Tuesday Readables

- Just announced: a new central bank for the Gulf region.

- Updated list of the best fucking books on the financial crisis, sorted by fucks-per-page.

- US consumption: gasoline vs. bimbos

- Bernanke's 2005 "savings glut" theory for the global macroimbalances does not match the data - perhaps irrational exuberance played a role as well?

- Talks in Thailand reach a standstill

Spring Cleaning chez IPE Journal

In an attempt to exercise some spring cleaning on the blog (and thereby procrastinate any actual cleaning of my apartment), I have decided to reduce and simplify the labels used for our posts. Previously, Rory and I had been applying whatever labels struck our fancy at the time - the end result is several hundred of the blasted things that make it harder, not easier, to search among related topics.

With that in mind, I have decided to limit the categories to no more than twenty. This might hopefully one day evolve into one of those neat-o "Topic Bubbles" that gives new readers a sense of what we discuss most frequently on these hallowed pages. More immediately, it will allow me to keep my scattered musings contained within a specific list of topics. To wit:


Economia - a catch-all for economics, economic theory, and current economic affairs
Politique - political affairs, current events, legislative shenanigans, elections, and the rest of the circus
The Invisible Hand - business, trade and markets
The Fourth Estate - the formal and informal media, the peanut gallery
Paradise Lost - the fall of man/woman and their ensuing foibles. Expect frequent appearances from Berlusconi, Chavez, Putin, and the rest of the gang.
Architecture - financial regulation and the failures thereof, both national and international
Emerging Markets - focus on emerging markets
The Bottom Billion - non-emerging markets
Shadows on the Wall - philosophy: the meaning of life, the universe and everything
The Academy - Academics, research, intellectual pursuits
Lords of Finance - Wall St, The City, Masters of the Universe, vampire squids, etc...
Blistering Bombast - rants, raves, orations, bloviations & bile-sputtering tirades on any and all topics
Sport - sport
Les Arts - the arts
The Rest - miscellaneous, plus blog-related
Readables - links to things of interest

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For many readers, the use of such snobby, elitist labels merely reinforces their suspicions that this is a snobby, elitist blog. I cannot argue with that. But I do welcome suggestions for any topics I may have overlooked.

Thursday Readables

- "What is the Second Amendment?" "The reason our convenience store gets robbed." Joe Wong at the correspondent's dinner

- Simon Johnson and Peter Boone examine why the US should not look to the Canadian banking system for ideas. Some good points, but overall a misleading piece.

- Sigh. New rules allow Venezuela's government to use "excess" central bank funds.

- Cool vending machines (via MR)

In the long run...

Over at Aidwatch, Bill Easterly is diving in to Reinhart and Rogoff's This Time It's Different, an epic catalog of financial crises through history. (As a side note, the book is excellent. Although, as Rogoff is a crack statistician, it leans heavily on data sets and can be a bit dense. It's also heavy on perspective, so if you're not looking for any of that, stay away.)

The main message of This Time It's Different is, of course, that this time is not different: that financial crises repeat themselves, repeatedly, under remarkably similar circumstances (although always slightly different in the final details). Rather than reading this as a dour condemnation of the market system, Bill Easterly reads this as a ringing endorsement:

"First, financial crises are remarkably common... Second, the global capitalist system does well in the long run anyway....I don’t mean to minimize the short run pain that the current financial crisis has caused. It’s horrible. But there is no reason to panic about the long run growth potential looking forward. The obvious rejoinder is Keynes’ “in the long run, we are all dead.” But we can’t ignore that Capitalism already survived repeated financial crises and has made us all vastly better off despite them. So here’s a counter-quote: “In the long run, we are all better off because our dead ancestors stuck with capitalism.”

Easterly's advice, like that found in the Hitchiker's Guide to the Galaxy, is simple: Don't Panic. I made a thematically similar argument back in the fall of 2008. But what are the implications of this conclusion?

