Time for a New Plaza Accord?

When politicians discussing the current economic situation tell us "it's likely to get worse before it gets better," it seems they weren't kidding.

Yesterday the U.S. Senate failed to come to an agreement on a $14 billion bailout for the U.S. auto industry, and this morning, the Japanese yen hit a 13-year high against the U.S. dollar, a troubling signal for two of the world's largest economies.

Apart from Germany and China, Japan is the world's preeminent export economy, relying on a weak Yen to peddle its goods to primarily the U.S. market. With slumping demand in the U.S., and the rapid depreciation of the dollar versus the yen, Japan stands to lose out significantly. This has helped to reduce Japan's current account surplus significantly, as exports fall. The drop in the oil price might help in relieving the costs of imports, but a country once known for its massive trade surpluses seems to be losing its edge.

I have argued frequently in favor of a larger role for Japan in the world economy. Too infrequently during the current economic crisis have we seen the kind of leadership that Japan is capable of and responsible for. Perhaps it is the ruling Liberal Democratic Party's precarious political prospects that are discouraging it from taking the risky but potentially rewarding policies needed to stabilize the world economy.

It may be time for a new type of "Plaza Accord," in which the U.S. coordinates with Japan a managed exchange rate revaluation. Only this time, it is the U.S. dollar, not the yen, that is increasingly depreciated and needs propping up. Another factor is that the value of the dollar, of course, has been partially supported by the massive stockpiling of U.S. dollar reserves by China, which itself enjoys a massive trade surplus because of an undervalued, but steadily appreciating, currency. But now, the problem is the Chinese also face the prospects of slower economic growth, primarily due to the American recession. And like Japan, China may face a threat of a political reckoning if it cannot help its people absorb the impact of the global recession.

Some more thoughts...

Here are some very nicely put thoughts on the Mumbai attacks from consider, evaluate, act.

There is more evidence that a Pakistani group was involved with these attacks...let's hope Pakistan and India can work with, not against, each other.

The Unsung Heroes

One of many stories of heroism in Mumbai:

http://www.tehelka.com/story_main40.asp?filename=Ne061208ro_ticket.asp

A Bleeding Heart...

It has been a long while since I've written, primarily because school work had finally gotten the best of me. This latest post is really just a dedication to the people of my motherland, my brothers and sisters in India, who are in pain after last week's terrorist attacks.

As everyone in the world knows, the 26 November attacks in Mumbai were devastating. I still feel nauseous thinking about it and I haven't been able to sleep since it happened. But if I know anything about India, it is that the country will bounce back. The country gained independence on non-violent ideals and I hope it fights back with these same ideals.

Still, there are things that I think have been missing from the entire discussion of these attacks. Here are some thoughts:

1. Trying to galvanize the world against terrorists is a noble thing to want, and it makes for rousing speeches from dignitaries ranging from Prime Minister Manmohan Singh to President George W. Bush. But the terrorism threat that confronts the United States is distinctly different from that faced by Israel, Iraq, Afghanistan, Pakistan, Great Britain, Sri Lanka and of course, India (to name only a few).

So while international cooperation is a no-brainer in the war on terror, each country that faces terrorism has domestic issues that are tied to those terrorist threats, and we must not forget that. Palestinian terrorism is connected to the Israeli-Palestinian situation, a very complex matter. Terrorism in India mostly emanates from radical groups who use violence to express a belief that Kashmir should be free from Indian control. And so on. We have to temper our expectations that a global effort - that is further intensified after last week's mayhem - can solve the world's terrorism problems, much of which are connected to long-standing regional or domestic disputes.

2. Not Secure Enough? - India's cities and streets are porous, and that is what so many people love about it. A great way to describe India is to call it "organized chaos." It is as diverse a country you can get, a place that is bursting at the seams with a billion people. And while India is still very stratified socially, it truly is a land of liberty, of imagination and thought. Music blares on the streets. Street food vendors are everywhere. Conversation and currency flow like water. It is a reason why Indians take so much pride in Mumbai, a distinctively entrepreneurial, spirited and on-the-go city.

It is the city's openness that the terrorists took advantage of. To say the city is lax on security is one thing, but to fortify the city as a result of last week's events will not solve the problem. It will only suffocate a city that is meant to be vibrant and flowing.

3. "India's 9/11" - To call the latest event India's 9/11 is certainly appropriate - the terrorists had a uniquely ghastly approach to their killing spree. But what troubles me is that the attacks hit headlines only when the five-star hotels - with foreign guests abound - were named as attack sites. Even as the 100+ death count of Indian citizens mounted, the casualties among foreigners and VIPs were highlighted. Is it India's 9/11 because it hit home with folks from the West?

