Month: June 2010

Assorted links

A public choice theory of the IMF

Via Menzie Chinn, Mark Copelovich writes:

As the Fund's largest quota contributors, the "G-5" countries (the US, Germany, Japan, UK, and France) exercise de facto control over IMF lending decisions. At the same time, the G-5 countries are also home to the largest private creditors in global markets, including the world's largest commercial banks. Consequently, G-5 bank exposure heavily influences these governments' preferences over IMF lending policies. In particular, I find that IMF loan size and conditionality vary widely based on the intensity and heterogeneity of G-5 governments' domestic financial ties to a particular borrower country. When private lenders throughout the G-5 countries are highly exposed to a borrower country, G-5 governments collectively have intense preferences and are more likely to approve larger IMF loans with relatively limited conditionality. In contrast, when G-5 private creditors' exposure to a country is smaller or more unevenly distributed, G-5 governments' interests are weaker and less cohesive, and the Fund approves smaller loans with more extensive conditionality. I find strong evidence that these patterns hold both within countries over time (I focus on IMF lending to Korea and Mexico from 1983-1997 in the book), as well as more systematically over time and across cases for the universe of IMF loans from 1984-2003.

Most of the post concerns what will happen with Spain; can you predict Chinn's answer?

Hail Interfluidity!

This post is superb, as it is very much trying to elevate the level of debate on fiscal stimulus.  Here is one excerpt:

Lying is optimal. The debate among public officials about austerity cannot be taken at face value. Savers really could flee the euro, dollar, yen or yuan. Interest rates here or there could suddenly spike. A sudden dash to gold is possible. None of these financial market events would directly affect the real resources at our disposal, but any of them could devastate our ability to organize economic behavior, and would call into question the legitimacy of economic outcomes and the stability of governments. For policymakers who seek positive short-to-medium term outcomes, the optimal strategy is to avoid the first-order costs of austerity by spending and avoid second-order costs #1 and #5 by obfuscating their spending as much as possible. Costs #2, #3, and #4 tend to bite over the medium-to-long term, leading policymakers to discount them. I think we should expect a lot more austerity theater than actual austerity, for better and for worse. Expect central bankers especially to preach austerity while intervening madly in the shadows. That’s just what they do. By the same reasoning, we should expect policymakers to justify their actions with a lot of intuitive but awful theory. As the Modern Monetary Theorists remind us, the analogy between a fiat-currency-issuing government and a budget-constrained household is poor. It is, nevertheless, the framework under which most citizens and savers understand government accounts, and forms the basis of conventional discourse. Irrespective of what is a better or worse description of reality, it is safer for policymakers to frame their communication in terms of conventional theory than to promote a profoundly destabilizing paradigm shift. Expect President Obama to keep talking about how we are “out of money” even though he knows better.

What do basketball fans want?

Historically meaningful match-ups between titans: reported Wednesday afternoon the most demand for NBA Finals tickets in the website's 10-year year history, with the average asking price of more than $1,100 a ticket double what it was for last year's Finals between the Lakers and Orlando Magic. Even as the Lakers faced possible elimination in Tuesday's Game 6, prices for Game 7 remained steady at $1,260 per ticket, according to When the Lakers won Game 6, spokesperson Christian Anderson said the average ticket price quickly jumped to $1,562.71."

The link is here.

The Austerity Files

You'll see so many blog posts and columns talking about the low interest rates and high unemployment of our times, thus arguing in favor of further fiscal stimulus.

So far, these are the least likely arguments you will hear addressed:

1. The monetary authority moves last anyway.

2. We don't need exotic "quantitative easing," we can simply print up more money and hand it out to consumers through a simple vouchers program, at basically zero budgetary cost.  If consumers save all that money, fiscal stimulus also won't have much of a kick.

3. The real fiscal problem is spending contraction at the state level (expanding and contracting spending are not symmetric in their effects; contracting spend hurts more than expanding spending helps).  The correct fiscal policy move would have been, and still is, to take Medicaid away from the states and make it fully federal.  This would give state budgets a huge break, and help employment, yet as a one-time change it reduces the moral hazard problems from ongoing outright grants.  Furthermore federalizing Medicaid is a good idea in its own right and it also could be a spur to make other improvements in the program.

4. Rather than just arguing about the most likely scenario, we should apply the same worst case scenario thinking that is recommended for climate change.

5. Macroeconomics really is just a theory.  Politicians are reluctant to spend more money, in tough times, on the basis of a mere theory.  Advocates of fiscal stimulus make it sound as simple as solving an undergraduate homework problem and I think they sometimes genuinely do not realize how much the rest of the world, including politicians, views them as simply being very convinced by their own theory.  There are plenty of historical examples with confounding factors and I've linked to some of them lately.  One default hypothesis is that the ranges of fiscal policy being discussed, whether looser or tighter, aren't going to matter much one way or the other.  

The next time you read a blog post or column on fiscal stimulus, and it isn't addressing those issues, the correct response is to think that a deeper analysis is needed.  Don't be swayed by the mere repetition of the usual arguments about interest rates, unemployment rates, and the like.

Scandinavia and Germany

Sune, from the comments, writes:

As a scandinavian I'm surprised by the admiration for Germany.