Easterly seems to be suggesting that short-run worries about debt-sustainability and economic recovery are misplaced. Things will be fine once growth returns. Mark Thoma, however, reads this slightly differently: if the economy will return to growth eventually and debts will be slowly inflated away, don't you dare hold off on that monetary/fiscal stimulus when a crisis is afoot! Do not, in other words, go easy with the firehose for fear of soaking the curtains: they will dry eventually. The implications of Thoma's view are clear enough - we need to address the immediate problems immediately, and that means unemployment, social safety nets, getting credit flowing again, etc.

These are good arguments for you to ponder. But before you begin pondering, I would only add a couple of small, niggling points:

Primo: not all countries have the same bounce-back capacity as the United States. When you have the world's reserve currency - and when global commodities are priced with your moolah - you have great power to outgrow deficits. You can effectively outsource your debt. Most countries do not have this capacity, and a financial crisis of significant magnitude can bog an economy down for years and sometimes decades. For most countries, then, panic is an appropriate response.

Secondo: despite appearances, these charts are far from a ringing endorsement of the bounce-back ability of financial markets. We do not know what those charts would look like if financial crises ran their course because that has never been allowed to happen. Let me repeat: governments always intervene in the event of a financial crisis. Eventually. Sometimes it takes a very long time (i.e. 1930s) to set things right again, but financial crises have never been permitted to simply run themselves out. This was a fundamental point I took from Charles Kindleberger's work on financial crises, and I think it's something to keep in mind when you evaluate the long-run historic success that is capitalism.

Monday Readables

- Health care bill: check. For some, it is a landmark in reform that aims to provide to millions of Americas health coverage of the kind the rest of the rich world takes for granted; for others, it is “one of the most offensive pieces of social engineering legislation in the history of the United States.” Potato, potahto.

- Last week, political uncertainty grew in Latvia after a member of the ruling coalition pulled out of government. This leaves the current government in a minority position while it attempts to impose reform measures to comply with EU/IMF assistance. The good news: the IMF says it intends to carry on working with the current government and talks are set to begin for another party to join the government, returning it to majority status. Given the small Baltic country's serious economic woes (and the fact that 90% of their debt is denominated in foreign currency), maintaining EU/IMF assistance is going to be essential in containing the damage.

- Facing rising inflation, India is beginning to raise rates again. The markets dropped a bit, perhaps surprised at timing but not the outcome of the decision. Update: FT Alphaville ponders whether this is a "dry run" for China's expected monetary tightening (but concludes probably not).

- According to El Nacional, purchasing power in Chavez' Venezuela has fallen 162%. That's a lot. Some perspective: "So if, pre-Chavez, you could buy 100 potatoes, you can now only afford 62 anti-potatoes."
Wait, disregard: "Math" suggests that it has only fallen by 22%.

A long goodbye

Rory Doyle writes in a personal capacity. The views expressed are his own and do not necessarily represent the views of AIM or its investors.

A couple of weeks ago I accepted a position in the hedge fund industry, which limits my ability to write publicly on the topics and issues we cover here at IPE Journal. Moving forward I will be largely absent from these pages, continuing as sort of a co-editor-at-large, very much a compliment to Dave's incredible output and insight.

I won't wax poetic or bore you with some farewell treatise on the state of the international economy, but I will say that it has been a truly rewarding experience to share this platform with someone I consider the smartest guy in the room. We've been lucky to have a forum to share our views over an historic period of time, and I leave grateful to all of you readers, from Singapore to Seattle, for giving us your attention.

The scope of my contributions will be decidedly narrow and sporadic, and accompanied by the little disclaimer you see above. But this is the start of a long goodbye; one that will hopefully stretch well into the future.

European Central Banker Writes Op-Ed, Confusion Ensues

Lorenzo Bini Smaghi, a member of the ECB Executive Board, penned an op-ed in the FT today entitled "It is better to have explicit rules for bail-outs." Given the relative simplicity and directness of such a title, one would expect the piece to lay out the logic behind such a statement. Instead, what follows is largely nonsense,and self-contradictory blather.

Let's begin:

"One of the many lessons we can draw from the financial crisis... is that economic agents do not always behave rationally, especially when they take decisions affecting others. Research has shown in particular that agents are not only motivated by self-interest, as economists are keen to believe, but also by considerations of fairness."

