Heated Debate

As expected, the meetings in Copenhagen have amounted to mostly talk and little action. While Europe has taken some steps to pledge financing to developing countries for taking a low-carbon growth strategy - far more than the United States has been willing to front - the prospects for agreement are no more firm than before the meetings began last week.

But perhaps what is lacking is a proper frame for the issue. Public acceptance of the existence of climate change is a moot point; the very existence of a world meeting on reducing carbon dioxide and other greenhouse-gas emissions signals it. But defining the issue as specifically one of temperature change, rather than as a broader dilemma of environmental conservation and biodiversity, is what is keeping the eco movement from achieving its full potential.

The 350 campaign and others have succeeded in putting carbon dioxide emissions in the public consciousness. Even the average person can understand CO2 emissions create a greenhouse effect, rising temperatures and effects ranging from subtle changes in seasons to outright climate catastrophes. The simplification of climate change has enabled a mass movement.

But this gives leaders an easy escape. Emission of greenhouse gases such as CO2 or CH4 (methane) can be tied directly to industrial or agricultural production, energy consumption or cows breaking wind. Therefore, this makes trade and protectionism the arena for debate; and the recent round of WTO talks has shown that this is where leaders from both developed and developing countries can drag their feet and blame the other side. But if environmentalists can successfully implant in the public's mind that it is not only climate change (temperature changes), but also environmental degradation, mass-extinction of species, turning our oceans and parks into oil wells and mines, and utter waste (does your mobile phone charger really need to come with 3 pounds of packaging?), they can successfully re-frame the issue into one of broader importance.

I'll conclude with one example. As a student of international affairs, I have many classmates who profess a devotion to saving the environment. Copenhagen must come up with positive results, they say. Yet, I can't even begin to count how many times I visit a sandwich shop frequented by many such students and see how wasteful our society can be.

When a customer buys a sandwich, the woman at the register puts it in a plastic bag. Not long after eating the meal, many of these students discard the perfectly pristine plastic bag - destined for a landfill after being useful for literally 7 minutes (the time it takes to walk the sandwich over to a place to sit, take it out of the bag, and eat it). Multiply that by the hundreds of students who visit this one sandwich shop in New York City.

The amount of waste is astounding, and it seems to me, at least, that few link waste and climate change as one issue about protecting the environment and reducing our consumption. Saving the environment is not just about maintaining a temperature.

The Lame Congress

When looking at President Barack Obama's tanglings with the Democratic leadership on Capitol Hill, one can start to see some virtue in Obama's predecessor's desire to consolidate executive branch power, even when he had a Congressional majority for much of his 8 years in office.

Congress just gets in the way.

The so-called "genius" of American democracy is the so-called well-functioning legislative branch. Unlike many traditional Parliamentary systems such as that of the Brits, however, the United States has a powerful lower house AND upper house. In time of political and economic struggle, this body of legislators has proven itself increasingly beholden to special interests.

Two of the most significant legislative breakthroughs in the current generation - health care reform and a commitment to greenhouse gas emissions reductions - are on the horizon. The Copenhagen meetings are moving ahead this week and health reform is in the United States Senate will a more-than-50-percent chance of passage.

On both accounts, however, President Obama is dramatically weakened by a gridlocked, polarized Congress. Right-wing Republicans, fearful of losing their party base in midterms next year, are holding ground on their "conservative" values of small government ($700 billion bank bailouts) and personal responsibility ($700 billion bank bailouts). Meanwhile, Democrats are doing more to hurt their own chances with a weak leadership at the helm (Pelosi and Reid).

The result is depressing. The Democrats have dropped the public option - the primary innovation in health reform - from the negotiations, and Obama will arrive in Copenhagen empty-handed and with only an argument that his Congress won't change the status quo no matter how much the United States is to blame for climate change.

President Obama has barely been in an office for about 11 months. While his potential for achievement is great, his Congress will likely have more to say about that.

A Bretton Woods Moment?

Sorry for my long absence from the elastic thinker. The demands of grad school have greatly weakened my brain's elasticity, and has rendered my gray matter into an examified/essayified amorphous pulp resembling baby food.

However, I recently contributed a post to The Morningside Post, a student-run newspaper/online blog at Columbia-SIPA, to re-whet your appetite!

http://themorningsidepost.com/2009/11/a-bretton-woods-moment/

The LDP Saga

The Financial Times yesterday finally published a graphic previewing the Aug. 30 Japanese general election, in which the mainstay Liberal Democratic Party (LDP) will likely lose power in most convincing fashion since 1955. I did the bulk of the research for the graphic and am happy it came out OK!

You can view it here: http://www.ft.com/cms/s/0/ce4c5268-8745-11de-9280-00144feabdc0.html

Call centers to plowshares

In the last couple of weeks, new developments have shown that drought has severely impacted India's agricultural sector. But this has failed to grab major headlines until recently, when the situation became especially dire.

The situation should call attention to the still-pressing needs of India's farmers, who are less able to benefit from the economic expansion that has made India an emerging hub for call centers, software development and other "business processes." India largely remains an agricultural country - agriculture, forestry and fishing account for 17 percent of GDP - and should therefore promote the development in rural areas as much as it should focus on its "knowledge" sector, which generates more wealth and investment but also employs far fewer people.

Why bankers rule

In the past couple of days, much anger has arisen regarding bonuses paid to bankers on Wall Street or in the City of London among populist good-for-nothing welfare-state leeches like poor people and the uber-liberal-Sarah-Palin-hating "mainstream media" who, in between their worship of Barack Obama's statuette, find it so easy to bash anyone or anything that has a connection to financial services!

In an unusual effort to quell these outrageous attempts by all those pesky median-income or minimum-wage earners out there who can't get enough of taking a free ride off the hard work of rich people (all of whom got rich only by the virtues of hard work), the elastic thinker has decided to produce a list of 8 reasons why there is no problem paying out massive bonuses to bankers during an economic crisis that has produced unemployment of 9.5% (and rising):

1. Contrary to public opinion, bankers are actually the smartest people in the world. Unlike the money you earn, theirs requires $60,000/year MBAs, which means they're really, really smart. They actually earn their money, 'cause they figure out how to make money using other people's money.

