Fare Thee Well, oh Blogosphere...

Usually after a prolonged hiatus on this blog I find some inspiration to write about a topic fresh on my mind or in the news. Only this time, however, I must bid farewell.

I recently began work at a news organization, and as such, will be suspending writing about subjects that I actively cover because of the potential of conflicts of interest and of course because I need to devote my energies to my employer. It's a sad thing but also a necessary thing in the world of journalism, where reporters should be held to higher standards of independence and balance. I hope to blog again in the future, but for now the elastic thinker is going on a bit of a sabbatical.

This was an enjoyable experiment in the blogosphere. While I had few readers, I would be remiss if I didn't thank consider, evaluate, act, Luc in Progress, and the budding anthropod for their loyalty and dedicated readership. For those of you who are reading this, I highly recommend you add them to your feeds as they cover some interesting subjects in British politics, science and environmental policy, sustainable development and other issues concisely and intelligently.

Thanks for your support, all!

Bottom-up Financial Reform

The financial reform bill recently signed by President Obama will attempt to attack numerous regulatory gaps and enforce new consumer protections to prevent the next global economic crisis.

But consider this thought from historian Niall Ferguson in his book "The Ascent of Money" (which, by the way, was written before the worst of the financial crisis hit):

"Politicians, central bankers and businessmen regularly lament the extent of public ignorance about money, and with good reason. A society that expects most individuals to take responsibility for the management of their own expenditure and income after tax, that expects most adults to own their own homes and that leaves it to the individual to determine how much to save for retirement and whether or not to take out health insurance, is surely storing up trouble for the future by leaving its citizens so ill-equipped to make wise financial decisions."

The financial institutions who duped unassuming home buyers into taking on mortgages they couldn't afford and the regulators who failed to identify the risks of doing so are certainly to share the blame for the recent economic turmoil. But a major missing piece in the recent regulatory reform bill, and in the general conversation about righting the economy, is an effort to improve basic financial and economics education - something that should be part of every primary high school and college curriculum. For most Americans, this education once came in the home, with parents teaching children about saving money, living within one's means, earning before spending.

But the expansion of credit over the last two generations has complicated this message: Spend, so long as you can pay the interest. Living beyond one's means is now possible - indeed a miracle of credit - but has created a sort of financial overconfidence in society.

In the principal-agent failure that took place in the recent crisis, the "principals" (bankers, etc.) with access and financial sophistication far above that of the average person were able to manipulate finance to make enormous profits, all the while knowingly risking stability of the financial system that enabled such tactics.

The new reforms notwithstanding, it is difficult to assume these mistakes won't happen again when the "agents" in society, ranging from local police pensions funds to average Joes, continue to be ignorant of the rapidly evolving world of finance.

The Romer Aftermath

The recent departure of Christina Romer signals a troubling future for the Obama Administration's economic policy team -- and does not bode well for the president's party before the crucial midterm elections this November as the American public grows weary with the nation's slow economic recovery.

After his election, the president was criticized for his selection of Washington has-been and politically connected Larry Summers and New York Fed boss Tim Geithner as his main economic policy henchmen. But he balanced these appointments with solid choices in Peter Orszag, former head of the non-partisan Congressional Budget Office, to head up the president's budget office (OMB), and Romer, an academic economist respected for her expertise on recessions, to run the Council of Economic Advisers (CEA). Obama also tapped former Federal Reserve Chairman Paul Volcker as an adviser, though Volcker's role in economic decision-making is not quite as clear or concrete. Orszag and Romer are now gone, both for different reasons.

Though Romer has denied it, it appears the CEA's role in economic policy advising was largely minimized with the presence of Summers, whose position , created ad hoc, seems to conflict the responsibilities of other officials such as Romer, whose role as chief economic adviser to the president was clearly defined.

Despite his many policy successes, President Obama has still yet to send clear signals to the markets as to what his economic policies mean for the American economy, as well as who is informing his policy-making. With Romer's departure, it has become more clear that certain heavyweights such as Summers are pulling more strings, while other advisers may be cut out of the process.