A strong start - I'm with you so far, Lorenzo.

"Such attitudes make it difficult for governments to act consistently in times of crisis, especially when elections are close. This was notably the case in September 2008, shortly before the US presidential election, when Congress, despite the gravity of the situation, rejected the government's bail-out plan until Lehman Brothers' failure made it apparent that the risk of financial collapse would have devastating effects for all."

Mmmkay - not the best example. Congress rejected the government's bail-out plan not out of considerations of fairness, but because the Democrats tried to ram it down the throats of Republicans too blinded by ideology and obstructionist predispositions. Maybe our author is trying to be polite.

Regardless, he believes that democratic governments cannot be relied upon to react swiftly to address crises:

"Systems and institutions with specific crisis-resolution mandates thus need to be established to permit rapid responses."

Therefore: clearly established, fixed procedures for bailing out (woops, "resolving") an institution in crisis to prevent contagion is the way forward. Would this not create moral hazard? Would not this not allow the clever folks at large banks, investment firms, and hedge funds to find ways around the fixed rules, just as they have consistently done in the past? Would it not be better to provide regulatory bodies with resolution powers that are both broad and ambiguous enough to create uncertainty for financial actors as to when/how they might get bailed out in the future? Would this not go some distance to preventing them from gaming the system just as they have consistently done in the past?

Lorenzo's argument seems to be that elected officials should not be trusted to solve problems in the heat of the moment. There is some truth to this: it's messy and leaves you vulnerable to political cycles and populism. Ad hoc crises resolution efforts at the national level can also make things worse at the international level - we saw this with Ireland's unconditional guarantee of bank liabilities back when the crisis was as its worst.

But it does not follow that iron-clad rules need to be laid out in all cases. Fixed rules based on the last crisis are almost certainly not going to be well-suited for the next one - we do not want to train our generals to fight the last war. Smaghi does not seem to have grasped this fundamental lesson from history at all:

"Moral hazard should ... be addressed by establishing institutions and procedures that allow for incentive-compatible solutions (carrots as well as sticks). This means, in particular, that financial assistance, if needed to avert a major systemic crisis, can be granted on strict conditions that aim to prevent any recurrence of the problem."

Really? Any recurrence of the problem? Please don't insult your readers with this drivel. Finally:

"[M]oral hazard cannot be tackled simply by assuming that crises will not occur. Nor can it be assumed that letting an institution or a country fail is always and everywhere the most desirable solution, as the post-Lehman experience has shown. Decision-makers in both the public and private sectors must thus be ready to deal with worst-case scenarios and make sure that they are not prevented from delivering the appropriate decisions."

Aside from stating the blindingly obvious, I read this last paragraph undermining Smaghi's argument entirely. Given the fact that the next crisis will not be identical to the previous one, flexibility is key. "Explicit rules for bailouts" is not flexibility, and is certainly not going to equip decision-makers with the capacity to deal with worst-case scenarios. Indeed, explicit rules may very well prevent them from delivering appropriate decisions.

*deep breath*

Flexibility essentially means power. The debate that we should be having is over how much power financial regulators should have/are able to use effectively. How much should we be able to rely on this power? Will it dampen the inherent moral hazard of future government bailouts?

Smaghi's argument is not so much an argument but rather a vague collection of statements that are tenously linked together, not particularly convincing, and seemingly self-contradictory. He has contributed nothing but confusion.

Monday Readables: Inflation & Inhalation

- China's looming property bubble: the opening anecdote about a cabbie-turned-real estate broker reminds me of a few of the stories we heard out of Thailand before their economy bottomed out in 1997. It is only an anecdote, but there are worrying numbers to back it up. China's careful tighting of banks' reserve requirements and mortgage regulations since the beginning of the year also suggest they're paying very close attention - investors seem to think more monetary tightening is on the way.

As a side note, you can be sure that China's decisions regarding the valuation of its currency will have everything to do with their delicate internal economic balancing act, and very little to do with all the noise foreign governments are making.