We often talk of Germany as being a step behind in economic policy with their labor market being so rigid, and the still significant power of unions.

When I first visited West Germany, in 1985, it was arguably the best-functioning social democracy.  You could mail a letter for single-day delivery anywhere in the Bundesrepublik, the concept of "deutsche Wertarbeit" was near its peak, Mercedes was the gold standard of automobiles, and the northwest industrial areas had not yet been hollowed out (though they were suffering).  The country also had among the world's best systems for mass transit and urban planning, as well a high living standard and lots of vacation time, all topped off by what was arguably the world's most curious, most travel-hungry, and most intellectual population.

Since then, unification cost a lot of money, and delayed progress, but the country hasn't exactly fallen apart.  It retains many of these virtues, albeit with some fraying at the edges.  What it has gained since 1985 is a greater feeling of normalcy, a stronger identity as European, much better levels of customer service, and the final aging and (mostly) disappearance of a large number of Nazis and Nazi sympathizers.  Those who were sixty, and running the country, are now eighty-five and mostly dead or retired.  Those are some big gains.

The Nordic countries have in some ways moved ahead.  The stunning contemporary architecture of Copenhagen sets the city apart from most of Germany, which now has a somewhat tired-looking infrastructure and a great number of mediocre postwar buildings.  Denmark also has made bigger strides toward economic freedom.  Sweden has shown it can cut spending, reinvent itself, and circumvent what appeared to be a dire fiscal future; this was not apparent in 1985.  Sweden also has done very well by globalization and information technology.  Norway has mobilized its oil and gas wealth to greater degree and strengthened its good governance.

Still, either then or now, I'd rather live in Germany, even if it is harder for larger countries to turn on the proverbial dime.  The country has dealt with more serious problems, so its performance has been less in absolute terms.  But in part it's had more serious problems because it is a more interesting place.  Germany is bigger and more diverse than the countries to the north.  At the very least I would reject the portrait of Germany as a country which has fallen behind the other major social democracies.

Privacy in Germany, it’s for banks too

Until now, Berlin has resisted the US-style publication of information about banks’ capital cushions because it feared the results could be manipulated, could send the wrong signals, and break German laws about commercial secrets.

The government’s U-turn is likely to rouse the anger of German banks, which have been in lock-step with Berlin so far in resisting the publication – and under German law they would have to approve any public use of their own data.

Deutsche Bank chief executive Josef Ackermann last week warned that publishing the results of stress tests would be “very, very dangerous” if there were no “backstop facilities” in place to allow stressed banks to draw on new capital.

The full story, which includes information on Spain, is here.  The last paragraph may sound slightly ridiculous to an American reader — why make such an admission of vulnerability?  Yet in Germany privacy norms and laws are quite strong and virtually everyone will grant you the right to assert privacy.  If you are waiting at an ATM, you had better stand very far back, behind the person at the machine, otherwise you will hear about it.  Everyone at the university keeps their office doors closed, although not for the American reason of avoiding students.  The goal is to have a closed door and a private space between you and the rest of the world.  German blog readers who see you in public will talk less to you than would American blog readers.  "Direct mail" is considered not only a nuisance, but also a privacy violation.  People work next to each other for twenty years, and it's still just "Frau Mueller," etc.

Obama’s Oil Speech: Old not Bold

Here is my reaction at the NYTimes:

President Obama lost his cool last week when – sounding like the old president – he said he was looking for some “ass to kick.” He didn’t regain any lost cool in Tuesday’s oil speech, which also made him sound like his predecessor: “Make no mistake: we will fight this spill with everything we’ve got for as long it takes,” he said, emphasizing “We will make BP pay….” Call it President’s Obama’s war on error.

Turning to energy, the president called for innovation and hard choices but offered little new or courageous thinking of his own. Instead, he went back to the same well he has drawn from repeatedly; blame the previous administration and their “failed philosophy.”

Whether justified or not, this refrain is getting old. Even the president’s appeals to America’s greatness sounded old. Can his speechwriters really do no better than 'remember when we won World War II and put a man on the moon?'

Most important, nowhere did the president mention two hard ideas that the public must accept if we are to move to a cleaner energy future: nuclear power and carbon taxes.

More here.

Can we expect real reform from Basel III?

You can be for or against these interventions, but I find it amazing (though not surprising) that the biggest financial crash in recent history hasn't so much changed the political equilibrium.  Here is a recent report about interest group machinations behind the process of financial regulation:

Economic growth in the eurozone, the US and Japan will be cut by three percentage points between now and 2015 if current proposals to force banks to hold more capital and liquid assets go forward unchanged, the world’s leading banking industry group warned on Thursday.

As a result, 9.7m fewer jobs would be created in those areas over the period, according to an impact assessment issued by the Institute of International Finance at a meeting in Vienna.

The group is pushing hard for the Basel Committee on Banking Supervision to rewrite or at least delay implementation of the proposals, known as Basel III, which are slated to be voted on later this year.

You will recall that the Obama administration had been claiming that Basel III will be responsible for the single most important piece of financial reform, namely tighter general restrictions on financial institution leverage.  Might this slip away?  Do you still hear serious talk of reforming the mortgage agencies?  When the choice is "jobs and homes before the next election" vs. "limiting a small probability of extreme tail risk," guess which one wins out?