This crisis also came at a time that allowed the West to focus its attention. It transpired as the American and European news cycles were kicking into high gear for the day. And Americans were starting their Thanksgiving holidays; the news networks had their undivided attention through the weekend.

Like the countries named above, India has been a victim of terrorism all too often in its history. Violence has maimed and killed hundreds of average-Joe-Indians - Hindus and Muslims, Jews and Christians alike - who make a few bucks a day and catch a packed train home from the Victoria Terminus, where attackers also imposed their will. While this attack opened up India's and the world's eyes, let's not forget that this is but a chapter in a long history of terrorism. And if future attacks occur at sites that may not attract businessmen from foreign countries, I would hope it gets the same level of coverage in the news media.

Regardless of their national origin, each victim should be honored. I simply hope all victims will be treated with equal care.

4. Slow to respond - Many have been quick to criticize the Indian police and security forces for responding slow or ineffectively to the attacks. But it is important to realize that India is still a developing country that has myriad issues to deal with. Among them is a lack of a competent civil service and the presence of corrupt elements throughout government. The country's national guard did a highly admirable job, and they should be commended for responding and decisively handling a complex and uncertain situation that would not have been easy for any country to respond to - even the industrialized West. So, while the public conducts a postmortem of the attacks and bemoan the lack of security, we need to temper our expectations of what a country like India really can do in the face of such a devastating attack. Institutions that provide for public protection can take years to build. I hope the Indian government make a serious effort to examine its security gaps, while also making these efforts fiscally sustainable. The attacks also highlight the importance of preemptive intelligence gathering, an activity that even the United States is learning how to do post-9/11.

5. Indian Nationalism - The best thing Indian citizens can do is demand more from their government. But I fear these attacks will stoke Hindu nationalism and call for a return to right-wing (and tacitly anti-Muslim, anti-Pakistan) politics in India. What makes 9/11 different from 26/11 is that the former unified the United States, while the latter may be a divisive agent in India. Political instability is the last thing that India needs, and I hope that this does not jeopardize much of the goodwill between India and Pakistan. Pakistan itself is a victim of much more frequent episodes of terrorism, and must deal with the constant threat of violence from people within its own borders.

Anyway -- I am sad for my country and sad for the world. I hope we all can keep fighting against terrorism in all its forms, and someday this will all stop.

Exit Poll

There's something about crossing the River Thames at sunrise on November 5, 2008.

It is not the view of the east, where an ailing, once-venerable financial district that controlled the world's affairs for two centuries sits, awaiting the storms of the current times to pass.

Or to the west, the seat of Parliament, where MPs and PMs have tried to re-tool a fragile economic and political system, awaiting the emergence of someone on America's shores to take leadership in solving a crisis that was largely America's doing.

But something in the rising sun on the horizon of a country foreign to my own, the morning after an important election, makes me so proud to be from the United States of America.

Senator and President-elect Barack Obama has a lot to do to prove to the United States that his pledges for "hope" and "change" can be followed through with. But his resounding victory is a signal that the great nation of the U.S. has come to its senses.

Sen. Obama's speech, with figures such as Jesse Jackson - who laughed and cried with the great Martin Luther King Jr. and Robert F. Kennedy - letting the tears flow, was an inspiring spectacle. It makes me not only speculate, but know, that my 4-year-old niece, and her children, will understand the truly global world that we have come to experience, and will see it possible to run for office and make a change if she is inspired to do so. And it will be so not because she may be a Democrat or Independent or Republican, but because she is American.

Still, there were the panes of bullet-proof glass shielding President Obama in Chicago's Grant Park from the realities he will encounter over the next four, perhaps eight, years. He will face white supremacists, a weakened but nonetheless fierce Republican opposition and a skeptical right-leaning segment of the populace. On Day One in office, January 21, 2009, the Obama dream campaign will necessarily transition to painful reality - when Sen. Obama must address the immediate concerns of two costly wars in western and central Asia and a financial crisis that has already affected the world in ways unprecedented.

The achievements of Obama's opponent, Sen. John McCain, must not go unnoticed. In fact, Sen. Obama's gift of oratory was often matched by that of Sen. McCain -- and it was no more apparent during the campaign than during Sen. McCain's classy, respectful concession speech from the Biltmore Hotel in Phoenix.