Taxes and Spending: A Moral Gulf

As a die-hard supporter of the Pittsburgh Penguins professional ice hockey team, I was, like every other supporter, ecstatic when it became official that city, county and state authorities approved a massive bond issuance to finance a new arena for the team a few years ago. The deal prevented the team's threatened move to Kansas City, a city with hardly any hockey culture. It came as no surprise, of course, because these days professional sports franchise owners easily have their way with local governments when demanding new facilities.

More importantly, though, part of the arena's financing would come from newly legalized slot machine casinos that the Commonwealth of Pennsylvania legalized to generate new revenues in a cash-strapped economy. On one shore of Pittsburgh's three rivers, just a stone's throw away from a world-class science museum popular among children, local residents could feed their gambling addictions in a new magnet for crime - and thereby help pay for the new arena. As a fan, I was happy to know my team would stay put - and win a championship one year later - but I also felt dirty knowing the means to that end.

The arena illustrated the paradox of the Reagan-era conservatism that has persisted in today's political culture: with a refusal to raise taxes as a means to finance growing government outlays including large public facilities like arenas and stadiums, you put pressures on governments to find revenue in other, less savory places. Conservatism as a means of preventing "big government" only forces governments to look elsewhere for the funds needed to pay for programs: so-called immoral activities, corporations, and in recent years, other countries with whom the United States shares few common interests.

Take, for example, an idea being pushed, ironically, by Democrats in Congress to legalize Internet gambling as a way of raising just $42 billion over 10 years. Such a sum is minuscule to the size of the federal budget deficit. But the new willingness of Congress to legalize Internet gambling - the addiction for which is probably more difficult to prevent because of the Internet's dispersion and anonymity - shows Congress has reached its last resort in an election year and has run out of ideas to combat real waste in government spending.

The Dangers of Austerity

If the recent Group of 20 summit is any indication, a reprise of the mistake of the 1930's may soon be on the horizon.

An interesting article in The New York Times details how governments worldwide are under pressure to begin scaling back their stimulus measures implemented in late 2008/early 2009 as a response to the global financial crisis. A rhetoric of austerity is the new modus operandi among governments who increasingly feel the political pinch from large budget deficits. The major economies in the 1920's and 1930's also attempted the same thing, thinking such a strategy of austerity would remove the ills of an overheating, inflation-bound economy, but with disastrous results.

The decision in the 1930's to deflate was borne out of a stubborn bias among the world's major central banks of the time - those of the United States, England, Germany and France - toward the international gold standard, which required countries during economic downturns with high inflation prospects to reduce aggregate demand, and therefore prices (wages) and stabilize trade flows, thereby stimulating gold inflows and bringing trade flows back into balance. It is widely believed by scholars, including current Federal Reserve Chairman Ben Bernanke, that this bias by central bankers toward the gold standard during the economic crash in the 1920's and 1930's inadvertently accelerated the descent into Depression because unemployment exploded and the banking system of the time could not handle the stresses of such economic uncertainty.

A major reason why central bankers held such a view was the relative political strength of Wall Street and other financial political-economic machines at the time. The 1920's spelled the official rise of New York as an international financial center, and helped catalyze a shift of political weight from Washington and the farmers to New York. This growing class of financial elite demanded government economic policies that were staunch against inflation, because deflation favors people with assets (bankers and other elite) and disfavors those with liabilities (everyone else).

Today, however, it is unclear whether the financial elite hold as much relative political power. It is therefore doubtful that governments, at least the U.S. government at that, will actually follow through on promises to impose austerity measures. Only in those countries where the financial or industrial sectors hold greater political power (the United Kingdom, for example), will governments actually implement real austerity measures - or at least create the political illusion of it. Indeed, the UK's coalition government proposed an austerity budget that could create drastic cuts in government ministries. Though each country has its own reasons for and against imposing austerity measures, such measures at a time of continuing economic weakness around the world could be disastrous and undo any of the progress made in the last year.

