will be non-existent for the next couple of weeks. ADAGIO is sailing from San Francisco to Hawaii, departing 0500 today. Hoping to make landfall at Oahu around July 10th.
Monthly Archive for June, 2009
Chilling commentary from David Goldman (as Spengler). We’re too busy preparing to sail for Hawaii to do any research now or for a while, so don’t have much clarity on the accuracy of Goldman’s perspective:
Writing this morning in Asia Times Online, I draw out the implications of the power vacuum left by the collapse of American foreign policy with the Iranian elections. The editors’ summary is:
President Barack Obama has not betrayed the interests of the United States to any foreign power, but he has done the next worst thing, namely, to create a void by withdrawing American power. By removing America as a referee, he will provoke more violence than the United States ever did. A very, very dangerous period is about to begin, and it could start with Iran.
I wrote:
There’s a joke about a man who tells a psychiatrist, “Everybody hates me,†to which the psychiatrist responds, “That’s ridiculous – everyone doesn’t know you, yet.†Which brings me to Barack Obama: one of the best-informed people in the American security establishment told me the other day that the president is a “Manchurian Candidateâ€.
Follow the link above for the rest.
That can’t be true – Manchuria isn’t in the business of brainwashing prospective presidential candidates any more. There’s no one left to betray America to. Obama is creating a strategic void in which no major power will dominate, and every minor power must fend for itself. The outcome is incalculably hard to analyze and terrifying to consider.
Obama doesn’t want to betray the United States; he only wants to empower America’s enemies. Forcing Israel to abandon its strategic buffer (the so-called settlements) was supposed to placate Iran, so that Iran would help America stabilize Iraq, where its influence looms large over the Shi’ite majority.
America also sought Iran’s help in suppressing the Taliban in Afghanistan. In Obama’s imagination, a Sunni Arab coalition – empowered by Washington’s turn against Israel – would encircle Iran and dissuade it from acquiring nuclear weapons, while an entirely separate Shi’ite coalition with the North Atlantic Treaty Organization would suppress the radical Sunni Taliban in Afghanistan and Pakistan. This was the worst-designed scheme concocted by a Western strategist since Field Marshal Bernard Montgomery attacked the bridges at Arnhem in 1944, and it has blown up in Obama’s face.
Iran already has made clear that casting America’s enemies in the leading role of an American operation has a defect, namely that America’s enemies rather would lose on their own terms than win on America’s terms.
A cap-and-trade system with freely allocated permits is equivalent to a carbon tax in which the tax revenue is given to stockholders.
The American Clean Energy and Security Act of 2009, a bill co-authored by Congressmen Henry A. Waxman and Edward J. Markey, may soon come to the House floor for a vote. The bill details an expansive greenhouse gas reduction agenda, including the establishment of a cap-and-trade system.
Under cap and trade, American firms must have a permit for each ton of greenhouse gases that they emit. The permits are tradable, meaning that firms may buy and sell them. By limiting the quantity of emissions permits, the federal government controls the total quantity of greenhouse gases emitted. The Waxman-Markey bill requires that America’s economy-wide emissions be reduced to 17 percent of 2005 levels by 2050.
In simple economic models, a cap-and-trade system can be identical to a carbon tax. If the government sells all of the permits to firms at auction, it raises the same revenue as if it had imposed a tax on carbon. Like a carbon tax, a cap-and-trade system is a market-based regulatory mechanism to reduce carbon emissions. These mechanisms impose a cost on carbon emissions by requiring emitters to either pay a tax or obtain a permit. Ideally, this cost should be equal to the environmental damage caused by emissions. Market-based solutions tend to be the most efficient regulatory approach for correcting environmental externalities because producers and consumers are left free to choose the most cost-effective way to reduce emissions. This efficiency can be lost under regulatory systems that dictate particular ways to reduce emissions.
The best policy option would be to use the revenues from cap and trade or from a carbon tax to decrease the marginal tax rates of other distortionary taxes.