2. Bankers work harder than you do. What? You want a bonus during a recession? Mortgage tough to pay? Well, bud, you shouldn't have bought that house. If you were smart enough to read that 10-K filing or actually turn on that Bloomberg terminal you have at home, you would've seen all this coming. What's that you say? You don't have a Bloomberg terminal? You snooze, you lose.

Again, that's why they get paid more than you, because they are actually smarter! Don't you know economics? Skill and its scarcity in the labor market are rewarded largely through compensation. That's why you make less, because you just couldn't make the cut.

3. Had Goldman Sachs and all the other God-affiliated institutions didn't pay bonuses, they couldn't attract such amazing talent! If they didn't pay bonuses, some other bank would find a few million to throw at them. That would risk a massive brain drain.

4. Bankers are prophets and decipherers of mysterious information that normal people simply are too incompetent to understand. I mean, come on, this is why one day the markets jump and the dollar gets stronger, and the next day the opposite happens based on new information. Let's leave figuring all that out to the bankers. They know best.

5. If it weren't for bankers, we would not have the movie "Wall Street," the actress Darryl Hannah, or the name Gordon Gecko in our vocabularies.

6. Bankers have more culture than you. They drive better cars, eat better food, wear better clothes, use BlackBerrys and go to better gyms than you. Not only that, they don't have to sit with the commoners at sporting events. They can get their caesar salad, Chardonnay and chicken fingers with dijon mustard dipping sauce in an air-conditioned box while you stand in line for 15 minutes to get your aluminum-foil-wrapped hot dog. Remember, perks like this are necessary to keep bankers happy. They are very busy people and need to relax every now and then to blow off some steam. Strip clubs help, too.

7. Bankers represent what the American economy's future is all about. Who needs to make useless widgets when you make knowledge?? It's the knowledge economy, baby!

8. Bankers are the backbone of America, generally speaking. When national challenges arise, they are the first to go to war ('we rate Halliburton a strong BUY'), show their patriotism (speculating on foreign currencies), and campaign for a cause ($240 million in lobby spending in election year '08!)!

The Unforgettable Fire

Last weekend I had the opportunity to live a dream -- twice. My sister gifted me with the immaculate graduation gift - tickets to see one of my favorite bands in their home city. And so it was, my sister, myself, and our friend Brennan on the Emerald Isle to hear one of the greatest rock bands of our time "melt some faces" (Jack Black).

U2 at Croke Park in the north side of Dublin, Ireland, did not disappoint. These guys, more than 30 years on, still have it.

The first show we saw was on Friday July 24 - we had pitch (standing) seats...we couldn't get enough so the next day, we got scalper tickets and sat on the upper levels!! Both shows were incredible.

Among the highlights:
- seeing my sister go absolutely nuts :)
- hearing some of my favorite songs live by the band that wrote them!!
- watching the Edge, Larry Mullen Jr., Adam Clayton and Bono play like they're back in 1983
- an acoustic version of "Desire"
- a techno remake of "I'll Go Crazy if I Don't go Crazy.."
- "Sunday Bloody Sunday" under the green lights to honor protesters in Iran, with a little "Rock the Casbah" intertwined

Here is a sampler video - I intentionally did not take too much video of one particular song because I only had one memory card and wanted to get as much as I could (most of it is on YouTube anyway) - just thought you might like to see it from my perspective!

Taro Aso's Nightmare

Less than one year after Japanese Prime Minister Taro Aso took the reigns of the hobbling Japanese government and economy, he is faced with a daunting prospect - the end of his term as Japan's leader, and of one-party rule in Japan.

While Aso is well regarded by foreign leaders, his tenure is sure to come to a close now that Tokyo municipal elections delivered a smashing blow to Aso's party, the Liberal Democratic Party (LDP), in favor of the rival Democratic Party of Japan (DPJ).

As various news outlets have reported, Aso has attempted to use pork barrel spending - a time-worn tradition in modern Japanese politics - to assuage voters ahead of the election he has called for Aug. 30. And recent economic data show Japan's slump could be nearing an end. Aso hopes these factors will renew some public trust in the LDP's national leadership in the next month.

The elastic thinker thinks Japan deserves and is ready for political change. The LDP has not necessarily squandered Japan's economic might - but it has certainly allowed back-room politics to become even more entrenched. Whether the DPJ will bring fresh ideas, or serve simply as the "anti-LDP," is a huge question mark, but one that the Japanese people deserve an answer for after years of LDP dominance. The biggest risk from DPJ election gains, of course, is a government that much more politically polarized that solving Japan's myriad economic issues will become even more onerous.

But the Japanese public, who are about to descend in what could be another "lost decade" of economic stagnation, most likely want change. It appears they will get it this time around. This will prove to be a significant development in world politics, and in the world's second largest economy.

(A) judgement cometh

When Rupert Murdoch's News Corporation purchased The Wall Street Journal in 2007, promises were made by Murdoch, the world's 21st-century William Randolph Hearst, that the Journal's sterling editorial integrity and independence from ownership would go unscathed.

Even when a popular managing editor in Marcus Brauchli was replaced after the acquisition with Murdoch's choice, Robert Thomson, there were few other conspicuous signs that Murdoch had the same sort of stranglehold on the Journal's day-to-day news coverage which he has shown with his other newspapers. In the initial months of News Corp.'s ownership of the Journal, it seemed Murdoch would keep his promise.

But recent developments will truly test the mettle of the United States' second-largest newspaper by circulation. A report by one of the few daring newspapers left in the English-language news media, The Guardian, revealed evidence that the News of the World and other trashy News Corp. tabloids illegally hacked into the phones of British politicians and other public figures. While the news has caught international attention, the Journal's coverage has been markedly muted, and is limited to an un-bylined "Wall Street Journal Roundup" - likely extracted from a wire service. This article makes no disclosure statement that the Journal itself is owned by News Corp. until the 8th paragraph, by which time most readers have already moved their attention to YouTube, Hulu.com (d'oh, also jointly owned by News Corp.!) or Facebook. It is a highly unusual way to cover a highly newsworthy event involving the world's best-known media mogul, no?