The Peg is Dead

China's controversial currency policy may finally be headed to the gallows, but what remains unclear is how this will affect and prompt movement on numerous politically sensitive issues in the United States, namely its large twin deficits, the current account and government primary deficit.

Make no mistake: China's move is largely motivated by domestic factors - the need to allow inflation to finally creep into its possibly overheating economy and re-balancing its export-based economy with a decidedly smaller dependence on other economies - but, certainly, it was also under pressure to allow the yuan to appreciate by external players.

But for this move to re-balance global economic flows, the United States will have to do its part in the medium to long term. That is, to reduce its deficits and minimize its dependence on foreign creditors to finance those deficits by cutting spending and boosting national saving. Some of this could be accomplished by the hoped-for re-balancing in the current account. But currency values alone do not dictate trade, and therefore current account, balances. The United States needs to go back to being a center of innovation in manufacturing for a real re-balancing to be meaningful. And, with the current crisis in the eurozone, there is even one view that the revaluation could actually backfire.

The Obama Administration and his Treasury have achieved a victory long-sought by the president's predecessor. But now that China has been tamed on the currency issue, the ball is in the American court to do what is necessary to allow the full economic results of a yuan appreciation to benefit those constituencies who yearned for it.

More on the ECB...

More soul-searching at the ECB...

http://www.nytimes.com/2010/05/31/business/global/31deflation.html

Banking on Europe - the ECB's Uncharted Waters

Just in time for the 50th post of this less-than-illustrious blog, the Greek debt crisis reaches a fever pitch and her European neighbors step in to save the day.

Late Sunday various leaders and finance ministers in the European Union and Eurozone as well as the International Monetary Fund announced the creation of an almost $1 billion fund to aid indebted countries in Europe, calming markets and soothing nervous politicians - especially German Chancellor Angela Merkel, whose delicate tightrope walk in leading Europe through troubled economic times has already cost her party in the polls in a recent regional election.

In the elastic thinker's view, while this move was a necessity in the short run to sustain the euro currency zone and calm market fears, it undermined a major institutional strength of the European Union: its autonomy on matters of regional economic policy.

The European Central Bank is widely praised as one of the world's most independent central banks, conducting monetary policy strictly on a singular objective of keeping inflation close to a target range and harmonizing economic growth throughout the currency zone with zero regard for political pressures in individual countries to keep interest rates high or low or to finance government debt. As a result of its independence, it cannot serve as a lender of last resort to Eurozone members like Greece that forgo their responsibilities to keep public spending and debt, and ultimately inflation, under certain levels to prevent a misalignment in the exchange rate parities that keep the European Exchange Rate Mechanism functional.

Instead, with the creation of this fund, albeit necessary, Europe has decided to make the ECB more of an activist monetary authority without explicitly calling it that. By creating a separate "fund," there will be an appearance that a separate body, not the ECB, will be stepping in and rewarding bad behavior by bailing out profligate spenders in the eurozone - when in fact the ECB has already started purchasing bonds to inject money into the banking system. It may continue to be statutorily independent, however it will undoubtedly have no choice but to support any move to bail out countries because such bailouts will ultimately have monetary implications that will influence future interest-rate policy.

By sacrificing the ECB's independence in the short run, the European authorities have mortgaged away the biggest strength of its currency. This will hurt the value of the euro in the long run and undermine the currency's prospect of rivaling the U.S. dollar as the world's reserve currency.

It will be interesting to see how these uncharted waters for the ECB and other EU economic policy-making bodies will evolve during this key test of Europe's institutional unity.

Financial System Reform in the U.S.: What Happens Next

Columbia University's Committee on Global Thought yesterday hosted a lecture with two movers-and-shakers, past and present, in the world of financial regulation in the United States: former Securities and Exchange Commission Chairman Arthur Levitt, and current Commodity Futures Trading Commission chief Gary Gensler. The topic: how to reform a regulatory system that fell asleep at the wheel and failed to detect a crisis.