I have a very dear friend in the U.S. Army, who is a centrist Republican and McCain supporter. And for his sake, I do feel some sadness that Sen. McCain, a man whom I also rooted for in 2000, seems to have reached his pinnacle and political destiny, without reaching the office he so deserved -- primarily because he emerged when an even more formidable electoral force emerged in the campaign of Sen. Obama. And Sen. McCain picked a horribly inept running mate.

John McCain was truly a maverick, a voice of reason for a party that had increasingly catered to the whims of a far-right religious coalition and a war-frenetic military-industrial complex that exploited the U.S. Constitution to expand executive and extra-judiciary power under President George W. Bush. Sen. McCain was a true patriot, one of the few public servants who could stand in front of a crowd and provide cold, hard evidence that he is a "maverick" worthy of such a distinction. He braved the cruelty of war for several years, and those of us like myself who complain about cold weather or untimely subway trains can learn a thing or two from a man who suffered in prison camps and came out a strong survivor. John McCain is just as deserving of the presidency as any other public servant, and is as intellectually and politically astute as any politician. He was never given much credit for that, and I think such credit is due.

For that, I can express my hopefulness not only in Sen. Obama's victory, but the fact that a man like Sen. John McCain was finally able to get his due shot at the U.S. presidency. It reflects America's return to common-sense and dignified politics, even if it got nasty toward the end, as it always does. America's best made it to the top, and had a fair chance to win over the American public's imagination. At the age of 72, Sen. McCain likely will never run for president again. But he, like Sen. Obama, will continue to inspire myself and millions of others to fight for what is true and just.

President Obama, let's get to work. There is much to be done, and the whole world, including the great city on The Thames, is watching and waiting.

Oh, the Symbolism

On my walk along the Victoria Embankment to campus yesterday, I couldn't help but notice the somewhat chunky runner in short shorts running toward me. He was running east, toward the City of London, where the UK's financial center is located. I could hear him panting in exhaustion from several yards, his lips parched. The guy looked like he was going to keel over and explode. The veins in his forehead looked like tree stumps.

The best part, was not his evident lack of athletic ability, but his shirt, which proudly advertised:

"BEAR STEARNS"

I love irony. Kinda' like that magazine ad I read on exactly that weekend when Lehman Brothers and a certain insurance company kicked the can:

"The AIG companies have the strength to be there when you retire, so you'll never outlive your money. Ask your financial advisor about AIG or call 877 AIG 0993.

"live longer. retire stronger. AIG: The Strength to Be There."

"Vote for Me" Brought to you by...

Sen. Barack Obama will soon deliver a 30-minute address on television - it's technically an advertisement ($150 million in new campaign money can buy a heck of a lot), but it is clearly Obama's last big campaign push before the election (FINALLY).

Notwithstanding your political views, do you think this is ethical? Should John McCain be given a similar opportunity to provide his own life story and offer his own campaign message, uninterrupted for one half hour?

http://www.thrfeed.com/2008/10/obama-ad-may-ha.html

My pro-1st Amendment stance tells me it should be OK, but at the same time, Obama will likely reach a broad collction of voters/TV viewers with this ad. Should McCain have the same opportunity even though he lacks the cash?

A Solution for Public Education?

I'm not one to profess any expertise on public education, but here's a new program in my hometown, Pittsburgh Pa. (the Steel City), that may prove effective in improving student performance in inner city public schools.

The Pittsburgh Promise is a college fund that provides college tuition incentives for city school kids who stay in school and commit to going to college in the Pittsburgh area and possibly staying there to work. The program received a sizable endowment recently, and could give hope that if the private and non-profit sectors play a role, they can improve student performance by incentivizing it. I would hope, though, that the benefactors maintain a hands-off approach on changing curriculum or dictating how a public school system must manage itself.

The current of state of public finance on all levels is a mess, with a massive federal deficit and many states looking at fiscal issues of their own. Thus, the solution to public education's problems in inner cities cannot be found in increased funding. Creating new incentives for students to pursue college (and get a big tuition bonus) is a pretty good way to motivate.

Fly me to the moon

Today was historic for India -- it joined a very exclusive club of nations to send a spacecraft to the moon (unlike the NASA Apollo missions, India's was unmanned). It is a tremendous accomplishment for a country that has always produced top-notch scientists but never seemed to get recognition for it. But the usual skeptics are bound to surface and ask, "why is India looking to the moon when it has plenty of its own problems?"

I think both sides of this argument have some merit; India has issues of disease, poverty, environmental degradation, population growth and a growing rich-poor gap (all of which are interrelated), but has decided to divert a significant cut of the resource pie to sending a rocket to take pictures of the moon.