Indeed, it's another example of a news organization struggling with its corporate parent, a time-old challenge of keeping big business out of the truth's way (see NBC trying to cover General Electric, or ABC trying to report on Disney - it just doesn't happen). I suppose we shouldn't be surprised.

Morally hazardous waste

As policymakers in the United States mull over new ways to regulate an ever-changing, ever-widening world financial landscape, it is important to create legislation that is not only reactive, but addresses the deeper issues of the structure of the increasingly concentrated American financial system.

Previous financial crises teach a valuable lesson - that moral hazard, or the willingness of market agents to take excessive risks with knowledge of a high likelihood of government crisis protection or intervention, is endogenous to world financial markets whether we like it or not. It's a matter of learning how to mitigate moral hazard, rather than eliminate it, that can help reduce that chances of future financial catastrophes. Most people, I think, would agree that the lessons from the current world meltdown will go largely ignored when (or if) boom times come around.

While new regulations are necessary, the Obama Administration must also look proactively at legislation passed during the last 15-20 years that have created a commercial banking sector that is, indeed, "too big to fail."

Nevermind the repeal of the Glass-Steagall Act, which once created a firewall between deposit-taking commercial banks and risk-taking investment banks - something that would have come in handy in the last few years. The Riegle-Neal Act was the most significant piece of legislation to deregulate commercial bank consolidation and provide an environment conducive to a deeper banking crisis. The Act relaxed regulations on the ability of banks to merge with other banks, leading to widespread banking mergers and the swallowing of smaller, usually state-chartered "relationship" banks into larger banks with national and international reach. The consequence was greater market concentration for the larger banks in markets nationwide.

The mergers of inefficient businesses into larger, more efficient ones in itself is not inconsistent with "economic efficiency." But when such businesses are crucial to the economy's systemic viability, such legislation should have been evaluated carefully. As banks consolidate and grow larger, a larger number of players becomes "too big to fail," leading to the impetus for larger bailouts and greater regulatory capture. In addition, when a large corporation such as Bank of America owns branches and takes in deposits in a wider range of geographies - mistakes made at the top of the corporation could have spillover effects in each of those markets where a BofA branch might be.

The Obama Administration may not wish to reverse the trend of bank consolidation - indeed, it is probably too late. But banks that have larger systemic importance should be held accountable for excessive risk-taking. A more stringent cap on market concentration would also be prudent to maintain the diversity of commrcial bank competition in markets nationwide.

The London G20 Summit gives IMF Massive Boost, but Circumvents Key Issues

The following is my coverage of the recent London G20 Summit. This was to appear in "Rationale," the LSE Economics Society's magazine, but from all indications the publication, which has a notoriously disorganized editorial staff, is several weeks behind schedule and may not even come to print. So I wanted to get this out so that at the very least, the three people who actually read this blog can see it and offer comments.

LONDON - British Prime Minister Gordon Brown has put the executioners on notice: send the West’s free-market policy orthodoxy to the gallows.

“The old Washington Consensus is over,” declared Brown, minutes after concluding contentious negotiations at the Group of Twenty (G20) Summit in East London on April 2. “Today we have reached a new consensus to take global action together.

“We have resolved that from today we will together manage the process of globalisation.”

Seizing on the symbolism of the first international summit since the American credit crunch spread its contagion worldwide, the British leader recognised the changing structure of world power – one in which one prominent leader can openly blame “blue-eyed, white” bankers for the global recession, for example, and another can openly challenge the U.S. dollar’s credibility with little backlash, denial or impunity.

But for all the sensational rhetoric surrounding the apparent decline of American capitalism, April’s meeting signaled the most sweeping expansion of the very organisation that has served as the Washington Consensus’s guiding light and lightning rod alike: the International Monetary Fund.

The G20 nations stopped short of reforming international finance on the scale of Bretton Woods, but still made a bold pledge of $1.1 trillion in new funds for the global economy to boost liquidity in a time of declining trade and growth.

As anticipated, at least $500 billion will go toward restocking the IMF’s financial war chest to $750 billion, making the Fund larger than the economies of four G20 member states. Japan, which already pledged $100 billion to the IMF in February, is joined by the European Union and China in providing $250 billion of this capital infusion.

The G20 have also pledged $250 billion to support trade finance. Another $250 billion in the IMF’s neutral currency, Special Drawing Rights (SDR), will be allocated to countries based on their IMF quotas to provide an extra buffer as trade declines. The multilateral development banks will also benefit from an additional $100 billion for additional lending.

At least $19 billion of the new SDR will be available to low-income countries, said IMF Managing Director Dominique Strauss-Kahn, and countries with surplus SDR will be able to sell them to other countries that have balance of payments or liquidity challenges.

“It is the beginning of increasing the role of the IMF not only as a lender of last resort, not only as a forecaster, not only as an adviser in economic policy in an old traditional role,” Strauss-Kahn said, “but also of providing liquidity to the world, which is the role…of a monetary institution like ours.”

The IMF expansion aside, the G20’s final communiqué also features stated commitments to continued monetary and fiscal expansion to the tune of $5 trillion worldwide by the end of 2010, adoption of new global financial regulations, and protecting international trade and development.

The six-point agreement from the G20 communiqué, as laid out by Brown:
· Set new principles for the global banking system: bring shadow banking system, i.e. hedge funds, into regulatory framework; improve accounting standards; provide oversight of credit ratings agencies; and “name and shame” non-compliant jurisdictions that serve as tax havens. Part of this will entail the creation of “colleges” of regulatory agencies and the creation of the Financial Stability Board to report on developments in global financial markets.
· Clean up banks’ toxic assets through a common global approach.
· Collectively implement $5 trillion in macroeconomic stimulus by end of 2010; pledge central banks to monetary expansion; infuse capital into IMF for increase global liquidity and crisis response capacity.
· Continue to strive for poverty reduction through Bretton Woods institutions, necessitating increased accountability, transparency and fair representation of developing countries in these institutions’ governance; heads of staff should be appointed through a competitive, merit-based selection process.
· Protection of trade, 90 percent of which depends on finance; and a pledge of $250 billion in trade finance and additional funds through multilateral development banks.
· Promotion low-carbon growth and a move toward creating a post-2012 worldwide climate change regime.