The panel discussion - chaired by Nobel laureate Joseph Stiglitz - came to two key conclusions: financial markets need more transparency, and the United States needs to take the lead in developing smart regulations if the rest of the world is to sign on.

Gensler's proposal is to bring more futures/derivatives trading into a central clearinghouse, allowing regulators to more easily monitor and assess risk in a market that is fragmented. Centralizing derivatives transactions into a more open, central clearinghouse will cut into the premiums earned by derivatives dealers but will also make the market less risky and more transparent, he contends.

Levitt, a veteran of the Clinton Administration, was decidedly pessimistic on the financial reforms proposed both in the U.S. House and Senate, saying they would do little to prevent moral hazard and a "too big to fail" mentality among major financial institutions. He also said Europe, the United Kingdom and other major financial centers will fail to tighten their regulations until the United States takes the lead. Gensler agreed, but admitted that after 18 years on Wall Street, he knows bankers will, in such a case, take advantage of the inevitable opportunity for regulatory arbitrage - that is, investors will put their money in jurisdictions where capital is less tightly regulated at the expense of American financial markets. These points illustrate that any kind of real policy coordination between the United States and the European Economic Community is an idealistic, rather than realistic, endeavor in such tight political and economic conditions.

What the panel failed to accomplish was finding a way to navigate through the alphabet soup of agencies that are already charged with regulating various segments of the American financial system. Very little was said about the Federal Reserve System, which despite being charged with regulating the banking system from a macroeconomic view, is widely criticized for failing to regulate and for creating the conditions that enabled the crisis through its loose monetary policy. And yet, the Fed remains a key player in any regulatory structure going forward and needs to be a keystone of any reform.

In the end, the discussion itself and the very presence of two speakers representing regulators that, in the grand scheme, have a small purview over the American financial system, revealed how broad a reform is needed. As such, is any discussion that contains only the SEC and CFTC even relevant?

The SEC, staffed with just 3,700 regulators, for example, has very little authority over financial instruments that fall outside the more traditional definition. And, how does an agency such as the SEC both target run-of-the-mill insider trading and securities fraud while also tracking systemic risk in a complex financial system? The failure to bring down Bernard Madoff before it was too late shows how overextended the agency already is.

In the meantime, as Gensler aptly pointed out, the CFTC only regulates futures markets, missing the important and growing piece that is over-the-counter derivatives, among which are the many mortgage-backed securities that were at the heart of the sub-prime crisis. The two in combination have little effect on monitoring a financial system that is increasingly global and increasingly spread over a variety of financial instruments.

Review: 'Videocracy'

A lot is known about the media empire that helped to create (and sustain) Italian Prime Minister Silvio Berlusconi's grasp on power. Erik Gandini's documentary "Videocracy" offers a deeper peek into the celebrity-obsessed culture of Italy, but only delivers a tangential indictment of a man who has turned Italy's democracy into a laughing stock of Europe.

Though director Gandini clearly has a knack for weaving images from Italian television, interviews with various well-connected television personalities and official press appearances by Berlusconi together into a single narrative, he misses a crucial opportunity to deliver a punishing blow to the public image of Berlusconi and educate people outside Europe about the dangers of a billionaire who controls the majority of Italy's television stations and newspapers also running a G8 country.

In some sense, "Videocracy" makes up for its lack of a clear thesis with an intriguing storyline; after all, the story of Berlusconi tells itself. Gandini gets extraordinary access to key players in Italy's media scene, many of whom regularly rub elbows with the prime minister. He spends time at the villa of Lele Mora, Italy's top television agent and a Mussolini admirer, and goes on a celebrity photo hunt with paparazzo-turned-fashion mogul/dark knight Fabrizio Corona. Gandini then gets incredible access to parties and events that attract the elite of Italy. And more importantly, he shows that Italian television capitalizes on sex appeal and thrives on objectifying women.