I disagree with these contentions. Space exploration in 1960's was one the greatest symbols of the Cold War, but most importantly for friendly, international competition. No one was maliciously killed in the Space Race; yet, it accelerated innovation in the United States and inspired a generation to think that, yes, the sky is no longer the limit. India is smart to foster the same ambitions, that accomplishing something as sending a rocket to the moon is symbolic. India is a friendly competitor in the field of science, and needed to send a message that it is able to compete on the global stage. That increased competition, I hope, will stimulate American innovation and get the United States to once again renew a mass-culture of innovation, ambition and drive.

God Bless America...

...and guys like this, who remind us that if the sickle and hummer represent the evil of Communism, that the toilet plunger represent the everyday average American guy workin' for the meal in a free, democratic America.

http://www.post-gazette.com/images4/20081017brk_ap_joeplumber_hp500.jpg

To recap this week:
* The EU, US and Switzerland each moved to stabilise their banking systems. In the US and UK, these were necessary but also politically sensitive considering the low public approval of the incumbent parties in both countries.

* North Korea was removed from the US' list of state-sponsors of terror. I guess no more 2-for-1 double coupon discounts for nuclear centrifuges "brought to you by North Korea."

* Friday was my first day as an intern in the United Kingdom Parliament, House of Commons. I had a chance to walk through the hallowed 1000-year-old Westminster Hall and other houses of Parliament that are more than 700 years old. The legacy of Britain's once unrivaled power was palpable. Amazing place. I then got to attend a going-away party for another Parliamentary staffer in the corner office of one MP in Portcullis House along Victoria Embankment...across the street? The River Thames, and Big Ben, right there.

Revisiting Alex Hamilton, Bretton Woods

Here is an interesting take on the redistribution of economic power - is a meeting of just the G-7 industrialized nations enough to find a solution to the financial crisis? At this juncture, and certainly down the road, the G-20 (which includes Australia, Saudi Arabia, and some developing but nevertheless powerful nations such as China and India) will play a significant and imperative role in resolving financial crises.

Also, here's an interesting (if superficial) article on one woman's effort to move her bank savings from a large bank, Wachovia, to a smaller community bank that has been operating since before the American Civil War. Could we be returning to those 19th century days when Americans didn't trust centralized financial authorities (i.e. a national bank) or large banks (sorry Alex Hamilton)? After the Riegle-Neal Act, we became accustomed to widespread bank mergers, and the current economic crisis has accelerated them. Our assets increasingly were held under large entities. But the backlash could be a return to depositors preferring their local banks, where they can get to know the management and have a better sense of what's in those community banks' loan portfolios - thus great security for their assets.

Making something out of nothing: A turning point for Europe's standing in the world?

It was Europe's time to shine, and shine it did.

Europe's leaders should be lauded for their joint efforts to infuse banking systems with cash by nationalising important and responsible financial intermediaries - and without the tired partisan – albeit pre-election - bickering exhibited in Washington. Europe's response to the still-unfolding financial crisis is not only a vindication of sorts of Europe's steady financial acumen, it illustrates the strength of common purpose borne out of a common market. Interdependence, in this case, brought all parties to their best. And it was Gordon Brown's and Chancellor Angela Merkel’s schemes, not President George W. Bush's, that are setting an example.

Still, questions remain for whether the efforts to recapitalise banks address the underlying problem that created the mess. Flooding cash into a banking system that did not behave the last time money was cheap is like giving a drug addict even more of a fix. Still, leaders also understand the reality that, for the sake of households and businesses, the economy can't quit cheap cash “cold turkey.” Now, there is but one certainty: it's the risk analysts and credit rating agencies who will have any kind of job security in the credit-crunched months ahead.

Post mortem of Greenspan's legacy

Aptly timed of course to my previous post, The New York Times' Thursday edition contains a really good write-up of Alan Greenspan's tenure, and its contributions to creating an environment where a housing bubble could form under a weakly regulated financial system. Check it out here.

Greenspan and Bernanke: Did they have a choice?

Much has been said about the lack of an evolved regulatory system to keep up with the evolution in financial markets, namely with investment banks and other non-depository lenders.

From my view as a layman, the biggest threat I see to the economy of the future is one in which the central bank has no effective control, a subject I hope to study further here in London. And I fear that while liberalized financial markets have allowed the United States and other countries to finance debt spending at low rates and encourage economic growth with freely flowing capital, central bankers may be losing the ability to predict and stop a collapse. Now, they are effective only when they mobilize in a reactive, not proactive, response.