Sir Nicholas Bayne, a former top economic diplomat with the British Foreign and Commonwealth Office and lecturer at the London School of Economics and Political Science, said the summit was a success in that delegations were ready to work together and put their main focus on aiding countries in the most difficulty with capital boosts for the IMF.

“But the key point will be to get the promised sums delivered,” Bayne said.

Just as significant as the results of the summit is what was noticeably absent from the communiqué. The G20 agreement lacked teeth on several specific issues such as climate change, specific financial regulations, and politically charged issues such as exchange rate policies and over-consumption in the United States, phenomena that may have helped produce unsustainable financial bubbles.

Ed Miliband, the British government’s climate change and energy secretary, said the G20 summit was a good opportunity to begin deliberations on climate change, but admitted there is another forum for that issue.

“The G20 shows that there is an understanding among world leaders that the world economic crisis and climate crisis can be solved together,” Miliband said. “It is promising but challenging to get an ambitious climate agreement. There are frameworks for climate change discussions (such as the United Nations) and we need to respect that.”

‘The IMF is Back’
U.S. President Barack Obama may have been the last leader to take the press limelight following the summit, but the IMF – which not long ago was fighting futility - was the real star.

“Maybe some of you were in the IMF press conference at the end of the annual meeting last October,” a beaming Strauss-Kahn said. “Some of you may remember what I said at this time was the IMF is back. Today, you get the proof.”

The massive expansion of the IMF’s coffers also enhances its role as forecaster and monitor of international economic developments. The progress of the G20’s initiatives will be measured against IMF projections and forecasts, building a stronger case for economic information to flow through the Fund’s research department.

“I’m really happy to be the head of an institution, which more than year ago in Davos, asked for a global stimulus,” Strauss-Kahn said. “Nobody, no other institution, was able to see that the crisis would be so deep that we would need a global stimulus. We asked for that and we have been followed.”

With the IMF’s expanded role, the complexion of the world’s response to the global economic crisis will have a distinct IMF flavour. The United States, unable to extract pledges of additional fiscal stimulus from skeptical France and Germany, must now look to the IMF as its last instrument of economic power during the crisis.

A less-publicised but equally powerful prong of the IMF’s post-G20 response will be the expansion of its new Flexible Credit Line, which does little to hack away at Washington Consensus orthodoxy and in some sense reinforces it.

The FCL is intended to provide “pre-conditional, precautionary” IMF financing to countries with “good” IMF track records, which would include countries that successfully implemented IMF adjustment policies and have a history of successful repayment of IMF loans. Mexico recently became the first country to take advantage of the FCL, gaining access to $47 billion in IMF credit.

In one attempt to balance its growth while enhancing its accountability and transparency, the Fund will also end a longstanding, informal tradition of elevating a European to manage the Fund. Now, as the communiqué points out, IMF staff will be selected through a competitive, merit-based process.

The G20 also agreed to accelerate reform of the IMF quotas that determines how much of a voting share a country may have on directing IMF programmes.

A review on the realignment of IMF quotas, which currently give the United States an effective veto with 17 percent of the vote (85 percent majority is needed to pass an IMF package), will now be due in 2011 rather than 2013.

“They are right to say quotas need to be changed but there is a timetable for that,” Brown said.

The IMF stopped short of recommending a transition away from the U.S. dollar as the world’s reserve currency, although Strauss-Kahn stressed the “symbolic” value of the SDR allocation. Prime Minister Brown denied there is any threat to the existing monetary order, especially considering recent renewal by China and Russia of time-old criticisms that the United States is an irresponsible custodian of the world’s reserve currency.

“Issues about international currency have not led to detailed proposals from anyone,” Prime Minister Brown told reporters.

The U.S. veto at the IMF will therefore remain during these crucial years of IMF expansion. The Washington establishment and its policy consensus likely still hold the keys to the car.

“The IMF is also back as a policymaker,” Strauss-Kahn said. “I’m not saying the different governments of the G20 are going to do all the time what we think is the right thing to do, but at least we are the partner to discuss with and analyse what kind of policy should be implemented.”

The American Chastening

On a day meant for concrete solutions to a rapidly spreading economic crisis, there was no shortage of symbolism and cynicism as new global powers came to the world stage.

On the morning of the summit, a journalist representing a Saudi newspaper put it this way.

"The world's problems will be saved all in a building that is owned by the Emirates," he said with a smirk, referring to ExCeL London, the East London Docklands convention centre owned by the Abu Dhabi National Exhibitions Company.

Even the London Summit logo indicates a shift in political and economic power. It depicts the earth and sun shining brilliantly along its arc. Europe is on the verge of rotating into the darkness of night, joining its friends in the United States, while a beacon of light emerges from the East. “Stability, Growth, Jobs” is the tagline.

And the U.S. president, known for his talents with the spoken word, was also battling a cough and cold that brought his normally rousing speeches down to earth, much the same way his country’s financial sector has been stricken by infectious leverage and toxic assets. Ultimately, President Obama was left atoning for the alleged sins of Wall Street, which are partly to blame for a crisis that will drop world GDP growth between 0.5 and 1 percent in 2009, according to the IMF.

“We exercise our leadership best when we are listening, when we lead by example and show some element of humility,” Obama told reporters.

“There were occasional comments [by other delegations], usually wedged into some other topic that indicated from their perspective that this started in America or this started on Wall Street, or this started with particular banks or companies,” he added. “Perhaps what helped was my willingness to acknowledge that - and it's hard to deny - that some of this contagion did start on Wall Street.”

While the summit revealed a new global economic landscape, it by no means created a permanent transformational shift. The United States and United Kingdom had considerable bargaining power during the summit, and used the fact that the summit was limited to one day of discussions to create pressure for parties to come to agreement. British officials reflected to that sentiment as they assured the media that G20 delegates would nail down an agreement.

“I don’t think we’ll get that many people back around the table soon so we’ve got to take action today,” said Lord Peter Mandelson, British business secretary, hours before G20 leaders were to emerge from the discussion room.

“There is some lively discussion but we are going to reach an agreement today,” added Stephen Timms, Labour Member of Parliament for East Ham and financial secretary to the Treasury. “Everybody recognises that we need to deliver.”

