'A revolution without a revolution'

Even looking back after 20 years at the collapse of the Berlin Wall - and by extension, the collapse of Soviet communism - it's hard to wrap your mind around the enormity of the change that swept through Eastern Europe.

I've seen plenty of articles recently that attempt to put things in perspective, but this piece by Der Spiegel strikes me as being particularly good. I'm about half-way through, but it drives home how the real revolution took place not in Berlin, but elsewhere in Poland, Hungary and Moscow.

It's not short, but definitely worth a read.


(Image from Europa.eu)

Party like its 2005, Wake up in a ditch

Last week I highlighted so-called 'CoCo bonds', and worried aloud that they are a sign of lessons lost from the financial crisis.

Well, apparently, things are a lot worse than I thought: mortgage-backed securities are rising from the dead.

I barf.

Securitization is not inherently bad, or systemically risky, and its financial utility can be quite large. But these particular instruments, the actual trigger of the financial crisis, are ticking timebombs that propagated the perverse incentives and speculation that boosted the housing bubble and sunk financial institutions around the globe. Their resurrection is an ominous sign that 'business as usual' is returning to the market, and the regulatory response thus far has failed to address the very issues that got us to this point.

And remember, banks never shed these assets, they instead sit as worthless weight on the balance sheets of the biggest recipients of taxpayer bailouts around the globe. When new mortgage-backed products enter the marketplace, and spur new lending within the housing market, the value of the old assets will rise, bringing with them a potentially massive windfall for banks and investors. This will be a tremendous boost to the market for these products, and reinforce the incentives to create them.

That's a problem.

G20 and the Gordon Brown self-destruction show

For once, Gordon Brown has managed to up-stage his cross-channel compatriot, Nicholas Sarkozy, at a G20 event. This might have had something to do with the fact that neither Brown nor Sarkozy really belonged at a meeting for Finance Ministers and Central Bank Governors, so the Frenchman had understandably stayed at home. But that technical detail was not enough to stop Gordon Brown, oh no.

In case you missed it, Gordon Brown gate-crashed the G20 meeting in St. Andrews by backing a proposal for a transition tax. (For a backgrounder on the transition tax, see here). This continues the trend of the Prime Minister attempting to use home-turf advantage to blatantly hijack G20 meetings to advance his electoral prospects.

The trouble is, it's not working very well. Remember that $1 trillion dollar figure that emerged from the chaos of the London G20 summit? The one which Berlusconi is said to have described as "the most expensive election campaign ever?" No? Well neither is the British electorate come voting time next year.

At least after the London summit, Gordon Brown managed to temporarily project the image of international statesmanship. With his latest PR stunt, the PM just comes across as desperate. He clearly hadn't bothered to build a coalition for the idea, instead trying to catch his colleagues off-guard. The effect was predictable: representatives from Russia, Canada, the IMF, the ECB and, most singificantly, the United States immediately rejected the proposal. Without the US, the idea goes nowhere.

So Brown backtracked from his position by the end of the weekend, looking very much unlike an international statesman.

Here's the thing: I believe that Brown is sincere in his arguments for a new social contract in which taxpayers do not provide costless insurance for large financial institutions. But the way he has gone about promoting this view smacks of political manipulation and panic. His headline-grabbing attempt over the weekend was yet another episode in the Gordon Brown self-destruction show.

The rest:

The big disappointment for me in the G20 communique from St. Andrews was its deafening silence on the issue of macroeconomic imbalances. The Pittsburgh G20 communique from September impressed me in that it actually included a commitment to address the issue head-on (and somehow China agreed!). The real test for G20 commitments, however, is that they continue to appear is subsequent communiques. So far, this one isn't looking good.

Coo-Coo for CoCo bonds

One day, we might look back at this article as an ominous sign that all lessons were lost, regulatory reforms insufficient and incentives misaligned following the crunch.

The banking industry looks coo-coo for CoCo bonds. Sophisticated debt instruments are back.

Quote of the day: Euro blues

“The Americans get the toys, the Chinese get the Treasuries and we get screwed.”

That is a quote from an EU official to Alan Beattie in his November 2nd article in the FT entitled, 'Renminbi at heart of trade imbalances.' The sentiment echoes my observation that the Europeans are turning out to be the big losers in the US-China currency dance.

