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