The Saudi reporter, who was less impressed than most by Obama’s international popularity, predicted the summit would be about the United States and its allies pushing creditor countries to finance fiscal expansion in the United States and elsewhere.

“I think it is the sort of thing where Saudi Arabia, Japan and China will be told, ‘look, you have to pay up,’” he said.

Bayne said there is more coordination between non-G8 participants on forming policy than is usually reported, but he added that countries may not be ready to assert themselves in the G20 environment.

“So far this has not led to major initiatives in the G20 or elsewhere,” he said. “They are biding their time and testing the water. China's reserve currency idea is a first indicator. More may surface when Korea takes over the G20 chair in 2010.”

What Comes Next

The lessons of the past and present may show that international cooperation is crucial to solving global economic crises. But just as important is the legitimacy of the organisation shepherding such cooperation.

President Obama has garnered praise from allies such as Turkey and Mexico for reaching out to the developing world. But as the G8 prepares to meet in Italy in July and the G20 again in Pittsburgh in September, other nations are justifiably concerned that they are yet again confined to the backseat of global decision making.

As pointed out by Daniele Archibugi, a research director at the Italian National Research Council in Rome, the G20 represents 85 percent of global GDP but also includes only one country from Africa. Spain and the Netherlands have greater GDP than Saudi Arabia and Argentina, and while the former were invited to the G20, they are not officially included in the G20 while the latter two are. Countries with large populations but small aggregate economies, such as Bangladesh, do not even receive invitations to the summits that determine so much of their future.

“The inability of the G20 to come up with solutions is largely dependent on its institutional nature,” Archibugi wrote in The Guardian on March 28. “In a world that demands greater accountability in world politics it is inconceivable that everyman's problems should be addressed in summits held outside the confines of democratic logic.”

Bayne said the G8 is not necessarily obsolete. While the G20 has been engaged primarily with financial and macroeconomic issues, the G8 has a much broader scope of issue areas to work on.

“If the G8 can effectively co-opt the leading emerging markets they can still play an effective agenda-setting and initiatory role,” he said. “The Japanese chair did not do this in 2008, for fear of China. Italy this year and Canada next year may do better.”

Strauss-Kahn and Obama also endorsed an increasingly multilateral approach to the economic crisis response, but it remains unclear how this will be put into practice before the next major institutional reform, the 2011 IMF quota review, comes through.

"Last time you saw the entire international architecture being remade," Obama said of the Bretton Woods meetings following World War II. “Well, if there's just Roosevelt and Churchill sitting in a room with a brandy, that's an easier negotiation. But that's not the world we live in, and it shouldn't be the world that we live in.”

Strauss-Kahn said extending the G20 to be G24 or G25 with the addition of several “low-income countries” would provide an accurate representation of the world economy.

“Everybody has their own recipe – there was 12, then 13, 14, 15 and finally it has been the G20,” Strauss-Kahn said. “If we really want the G20 to be a body of governance of globalisation, then we certainly need the G20 to be increased to include some country representatives of the low-income countries.”

The rest of the world, still declining into recession, may not be able to wait that long. **


You can view the G20 communique at http://www.londonsummit.gov.uk/en/summitaims/summit-communique.

The G20’s Specific Plans for Strengthening the International Financial System: http://www.londonsummit.gov.uk/resources/en/PDF/annex-strengthening-fin-sysm.

IMF Resources and the G20 Summit: http://www.imf.org/external/np/exr/faq/sdrfaqs.htm.

G-20 Wrapped Up

Just got out of President Obama's press conference, which effectively concluded the major proceedings of today's G-20 summit. The president was clearly the main event, and used it as an opportunity to reassert American leadership - his press conference was not only significantly longer than that of Summit host Gordon Brown, but his was the last to finish it off.

The G-20 established a communique, some of it specific, most of it broad, to address the financial crisis. The highlight is the effective tripling of the International Monetary Fund's resources thanks to Japan, the European Union, and other unnamed donors -- it is unclear how much China or Saudi Arabia have provided, but it's likely they're a big part of it. In the words of IMF Managing Director Dominique Strauss-Kahn, "the IMF is back."

Partially due to recent economic data but also because of the apparent success of the Summit, stock markets in Japan, Europe, London and the United States rallied. Is this the end of the crisis? Will this improve confidence in the world economy? And will this help the poorest in the world?

This writer is skeptical. The Communique as such lacked meat on several key issues such as climate change, poverty reduction and corporate governance - it will be interesting to see if the 20 governments involved also will be to ratify or enact key parts of the deal. Agreeing to agree may not be enough.

Press conferences

After sighting Robert Gibbs, President Barack Obama's press secretary, I was able to find eke out a few more details on events at the G20 from the uncooperative, tight-lipped media team at the G20.

4pm - The European Union/European Commission will hold a news conference
4:30pm - President Zapatero of Spain will hold a news conference

Timms Says IMF will at least double resources

Stephen Timms, British Member of Parliament for East Ham and Financial Secretary to the Treasury, said at the G20 Summit in London Thursday he expects the International Monetary Fund (IMF) to at least double its resources to $500 billion.

The increase in resources was expected, but the magnitude has been unclear given the uneasiness among countries awash with cash, namely China and Saudi Arabia, to help finance stimulus packages in indebted countries in the industrialized world, such as the United States and the United Kingdom.

Later BBC reports suggested a draft proposal included a $500 billion increase to roughly $750 billion, but it is unclear who would foot the bill.

Arriving at the G20

The day has arrived, when leaders representing the world's 20 most powerful economies will solve the world economy's problems between lunch and tea time in a single day.

On the second bus from the media accreditation and security site to the ExCel Center, a journalist for a Saudi newspaper gave me his frank assessment of the Summit, as seen through the Arab perspective, especially given that the ExCel convention center in London is owned by the same company as Emirates.

"The world's problems will be saved all in a building that is owned by the Saudis," he smirked.

Ok, so time to figure out how this media circus works. I couldn't find a workstation with a plugin because, well, I'm a bit low on the totem pole. So I'm using the free wireless and hope to grab some free food in a bit. Most of the press conferences are accessible to pool photographers and reporters, so I hopefully will at least get to sit in on the final press conference at the end of the day.