Continue reading… Alan Viard
THE 88-page report issued by the Treasury Department last week proposes far-reaching changes in financial regulation. Unfortunately, the report is premature, overambitious and obsessed with reorganization. It is also afflicted by Roosevelt envy.
It is natural for a new president, taking office during an economic crisis, to want to emulate the extraordinary accomplishments of Franklin D. Roosevelt’s first months. Within what seemed the blink of an eye, the banking crisis was resolved, millions were hired into public-works jobs and economic output rose sharply. But that was 76 years ago, and the federal government has since grown fat and constipated. The program set forth in the new Treasury report, heavy on structural change, could take decades to put into effect.
The report is premature because there hasn’t been time to study causes of the current crisis in depth — and until these causes are determined we won’t know how to prevent a recurrence. We need some counterpart to the 9/11 commission’s investigation of a previous unforeseen disaster.
The causal account in the report is radically incomplete. It ignores the elephant in the room: the regulators, including the Federal Reserve and the Securities and Exchange Commission, were asleep at the switch, oblivious to the housing bubble and the rapid deterioration of the finance industry. When suddenly awakened by the financial crash, they reacted with spasmodic improvisations that sapped business and public confidence.
The report is scathing about the financial incontinence of bankers and consumers but complacent about regulatory failures. It suggests that these failures can be cured bureaucratically by creating a consumer financial protection agency, a national bank supervisor and a council of regulators, and by giving the Federal Reserve discretionary authority over the entire financial sector.
Politicians are instinctively drawn to plans for government reorganization, because such plans are cheap and visible and dramatic. But planning is the easy part; execution is where the American government falls down. Adding bureaucratic layers will not cure the pathologies of regulation, which are rooted in our regulatory culture — the timidity of civil servants, the contamination of public administration by politics and interest groups, and the power of the “office consensus†to marginalize independent thinkers for not being team players.
Continue reading… judge Richard A. Posner.
More of Brad Setser’s analysis
Now that the markets have lost a bit of their froth, it seems fitting to note just how sharply trade — and private financial flows — have contracted over the past year. The US q1 balance of payments data is rather stunning.
Trade (as we all know) contracted far more rapidly during this cycle than in the past.
But the fall in private financial flows — outflows as well as inflows — has been even sharper than the fall in trade flows. US private investment in the rest of the world rebounded a bit in the first quarter, but private demand for US financial assets remained in the doldrums. Private investors were still pulling funds out of the US in the first quarter.
Brad Setser looks at Japan, China trade – concluding with this:
[...]
The best that can be said of Japan’s May trade data is that Japan’s exports to China aren’t down as much as Japan’s exports to the US and Europe.Shipments to the U.S. fell 45.4 percent in May after dropping 46.3 percent in April, the ministry said. Exports to Europe slid 45.4 percent from 45.3 percent.
The y/y comparison will get more favorable soon. But there is now real way to put all that positive gloss on Japan’s 41% year over year fall in exports. It is an epic fall.
Japan’s May 2009 exports were even a bit lower than its April 2009 exports. There may be some benign explanation for the slight dip in May, but I don’t think there is any way to suggest that the Japan’s May trade data suggests a robust global recovery. [From Where is the spillover? China’s stimulus isn’t doing much to support Japanese demand]
Thanks Greg – there is considerable useful detail in these charts:
If you have trouble keeping straight all the events of the past couple years, these timelines from the NY Fed will help you out.[From Financial Crisis Timeline]
This is an update of the authors’ 6 April 2009 column comparing today’s global crisis to the Great Depression. World industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better. The update shows that trade and stock markets have shown some improvement without reversing the overall conclusion — today’s crisis is at least as bad as the Great Depression.
Eichengreen and O’Rourke have a new essay up at voxEU.org:
Editor’s note: The 6 April 2009 Vox column by Barry Eichengreen and Kevin O’Rourke shattered all Vox readership records, with 30,000 views in less than 48 hours and over 100,000 within the week. The authors will update the charts as new data emerges; this updated column is the first, presenting monthly data up to April 2009. (The updates and much more will eventually appear in a paper the authors are writing a paper for Economic Policy.)