- The End of An Era: Dani Rodrik believes that the IMF's February policy note - which acknowledged the occasional usefulness of capital controls - signals a huge shift in global economic orthodoxy. I'm not so sure it's as momentous as that, and it's unfortunate that Dani-boy is plugging a re-hash of the Tobin Tax. But I like Dani's suggestion that the IMF, now liberated from denial, can explore more closely when and how capital controls might prove useful.

This is important, because most capital controls aren't usually very good at doing their job. They are certainly no substitute for strong economic policymaking. But sometimes strong policy is not enough: for countries that are currently importing inflation from the low-interest rate economies (see Brazil, and Taiwan, and Scandinavia, and... and...) controls might be required to help slow the capital inflows before they become de-stabilizing. Brazil, for example, has already moved in this direction.

- Reinforcing pre-conceived notions alert!: higher cigarette prices in developing countries will probably reduce smoking. This abstract amuses me both for its inpenetrable language and in the number of times it uses the word "estimate." What is probably absent from this paper is any recognition of the underlying psychological appeal of smoking or the black-market side effects of raising prices on smokes. But hey, they're just economists right?

- Alternative health-care bills (The Onion).

Hello, My Name is John Maynard Keynes

Quoted, Not Read
When it comes to famous economists who are oft quoted but rarely read, Adam Smith jumps to the top of the list. Despite being widely considered as the father of modern economics, few people actually bother to read Smith's opus, The Wealth of Nations or its sister piece, The Theory of Moral Sentiments (including me: my copies rest largely undisturbed on the bookshelf). But this has not stopped the Scottish political economist from being quoted, mis-quoted, and generally used as a handy historical cudgel with which to beat one's ideological opponents. For example, Smith's metaphor of 'the invisible hand' is regularly used to support arguments for unconditional free markets, whereas Smith himself held a much more nuanced view. This abuse has led to, among other things, professor Gavin Kennedy devoting an entire blog to defending Adam Smith's "Lost Legacy".

Hello there
Not far behind Smith on this list you will find John Maynard Keynes. Certainly among the most famous economists of the 20th century, Keynes has had a huge impact on the policies adopted by governments in the Western world from the 1930s onward. Not only did his writings change the economic discourse, but he was also heavily involved in shaping and negotiating the Bretton Woods system that defined post-WWII international economic affairs. For all that, however, few people bother to actually read any of his writings.

This is unfortunate, for several reasons. First, it ruins the quality of the debate over economic policy. You will often find that people will argue for or against a "Keynesian" approach to dealing with the financial crisis based on a crude caricature of what that actually means. (Usually: "governments should spend lots of money" vs. "no they shouldn't").

It certainly doesn't help that an influential school of post-war economic thought calling itself "Keynesian" was a perversion of his writings. By the mid-1970s, the evident policy failures of the "Keynesians" swung the pendulum of influence towards the monetarist school of thought that begat Alan Greenspan and friends. Now, Alan Greenspan (and the rest of the world) has discovered that this ideology is flawed and the pendulum is swinging back in the other direction - at least a little. What better time to bin the caricatures and have a real debate?

Second, it's unfortunate because people are missing out on some great insight into human nature and its role in shaping political economy. Rather than being a purely mathematical sort, Keynes was a student of history, psychology, philosophy, politics and economics all rolled in together. It's therefore my impression that he developed his theories based upon what he saw around him - including the Great Depression - rather than vice versa. As a result, when you actually get around to reading what he wrote, you're left thinking: "Hey, that sounds just about right."

But don't take my word for it: I will point you to two pieces written recently by folks who "discovered" John Maynard Keynes by actually reading his flippin' book:

• The first example is by Richard Posner, a conservative lawyer, judge, lecturer and prolific writer. In his article last fall entitled "How I Became A Keynesian," Posner explains that, after reading The General Theory, he was surprised to discover that "[Keynes] is the best guide we have to the crisis."