Greenspan makes his case...again

I'm not even going to try to make a claim I have the slightest lick of economic expertise in comparison with former Federal Reserve Chairman Alan Greenspan, but I disagree with his latest defense that the persistently low federal funds rate - the Fed's short-term, benchmark interest rate - had nothing to do with the historically low, long-term mortgage interest rates that are blamed for contributing to a massive, unsustainable and unchecked expansion of housing credit.

Over-saving in growing Asian countries led to an excess of capital, which, after being reinvested in the United States and other economies to finance our deficits, pushed downward on long-term interest rates, he writes.

Greenspan does not mention that when interest rates are low, and banks can borrow from the Fed at dirt cheap prices, the ability to capture even higher profit margins sends banks looking for the high-priced goods, sub-prime mortgages and the like - at the very least, to beat inflation. The ability to get easy money in the short-term has spillover effects for the short and long term.

Mortgage rates may have been decoupled from short-term interest rate fluctuations as Greenspan contends, but don't low short-term rates spur inflationary growth and perhaps make people more confident about the economy and more willing to shell out cash for a long-term, debt-financed investment such as a home? The short-term and long-term may not be directly correlated, but doesn't the former impact a consumer's willingness to take risks in the latter?

He also neglects to mention the impact of short-term interest rates on the ability for banks to multiply money supply and expand other shorter-term vehicles of credit, from car loans to credit cards. This expansion drove up consumption to levels that, as we now see, were highly overblown (just look at how much the economy has receded without such free availability of cheap credit).

Finally, he barely mentions the Fed's utter inability to regulate banks' mortgage-lending practices. The crisis was as much a regulatory policy failure as much as it was a market failure.

Nevertheless, it may be difficult to pin the crisis on any one person or institution. The moral of the story probably is that the crisis is not Greenspan's or the Fed's fault, but that persistently low interest rates helped create a credit bubble - and the housing market was the first bubble to go bust.

The Most Trusted Name in Pseudo-News

It made for good comedy on "The Daily Show," but Jon Stewart's awe-inspiring, go-get-'em tirade against CNBC points to a larger, serious issue of integrity in the most important vein of the news media at the moment: the financial press.

Information is the lifeblood of efficient financial markets, and as a primary relayer of market-sensitive information, networks like CNBC have, above all, a journalistic responsibility to provide no-spin, accurate information on the daily intricacies of the world of finance, a world constantly in flux. CNBC's constant forward-looking, speculative, CEO-cheerleading, Wall Street-friendly analyses of economic policies before and since the outset of the crisis send a flagrantly incorrect impression to the American public that government policy can and will be effective only if it passes a Dow Jones Industrials Average litmus test - the up or down movement of the DJIA - and that government policy can only be effective if Wall Street thinks so. In any case, the current financial crisis and resulting government bailouts should be enough evidence that Wall Street does not always have the public's interest at heart).

Because CNBC, The Wall Street Journal, and other specialist business news outlets are now watched and read by more members of the average American public than ever before, the corporations that own these outlets are under pressure to "dumb down" business news. The result has been networks like CNBC moving toward the mainstream cable news model of opinionated talking heads running "news" shows at the expense of the boring, mundane, intricate, black-white-AND-gray, dynamic thing people used to call, "journalism."

This is unethical and too dangerous a risk when the investments of pensioners, workers, parents and others are on the line.

Transatlantic handshake, Day 2

UK Prime Minister Gordon Brown topped off his visit to the U.S. with a speech to a full Congress Wednesday to promote his "Partnership of Purpose" with the United States. In a gracious, laudatory and often deferential-to-the-U.S. speech, the PM was forthcoming and direct in his support of the American hegemony and its new chief, President Barack Obama.

In his speech, Mr. Brown also issued a sharp rebuke to the George W. Bush Administration, saying "this is the most pro-American Europe in living memory," suggesting that the U.S.' obvious inability to cooperate with European allies in recent years was not because of ideological differences but because of how the pre-Obama occupant of the Oval Office managed relations with Europe.

For one, Brown looked re-energized, despite the stagnation of his political agenda at home. He appears to be truly renewed by having a trans-Atlantic partner in President Obama with whom there can finally be a dialogue between the UK and US based on respect, debate and exchange of information. He was clearly basking in the limelight.

Mr. Brown's stated objectives on issues such as "expanding scientific research" and eliminating abject poverty around the world are admirable, but there is, with good reason, some skepticism about Mr. Brown's commitment to such policies -- for example, how can a government that wants to help lead the fight against climate change also build a third runway at Europe's busiest hub airport instead of upgrading London's 19th-century public transportation system or investing in newer, more efficient modes of inter-city mass transit?

Some other highlights:
-- Sen. Edward M. Kennedy, the "lion of the Senate," is now SIR Edward Kennedy, thanks to Queen Elizabeth II.
--"A worldwide reduction in interests rates" is needed because the UK and US can't do it alone. This is a sign that the economy's real bad and is going to get much worse. The Bank of England's benchmark rate is already down to a meager 0.5% ("who wants money for free?") and the Fed's federal funds rate is less than that.
-- The Republican side of the house was often slow to applaud to Mr. Brown's proposals. Mr. Brown's stated agenda mirrors that of his American counterpart, and the fissure in Congress is obvious. At one point, when the prime minister attacked offshore tax havens, it took the Republican side of the aisle a good 5 seconds to start applauding (simply out of respect to the Right Honourable guest and not out of agreement).

Transatlantic handshake, Day 1

UK Prime Minister Gordon Brown began his highly symbolic visit with President Obama Tuesday. The unelected Mr. Brown became the first European leader to meet with the new president, beating out formidable opponents in Angela Merkel of Germany and Nicolas Sarkozy of France. Here are some thoughts:

1. We didn't get much of a chance to hear from the prime minister - his formal news conference with President Obama was canceled because of snow in the White House garden (isn't there an indoor spot for news conferences??) - but he and Obama struck all the right notes of cooperation between the traditional Allied powers in a toned-down "pool spray" news conference, pledging to coordinate fiscal stimuli and financial sector re-regulation.