The old adage that the USD is 'our currency, but your problem' is as relevant as ever, at least to Europe.

Quick hits and pink picks: FX-heavy

-Should the IMF embrace Brazil's imposition of (selective) capital controls? These two think so. Also, FT Alphaville had a good analysis of the decision (I realize we are a bit late on this.)

-Nouriel Roubini takes aim at the 'mother of all carry-trades.'

-Is the democratization of FX trading a good thing? Or is it really just another hustle?

-Will a weak dollar hamper Europe's recovery?

-Speaking of Europe, France had quite an expensive EU presidency last year.

-Is this Obama's 'Vietnam moment?'

-Finally, if Russia considered NATO exercises in its 'near-abroad' hostile, how should NATO interpret the simulated nuking of Poland?

Readables

Your Thursday readables:

- So it begins: emerging markets pass the developed world in foreign direct investment receipts

- The US economy returns to positive growth. Break out the party hats!

- Now listen to this podcast, and put your party hats away. This is excellent.

- What story can you tell in 6 words?

- Very cool nature pictures

Why The US Dollar Will Not Weaken (yet)

Barry Eichengreen, the reliably even-handed Berkeley prof, has written an article arguing that the future of the US dollar is not nearly as grim as some would have you believe:

"The blogosphere is abuzz with reports of the dollar’s looming demise."

With posts like this one, Barry? Onwards:

"The first thing to say about this is that one should be sceptical about economists’ predictions, especially those concerning the near term. Our models are, to put it bluntly, useless for predicting currency movements over a few weeks or months.... Over periods of several years, our models do better. Over those time horizons, the emphasis on the need for the US to export more and on the greater difficulty the economy will have in attracting foreign capital are on the mark. These factors give good grounds for expecting further dollar weakness. The question is, Weakness against what?"

This is precisely the point that one of our readers brought up when I discussed this issue a couple of weeks ago (see? we read your comments). The argument goes like this: the dollar is weakening, but so are the currencies of all other major economies due to stimulus packages and mounting government debt. If you are going to abandon the dollar, you need to switch to something else. Barry dismisses the likelihood of the USD being replaced by the euro or yen, and points out that China will not be ready to introduce the remnibi as a viable alternative for quite some time.

Nor is inflation a plausible threat right now, either: despite what some shrill voices may be saying, the Federal Reserve is still determined (and credible) in its fight against inflation.

So without an alternative currency to the dollar, there's nowhere to go. Aha! that is where gold comes in, right? Not so fast, says Nouriel Roubini in a recent interview:

"I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies.... The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense."

I think that these are all important counter-arguments to those inclined to write the dollar's obituary. My earlier post suggested that the evidence pointed to a long-run decline in the dollar - and that argument still holds. But for the short term? I leave the last word to Prof. Eichengreen:

"For the moment, the patient is stable, external symptoms notwithstanding. But there will be grounds for worry if he doesn’t commit to a healthier lifestyle."

Burgernomics: Iceland Edition

McDonald's is not only a giant in the fast-food world, but it is also the source of handy economic indicators. See, for instance, The Economist's Big Mac Index and its alternative.

But there's a much more blunt McD's indicator: it occurs when, despite operating in about 120 countries worldwide, the burger chain decides that your country is a lost cause:

Iceland edged further towards the margins of the global economy on Monday when McDonald's announced the closure of its three restaurants in the crisis-hit country and said that it had no plans to return. The move will see Iceland, one of the world’s wealthiest nations per capita until the collapse of its banking sector last year, join Albania, Armenia and Bosnia and Herzegovina in a small band of European countries without a McDonald’s.

That is serious.

Remainders

A controversial topic deserves a second-, and third-look:

-A shock poll out of the UK says one in five Britons would 'seriously consider' voting for the BNP following Griffin's Question Time appearance. This underlines my major point: Wake up, Britain.

-Lest you confuse my support for freedom of speech and political assembly with approval for the BNP, I give you the blokes at The Bugle and their take on the BNP.

'Nick Griffin is a man with a face that screams out, 'hit me with a plank of wood.'