All of these figures, in one way or another, intersect with the narcissistic prime minister (or "president," as he is referred to in the film). These characters are seemingly used to show how Berlusconi, as a television puppetmaster, can shape Italian cultural norms and opinions. But at many points, these sideshow players become main characters in a film that the viewer yearns to see culminate in a central thesis: that Berlusconi's influence is dangerous and is destroying a democracy. Gandini offers the viewer some hope when he shows how a director of a television show on a Berlusconi-owned network is bullied into cutting his program short 10 minutes in order to cut to a Berlusconi speech. But, ultimately, the film only succeeds in making the 73-year-old leader look like nothing more than a womanizer, a charge that he would be proud to agree with.

The film is marketed as an expose of Berlusconi's media empire, yet does little to connect the television obsession of a large majority of Italians to the larger questions of the dangers of Berlusconi's hold on power and public opinion. This is because Gandini fails to illustrate why Italy is a special case. Celebrity obsession and sex-peddling on television programs is nothing exclusive to Italy. If anything, television programmers in the United States have become masters of a formula in which big boobs and long legs get good ratings. Berlusconi's control over outlets that offer these things is fairly innocuous. The more interesting story, and which is more imperative to tell the rest of the world, is how his media control damages any semblance of a free press in a country that so direly needs it.

Export Opportunism - Part II

An update on President Obama's pledge to increase American exports - the president today made reference to the country's trade relationship with China, providing further evidence that the administration could take the route of pressuring China on the currency devaluation issue to address its trade imbalance, a move that the Chinese government will likely be less-than-thrilled about:

http://online.wsj.com/article/SB10001424052748704259304575043171767767724.html

Export Opportunism

President Barack Obama finished his first State of the Union address last week with the same vigor and rousing rhetoric that helped win him the presidency 15 months ago. But politics were on bright display and there seemed to be little 2010 doubt that, despite Obama's calls for congressmen to set politics and ambition aside to do what their electorate sent them to Washington to do, political impasse would be the name of the game in a year of midterm elections.

The speech has been President Obama's most useful tool in tackling a political crisis. When it came to selling the health care bill or troop surge in Afghanistan, the slumping president has looked to his rhetorical skills to remind everyone how inspiring he is and why a large majority of Americans liked him in the first place.

In practical policy, however, Obama has numerous challenges he ambitiously set forth in his speech last week, the most peculiar of which is his goal to double exports from the United States in five years. It is a seemingly innocuous pledge in a sea of promises that define state of the union addresses, however, it is much more puzzling considering that doubling exports is a keystone of his strategy to repair the American economy.

The United States has run a trade deficit every year since 1975, and contentious squabbles over the reasons why have dominated American international economic policy debates ever since. In the 1980s, it was Japan who bore the brunt of American criticism for weakening the yen and boosting exports at the expense of Michigan auto workers and other Rust Belt industrial firms. In the 1990s, the post-NAFTA "sucking sound" from Mexico was the scapegoat for another swath of American manufacturing job cuts and a drop in the number of things we consume that are produce at home.

The 2010 rhetoric signals that the United States will either enhance protectionist measures against foreign imports, or, more interestingly, take on the Chinese and pressure the world's fastest growing economy to halt its alleged currency devaluation, allowing the dollar to depreciate, boosting exports and reducing the trade deficit.

Either strategy would go contrary to the international economic policies that are in the country's best interest in the short term. The former would only jeopardize any hard-earned progress on recent trade negotiations, and the latter would further alienate the single most important country to America's economic future, in terms not only of trade but of finding a willing lender to finance America's massive debt-driven recovery. Or, it could just be a matter of semantics: the U.S. might well double exports in five years' time, but it might also double its imports, only worsening its untenable current account deficit.

Each of these potential reasons signals very little economic policy creativity; though it will be no small achievement if the United States can actually double its exports in five years.