I can't help but think PM Brown, who as Tony Blair's chancellor presided over the UK's financial sector deregulation and expansion of financial services as a hub industry, is in a sticky spot partnering with a president who is farther to the left on the political spectrum and whose criticisms of financial sector regulation could easily apply to Mr. Brown himself.

And for once, a U.S. president dismissed the whims of the stock market. Obama said:

"What I'm looking at is not the day-to-day gyrations of the stock market, but the long-term ability for the United States and the entire world economy to regain its footing. And, you know, the stock market is sort of like a tracking poll in politics. It bobs up and down day to day, and if you spend all your time worrying about that, then you're probably going to get the long-term strategy wrong."

I for one am tired of seeing day-to-day stock market fluctuations covered as "economic" news. The stock market is obviously a good indicator of long-term growth. But markets respond to information and the perceived implications of that information - so when the markets fall, it is due to more than one factor than merely the state of the economy at any one given moment.

2. The electoral effect - How will Brown's new relationship with Obama improve the Labour party's electoral prospects? Certainly Britons may want a leader who can mesh well with the new president, and we already know Obama isn't too impressed with the prime minister-in-waiting, David Cameron.

3. Brown challenged Obama to a tennis match while conceding he'd probably lose to Obama in basketball. The duo will meet again in less than a month at the G/20 summit in London - Obama should pack his racket.

Brown will address Congress Wednesday night - tune in here for a recap of Day Two.

A view from Mexico...

Yesterday I attended one of the more interesting lectures I've encountered here in London, a frank discussion with Jesús Silva Herzog, the former finance minister of Mexico (during the 1982 debt crisis, no less), among other things. Here are some highlights from his talk Monday evening:

(1) Mr. Silva Herzog sharply criticized neo-liberal orthodoxy, saying it has prevented Mexico's government from promoting full employment and economic development. He pointed to the escalating debt-to-GDP ratios of many industrialized countries (think U.S. and U.K.) as reason for why Mexico should allow its debt ceiling to increase slightly if it means preventing a total economic collapse.

(2) On the financial crisis - "We've been through it before, so a 2 percent drop in GDP [which has been projected] is not that bad." He expected Mexico, 80% of whose exports go the contracting United States economy, to suffer in 2010 as well. "This crisis is not a liquidity problem, it is about solvency."

(3) The banking sector - One of the main areas of vulnerability that Mexico has during the financial crisis is the opening of its well-capitalized, healthy banking sector to foreign ownership. For example, Banamex is owned by the ailing Citigroup. Further complicating this is that if the U.S. government takes a 30-40% stake in Citigroup as planned, that would break Mexican law, which bars any foreign government for owning a stake in domestic banks.

Liberalization of the Mexican banking sector (which was a bone of contention during NAFTA negotiations in 1993), was one of the greatest mistakes Mexico has made, he said. Mexico is the only G/20 country that has allowed such deep, widespread ownership of domestic commercial banks. The threat of foreign banks repatriating capital for their own survival in their home countries is an omnipresent threat Mexican officials must consider.

(4) On aid from the United States to fight crime related to the drug trade - "it's nothing. It's more of a symbolic thing, that the U.S. is helping us fight the drug cartels." He used this point to stress that unemployment, particularly in the maquiladores in the northern cities near the U.S. border, could help fan the flames of the drug trade.

(5) On Latin American unity - Mr. Silva Herzog said Latin American unity has been difficult to find during the financial crisis because of the lack of synchronicity. Unlike the Euro zone countries, which more or less share the same business cycle (a big reason why the Eurozone has been a strong monetary union), Latin American countries experience differing business cycles.

He was also a little bit of a comedian, at times cutting through serious topics with a little bit of humor. Like when he said Mexico needs to once again take the lead among Latin American countries (a role Brazil has now assumed), especially at the G/20 summit in London next month. He suggested the three Latin American representatives in the G/20 meet somewhere in South America or in Madrid, across the Atlantic, "and I don't mean in the middle of the Atlantic."

Pay to Play?

In his speech to a fully assembled Congress Tuesday night, President Barack Obama spoke of Leonard Abess, a Miami bank executive who, upon departing his job, received a massive separation bonus. Instead of pocketing it all, however, Mr. Abess shared it with the hundreds of people who work and used to work for him.

There's no doubt this was a great act of kindness, but was Mr. Abess's prominent placement in the new president's first "state of the nation" address a result of his political loyalty over the years?

It turns out Mr. Abess is a significant donor to the Democratic Party, amassing $25,000 in "soft money" contributions on top of more than $137,400 political contributions, according to a search of Federal Election Commission records. Try the query here.

Not sure this is anything to cry about, but in this age of cynicism about politics, it's hard not to think that he got props in a major national speech as some sort of reward for his financial support of (mostly) Democratic candidates - although he did contribute to George W. Bush's re-election campaign.

Wanted: An Asian Miracle

On her first crack, Secretary of State Hillary Clinton has been making one of the most symbolic American diplomatic tours in recent memory. Indeed, it is a harbinger for the major shift of economic and political power from West to East currently in progress.

As the elastic thinker has previously insisted, any solution to future solution to the economic maelstrom of the day must include Japan, the world's second largest economy, one of the United States' primary trading partners and a key bulwark against nuclear North Korea and rising China. The Obama Administration is making a shrewd, no doubt intentional, move by hosting Japanese Prime Minister Taro Aso as his first visiting foreign head of state.

Clinton's visit also highlights the urgent imperative of engaging Japan in addressing the current global recession. Japan itself is due to experience the worst economic conditions it has ever experienced post-WWII -- mostly riding on the decline of the export-driven manufacturing sector. And unlike other countries that are currently suffering the brunt of recession -- namely the U.S. and United Kingdom -- Japan has the dual misfortune of having a strong/appreciating rather than weak/depreciating currency, exacerbating its poor economic prospects due to an already precarious reliance on exports.

By inviting Mr. Aso to the White House, President Obama is making it clear that not only is Asia the new center of political and economic gravity (even it's not centered in Japan). He will also likely seek advice from Japanese authorities on how to prevent an American version of Japan's "lost decade of growth." Sadly, Japan has its own issues to worry about - and this could indeed be Mr. Aso's first and only visit as prime minister; he is due to call for elections before September, and the Democratic Party of Japan is waiting to seize control.

