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.