationalising) would amount to a huge handout of public funds. This – the so-called “Swedish solution” that has also been supported in principle by Alan Greenspan and Kenneth Rogoff, and recently mentioned in passing and then dismissed on cultural grounds by Obama – entails nationalisation of banks, subsequent recapitalisation and then selling them back to the private sector once the storm has passed. There is a marked stress on noting that nationalisation is temporary, as permanent state ownership of the banking system runs very much counter to what most of the politicians, economists and population in general in the West would intuitively recognise as a good idea. However, regardless of whether the financial system would remain private or would be re-privatised if the nationalisation were to actually take place at some point, there seems to be a strong consensus that this should not mean turning back to “business as usual” under the same rules and regulations that we have had before. Johnson has underlined the need to “break the financial oligarchy” and suggested that the way to go would be to have, instead of current financial behemoths, a network of small institutions. However, I think there is an alternative to this, which would amount to a much more comprehensive solution.
If the current system were to be broken up, it could be done not by splitting the current giants into smaller, hopefully more manageable copies, but instead by splitting it along the lines of infrastructure and, for the lack of a better word, “merchant banking”. The “merchant banking” assets could indeed be split further into smaller units, in order to avoid piling up of financial risks that could once again undermine the whole system. The “infrastructure” part – basically retail banking along with plain vanilla lending – should be treated as a utility, just like our water and electricity companies or transport infrastructure. Those can all well be in private hands and don’t need to be micromanaged by the state. However, they often do operate under a specific kind of a constraint: their profitability is capped. Before crying foul and predicting the collapse of the financial system and the whole world, consider the utility companies – their profits being capped has not caused the quality of the service decline or even stagnate, nor have the investors turned away in disgust – quite to the contrary. Utility companies are, with their security and usually excellent earnings visibility, very much sought after investments.
As it happens, this would also take care of the perceived problem with “bonus culture”. Although I am sure that the relationship with bankers’ bonuses and banks’ profits is to some degree a mutual one, it is also clear that if banks were to become utilities it would also mean the disappearance of huge bonuses that seem to cause so much anger and resentment right now. It would certainly make the whole industry a lot less lucrative for certain people or at least for certain aims, but this is not necessarily a bad thing. I recently read an article somewhere that compared the current generation of bankers to the military of 18-19th century Europe – who used to be masters of their respective universe but are now perceived and treated as a public service. Another similar example could be Japanese samurai class, who, from their initial rise to power and eminence with Kamakura shogunate, became simple bureaucrats by late Tokugawa, and then were finally disbanded even as a nominally ruling class by Meiji Restoration. And although this would be quite against my own personal interest, I do believe that in the wider perspective this is what also needs to happen to bankers – they need to become servants, rather than masters of the universe.