For example, former Federal Reserve Chairman Alan Greenspan was forced to cut rates precipitously following September 11, 2001 and the concurrent recession. Greenspan was widely lauded as being an economic mastermind for his stewardship of the dot-com economy and the response to 9/11.

But it's now clear that his successor, Ben Bernanke, is dealing with the lagged impact of Greenspan's policies of loose credit in the waning years of Greenspan's term. Historically low interest rates contributed to the housing bubble that, in case you missed it, is blowing up.

To Greenspan's credit, he frequently criticized President Bush's deficit spending, the cause of the expansion of the United States' national debt and widening current account shortfall (and thus reliance on debt to sustain economic growth). But I don't think it is fair to blame Bernanke for the current crisis. He is simply dealing with the lagging effects of his predecessor's policies.

The key is -- did either Greenspan or Bernanke have a choice to make the interest rate decisions they made? Greenspan had no choice but to loosen credit after 9/11, and also to finance a growing debt that was rooted in a reckless fiscal policy. Bernanke has experienced much of the same; he has no choice but to offer this or that bailout, or extend credit to banks or companies, even if their executives still indulge in California resort retreats, to keep the system solvent. And now we have a power-in-waiting in China, which holds half a trillion dollars in American debt. What options do central bankers have? Are they merely guiding a system that is already on auto-pilot and out of their control?

The wheel keeps on spinning...

Some more news today:

On the heels of Germany's announcement over the weekend to guarantee all private savings, and potentially based on the bailout precedent set by the United States last week, the British government announced a massive bailout to help the banking system.

Meanwhile, the Nikkei average in Japan experienced its biggest drop since 1987, and Iceland is approaching bankruptcy. I guess that means no more Bjork...

Credit Crunch: The world's new soggy cereal

OK - I have some catching up to do. Like many of my self-initiated assignments, this blog started off with a momentous roar and then retreated with a whimper. Maybe it's that while I try to adjust to a new school and new city, the world is encountering new challenges each day that a word written about it in one minute is outdated the next.

We now know that the financial crisis is cascading to Europe, like a massive fan "wave" at a college football game. This really is the test of our time, perhaps more devastating than 9/11 in both its real economic and psychological impacts -- and the numbers are starting to come out as to what the impact on households will look like. It took America a couple of years to recover from 9/11, and it will likely take a lot longer when all the dust settles and the Congress settles on permanent legislation to regulate the evolving financial sector.

In one hour, the American presidential candidates will spar for the second of three times before Nov. 4, and for the first time since Gov. Sarah Palin accused Sen. Barack Obama of "palling with terrorists." It's an outrageous but certainly answerable claim, considering her source was The New York Times, which, undoubtedly to the dismay of the Obama campaign, Gov. Palin (or her speechwriters) most likely was reading for the first time when the article appeared.

Those are my "brain droppings" (RIP George Carlin) for now. Check back for a couple write-ups soon on recent lectures I attended here at the LSE. This truly is an amazing place; 160 countries represented, and lectures and professors that cover almost everything under the sun.

welcome: stretch your thinking

Welcome to the elastic thinker.

At the outset of my one-year graduate school experience in the great city of London, the world is facing obstacles unseen in my lifetime, certainly for the generation preceding mine. We are now entrants into an age where a Treasury secretary can be compelled to kneel and beg in front of the House Speaker for emergency legislation that, under normal circumstances, a lobbyist would ask for over a glass of wine and dinner at The Mayflower Hotel in Washington.

All rules are thrown out the window. Indeed, as the United States Congress mulls over throwing the nation’s most expensive life saver to the damsel in distress, the U.S. financial system, we have to consider the economic implications and social equity of a $700 billion bailout, and all the while understand the impact on the political scorecard in the 2008 presidential election.

The purpose of this forum, and thus of its title, is to discuss both sides of a variety of subjects under the sun. While much of the mainstream business press lauds the markets, the ways of Wall Street and its every move, the latest financial collapse is further proof that the markets in the short run tell us nothing about real growth and economic strength. Give a bull market five years and out comes an Enron, Worldcom, Tyco, Freddie/Fannie, Lehman Brothers, AIG and Washington Mutual. Once the next bubble forms and bursts, how big will the bailout have to be?

During my experiences as a business journalist and government grunt, I have seen that nothing is absolute. One camp may argue that free trade uplifts the direst developing countries and another may argue it destroys American industry and thus the fabric of the American middle class. Both side have valid arguments – this forum will attempt to bridge those views.

Of course, this will also serve as a sort of day-to-day diary of my experience in London, so be sure to check out those posts too.

Over the next year, read this spot for my views on international politics and economics, music, sports, and I hope you can join in the conversation.