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.

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.