Thoughts on...Nick Griffin and Question Time

Many of our readers will be familiar with the controversy in Britain over the appearance of the British National Party's (BNP) leader on the BBC's Question Time program. In short, the political and media establishment has rounded on the BBC over its decision to let Nick Griffin appear on the Thursday evening show, in my opinion the best political television program in the world. They argue that by granting the BNP a mainstream platform alongside the three most prominent parties (Labour, Tories and Lib Dems), the BBC is legitimizing the far-right party and providing its incendiary leader with a national audience to direct his 'fascist' message. The BBC has held its ground, and Griffin appeared on the program just hours ago while protesters clashed with police outside.

I have a few quick thoughts on this whole ordeal. One, Question Time is over and the constitutional monarchy stands (that was a close one!). Two, it is a slippery slope between between banning hate speech and repressing the legitimate political views of organized, well-supported parties. Griffin's views are despicable. But that does not mean he should be refused the opportunity to sit down at a table and debate those issues. That is what separates us from the animals. And as prehistoric as the BNP's views might be, they are a modern political party with a real, and growing, base of support in Britain.

Three, I recognize that there is a chance the BNP will incite violence or intolerance amongst its supporters or impressionable minds. But that is an insufficient test of whether they should be allowed on a program like Question Time. In my own country, members of the Republican Party have likened my president to Stalin, claimed he was a foreigner lacking the birthright to hold the office and warned that his government was coming to take away the guns of law-abiding citizens. There was a disturbing spike in gun purchases prior to Obama's inauguration. They have also labeled immigration over our southern border an 'invading army', leading private citizens to patrol that border with weapons (rhetoric likely to find a home with the BNP). But no serious political mind would argue that these elected representatives should be denied a chance to speak on any of our news networks. In fact, they have a whole network devoted to them!

Most representatives of the Republican Party wouldn't utter these words if they didn't resonate with their supporters. Likewise, the BNP's recent success at the polls is but a symptom of the growing resonance of its message. Disillusionment with Westminster has likely played a role in this as well, as the performance of smaller parties in the last elections demonstrated. If more and more people were not drawn to the BNP, there would be no demand for its leader to debate the political establishment on issues like immigration and European integration.

That is the real issue that the British establishment has conveniently ignored, instead directing their anger and insecurity at the BNP itself. I was disappointed that much of the panel debate and most of the audience questions this evening focused on the legitimacy of the BNP itself, as a political party, instead of forcing Griffin to openly debate its platform with members of the more established parties. It seems much easier, and more convenient, to attack the BNP than to debate why this party's support is growing. Those answers are likely far more difficult to deal with, and cut directly to the national character and social contract.

The BNP is a deplorable party. But Nick Griffin was on Question Time for a reason tonight. For his invitation, the BBC deserves enormous credit.

Thoughts on Flying

I just spent twelve hours of my day flying and hanging around in airports, so my brain is pretty numb at the moment. But here's a thought that struck me right as my plane was about to land: why do we still use lap-belts in airplanes?

Lap-belts were banned from land vehicles because they cause spinal/internal injuries in accidents. Even most back-seats have three-point seat belts because they are much more effective. In fact, I think airline pilots and even the cabin staff have 5-point harnesses - so what does it say about the passenger when they're only given a lap-belt? I see several possibilities:

1) You are not worth as much to the airline as the pilots & staff, so they have invested less money in your safety.

2) In the event of the plane crashing, the seatbelt will have such a minimal effect on your survival that upgrading to a three-point belt is not going to make a difference. The only purpose of the belt is to keep you from knocking your head in the event of turbulence, so a lap-strap is enough to do the job. But then why do the pilots have more secure equipment?

3) Consumers would complain loudly about lack of comfort and mobility, or,

4) Consumers would complain about feeling less safe in a 5-point harness because it would make one acutely aware of the dangers of flying.

It seems to me that points 3 & 4 are the most likely, but also unsatisfactory - the same arguments applied to the introduction of mandatory seat-belts in the 1960s, but we went ahead anyway because it's a good idea. And #2 doesn't stand up to scrutiny, either.

That leaves me with point #1, which is a less-than-encouraging thought. What have I missed?