Ah! you protest: Posner's piece is but another second-hand rehashing of Keynes' book. Doesn't that go against your advice to read the orig? Right you are, but I know that most of you are not going to bother so I offer a second-best option:

• Try reading The Epicurean Dealmaker's January piece on "Conventional Wisdom." This is a long-ish article, but if you skim further down you will find Keynes' views on financial markets and investors* quoted at length. For this anonymous blogger, Keynes' description of investor behaviour is absolutely bang on. Presumably he would know: he tells us that he is a veteran player of 20+ years in the mergers & acquisitions game on Wall Street.

Just to be clear, Keynes' views were far from perfect and his writings should be read with a critical eye. Nevertheless, some of his insights into human behaviour and political economy are just as true today as they were in the 1930s. And if you, like me, are still in the process of trying to figure out Just What The Hell Is Wrong With Our Financial System, Keynes is as good a place to start as any.

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*Keynes' The General Theory was not primarily about financial markets, but rather uncertainty and its impact on savings & the economy as a whole. I think.

Sovereign Debt Woes, or: How To Impress The Ladies With Your Own Island

The other day a friend of mine asked me if I had any advice for visiting Greece at this time of year. I replied, half-jokingly, that after visiting Thessaloniki he might head down to Athens and wait around for about a month until the country went bankrupt - he could then buy up his very own Greek island in the Med for cheap.

(See what I did there? I cleverly inserted into my travel advice a reference to the current politico-economic climate in Europe, thereby indicating my awareness of current events and razor sharp wit).

But like I said, I was half-joking. Turns out you can actually snap up your very own island in the Aegean for, like, a pittance!* Moreover, if the Greeks are forced to sell some of their sovereign soil to raise money to pay back the IMF or ze Germans, there could be some real bargains out there.

Your own island.... Mull that one over and try to tell me that it wouldn't impress your gender of preference.


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*starting at $1-2million, or higher if it comes with a place to dock your yacht. Or mermaids.

Kapow! Argentina's Senate Hits Back

"Not Boring" could be how one describes politics in South America these days. Not content with President Cristina Fernandez de Kirchner's preferred candidate, the Argentine Senate rejected the nomination of Mercedes Marco del Pont to the head of the Central Bank.

You may recall that del Pont's precedessor was pushed aside last month after refusing to use the central bank's currency reserves to fund the government's plans. With approval ratings already down to about 20%, Cristina Fernandez' government is looking increasingly weak and unpopular.

If you're interested, The Economist has a useful backgrounder on Argentina under the Kirchners.

Does not compute

According to the Wall Street gossip pages, US Senators are close to negotiating a deal that would (finally) create a consumer protection agency...:

Top senators from each party were near a breakthrough agreement to create a new consumer-protection division within the Federal Reserve. This has been a contentious point due to heavy criticism of the Fed's past handling of its consumer-protection powers..... This could dramatically reshape the focus of the Federal Reserve. For years, it has primarily been focused on monetary policy over bank supervision and often made consumer protection an afterthought. Republicans might be more supportive of the Fed option because they might see having Fed officials involved could lead to more bank-friendly policies than an independent regulator.

Seriously guys - what the f***? Does nobody read these things before they get published? "Bank-friendly policies" are the antithesis of consumer protection: they are the reason consumers need protecting in the first place.

The entire point of a central bank is provide credible stability in the economy through a focus on monetary policy: to keep the money supply such that we do not need wheelbarrows to cart cash around to the store to buy our weekly bread. A central bank has failed if we even think that this is a possibility in the future. If you don't appreciate how difficult this is, go have a look at Argentina or dozens of other countries with 20%+ inflation rates and political interference.

We could even have a reasonable debate, over a few pints, about requiring our central banks to consider asset prices as part of their mandate, since we've seen how things work out when those crazy housing bubbles get going. But when we consider the Fed's other responsibilities - acting as the nation's banker, supervising deposit-taking institutions - it's pretty clear that consumer protection does not belong on this list. The Fed's track record to date speaks for itself.

Stick to first principles: consumer protection requires a separate, independent agency. Fin.

Update!: Felix Salmon provides backup, coherence.