New findings:
- World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
- World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
- There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
- The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
- Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.
The facts for Chile, Belgium, Czechoslovakia, Poland and Sweden are displayed below; note the rebound in Eastern Europe.
In short, no:
In the debate over healthcare reform, another claim one often hears is that better prevention will save us money. I have noted previously how “schlocky” this argument is. Over the weekend, a doctor writing in the Wall Street Journal puts the point as follows:
Prevention of a disease, we all assume, should save us money, right? An ounce of prevention . . . ? Alas, If only such aphorisms were true we’d hand out apples each day and our problems would be over.
It is true that if the prevention strategies we are talking about are behavioral things—eat better, lose weight, exercise more, smoke less, wear a seat belt—then they cost very little and they do save money by keeping people healthy.
But if your preventive strategy is medical, if it involves us, if it consists of screening, finding medical conditions early, shaking the bushes for high cholesterols, or abnormal EKGs, markers for prostate cancer such as PSA, then more often than not you don’t save anything and you might generate more medical costs. Prevention is a good thing to do, but why equate it with saving money when it won’t?
Think about this: discovering high cholesterol in a person who is feeling well, is really just discovering a risk factor and not a disease; it predicts that you have a greater chance of having a heart attack than someone with a normal cholesterol. Now you can reduce the probability of a heart attack by swallowing a statin, and it will make good sense for you personally, especially if you have other risk factors (male sex, smoking etc).. But if you are treating a population, keep in mind that you may have to treat several hundred people to prevent one heart attack. Using a statin costs about $150,000 for every year of life it saves in men, and even more in women (since their heart-attack risk is lower)—I don’t see the savings there.
As a daily consumer of a statin, I appreciate the extra lifespan, even at the cost. So I am not opposed to prevention–only to the claim that it will yield substantial budgetary savings.
Thanks to Tyler Durden for this insight:
Bloomberg out with an article disclosing what every “tinfoil” hat wearer has known for a long time, namely that it was precisely Goldman’s collateral extractions out of AIG that were the cause for the firm’s collapse, and the ensuing financial catastrophe that to this day has been propped up only thanks to the US government’s backstop of nearly $10 trillion in various worthless assets.
Goldman Sachs got $5.9 billion and Societe Generale received $5.5 billion of about $18.5 billion in collateral paid by AIG in the 15 months before the September bailout. The payments helped settle AIG’s obligations on $62.1 billion of credit-default swaps that the Federal Reserve later removed from the New York-based insurer as part of the rescue. Officials at AIG, Goldman Sachs and Societe Generale declined to comment.
“It was precisely that drain of liquidity to Goldman and SocGen that put AIG in a position of illiquidity and ultimately threw them into the government’s arms,†said Charles Calomiris, a finance professor at Columbia Business School in New York.
AIG disclosed a complete list last month of payments made to settle the $62.1 billion in derivatives. The figures for the period before the bailout were calculated by subtracting post- rescue payments disclosed in March from the sum of more than 150 transactions outlined in May.
“Goldman is to be congratulated for seeing the problem ahead of others and protecting itself from the impending failure of AIG,†said William Poole, former president of the St. Louis Fed, in an interview last week. “It’s not the responsibility of any private firm to determine what the public interest is — that’s why we have a government.â€
Goldman Sachs bought protection on about $20 billion in assets from AIG, meaning the company was counting on $10 billion from the insurer after the underlying holdings lost about half their value, Goldman Sachs Chief Financial Officer David Viniar said in a March conference call. The firm had “no direct exposure†to AIG because it held about $7.5 billion in collateral and hedged its remaining $2.5 billion risk to the firm’s potential failure, Viniar said. The $7.5 billion tally includes trades unrelated to Maiden Lane.
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