Enough Said...

I need not write anything more, other than to quote one of President Obama's responses to a reporter at his first primetime news conference as head honcho:

"When it comes to how we approach the issue of fiscal responsibility, again, it's a little hard for me to take criticism from folks, about this recovery package, after they presided over a doubling of the national debt. I'm not sure they have a lot of credibility when it comes to fiscal responsibility."

I'd like to thank the prez for finally pulling a little punch on the obstructionist senators who are dragging their feet. It's not quite a knockout uppercut, but a slight jab from the Illinois southpaw.

Transparency or "Obama 2012"?

Today I received an e-mail addressed from David Plouffe, President Obama's campaign manager, on behalf of BarackObama.com. He asks me to watch a YouTube clip of the president's nationally televised plea for Americans to support his economic recovery plan. An abbreviated screen shot of the e-mail:


Note that it is signed by Mr. Plouffe, as Mr. Obama's campaign manager. So, what exactly is Mr. Plouffe's role in the Obama Administration? Obviously, having engineered one of the most effective (and expensive) presidential campaigns ever, Mr. Plouffe undoubtedly has won the president's loyalty. But with such an e-mail, who is Mr. Plouffe representing (especially when, at the e-mail's end, a statement reads that it was paid for by the Democratic National Committee)?

Ultimately, I think this e-mail is fairly innocuous - and it reveals the president's desire to communicate directly with constituents (or those who signed up to an e-mail list) in a direct, seemingly transparent fashion - but is this e-mail an item of electioneering? Or is it the president communicating with his constituency? I think Mr. Obama should be careful in such messages, as they could be construed as an ongoing re-election project, rather than factual communication on public policies currently being debated.

Time for the Dems to Grow a Pair

The honeymoon of the Barack Obama presidency lasted about as long as a Britney Spears nuptial. As America got back to business after the euphoric day of January 20, several large corporations announced layoffs, unemployment claims rose, the GDP shrank, and Citigroup held off (at least for now) its plans to buy a multi-million dollar corporate jet. These are just a few of the ridiculous headlines to remind us that, yet again, the little guy pays while the big-wigs suffer minor setbacks (the folks at Merrill Lynch might afford only one vacation to southern France, instead of three).

Mr. Obama's approach to the economy has, in my view, sent mixed signals. First, his recently-confirmed Treasury secretary (Timothy Geithner) irresponsibly sounded the battle cry of a trade war with China, outwardly stating the obvious but unspeakable - that China manipulates its currency to boost its export-drive economy (at the expense of American industry). This, ironically, before the passage of a massive spending bill that will need to be financed entirely by parties other than the debt-ridden U.S. government, namely the Chinese central bank. Not to mention the even more devastating consequences to China's economy if it were to revalue its currency further, an event that is not in anyone's best interest and least of all China's biggest trading partner, the United States. Japan is already hitting a wall with the yen at its strongest level in years.

On the domestic front, we have quickly found out that Mr. Obama's admired approach to building consensus may not be a match for the intensity of the current economic crisis and the political fault lines that have become clear this week. We need not look further than the fact that the House of Representatives passed President Obama's $819 billion stimulus bill without a single Republican supporter.

So what does all this mean? I respect Mr. Obama's desire to hear both sides of the issue, but ultimately, he is the boss that the American people elected. Somehow, the Democrats have such an inferiority complex and manage to bungle even those times when they have unequivocal legislative power - it is time to create the policies that the American people overwhelmingly demanded in the November election, not watered down, ineffective policies that attempt to bridge some sort of political chasm. It's time to ignore Republican obstructionism and faux consensus building and play hard, cold politics, if Mr. Obama is to get anything done for the economy in a swift manner. And I have faith that he will.

Not the Worst President

Tomorrow at noon, the eight-year reign of President George Walker Bush will come to an end. Many will celebrate Bush's final day as president, and some will look back in reverence in his historic, albeit turbulent, tenure. I have often disagreed with most of the outgoing president's policies. But the elastic thinker is all about fairness and hearing all points of view. And so this special inauguration edition will discuss why President Bush is not the worst president. Here are 5 reasons (yes, I was able to think of five) why I think history will ultimately have a forgiving look back on the 43rd president.

1. Democracy in the Middle East - the war in Iraq was a blunder that I opposed from the outset. But just as seeing American soldiers and Iraqis lose their lives is upsetting, the rise of a fledgling democracy in Iraq is certainly troubling to the autocratic regimes that surround it. Iraq, of course, has its own unique history and ethno-religious divisions that make it more conducive to civil war. But the anarchic unrest of that country could be a looking glass into the future for the other governments in the region that have long suppressed democratic forces. The neocons in the Pentagon were wrong about the war, but may end up with a favorable result down the road.

2. Nuclear cooperation with India - President Bush is the first U.S. leader to seriously engage with the world's largest democracy and formally establish strong economic and security ties with what I see as a key long-term ally in Asia for the United States. Though the U.S.-India nuclear agreement, ratified in 2008, would seem to blaspheme all international agreements on nuclear non-proliferation - it signals the Bush White House's acceptance of India's legitimate use of nuclear energy for peaceful purposes and its responsible custody of nuclear weapons. This new relationship between India and the U.S. will pay great dividends.

3. The fight for immigration reform - Bush was often the lone member of his party willing to accept sweeping immigration reform that was practical and acklowledged that the U.S. economy cannot function without migrant labor. Other Republicans were too worried about their electoral standing to take a real, hard look at the issue and instead took the hard, anti-immigrant line typical of the far right wing. The immigration reform bill died.

4. Taking on North Korea - this is more a credit specifically to the U.S. State Department envoy Christopher Hill, but the Bush Administration largely succeeded in breaking the impasse with nuclear North Korea. The administration smartly conducted multilateral (six-party) talks at times and bilateral talks at other times. The end result was the first tangible commitment (at least at that time) from North Korea to dismantle its nuclear weapons program.

5. He united us before dividing us - 9/11/01 galvanized the United States. Bush united the country behind a common purpose. He later squandered the goodwill earned among nations after the attacks, but the positive aspects of Bush's legacy, I believe, will be his response to 9/11. It all went downhill from there, though.