Month: October 2011

How to exit the eurozone, or Lord Wolfson, how about fifty quid for a blog post?

There is no easy way out of the eurozone, as Tim Harford explains with eloquence and good humor.  But here is my best guess at Wolfson’s query:

1. Issue a surprise announcement that all euro deposits in Ruritania will be converted into pesos (or whatever) at a new and lower yet defensible rate.  If I try to withdraw my ten euros from my bank, I receive an IOU for ten pesos which is worth say six euros.  Over time the government will replace these IOUs with a new paper currency.

2. Let physical currency euros leave the country, and stress they will be honored, in any case they are not easy to confiscate or convert.  And a country may need them as a partial money during the transition.  Not trying to confiscate them will mean that a lot of the euro currency stays.  There will be a dual currency regime for some time to come, but the medium of account will become pesos not euros.

3. If you borrowed money denominated in euros, from a Swiss or German bank, that is between you and them.  Obviously a lot of borrowers will be in partial or total default, given the whack to their bank accounts.  Let the northern nations bail out their banks, they won’t send tanks to extract the funds from good ‘ol Ruritania.  Who knows, the rest of the eurozone might be prompted to set up a sensible bank resolution mechanism — working through the ECB of course — though don’t count on it.

4. The assets of Ruritania banks, namely loans to Ruritania citizens, will be redenominated to pesos.  Labor and rental contracts will be redenominated too.

5. Nationalize parts of the banking system if need be, so much the better if you can pass on this one.  If the bank is essentially empty, that is a deflationary shock.  Have the government take over the bank and fill it with new printed money to restore deposits and counter the deflationary shock.  If the country cannot trust its nationalizers, they should just print up more pesos and nail them to the bank balance sheets, risking the resulting corruption and drain of funds.

Are we on track so far?  The consumption of imports will fall I believe.

6. What about default?  If your country is running a primary surplus (Italy yes, Greece no), partially default on your debt but make strict promises to resume payments ASAP.  Capture some wealth from the foreign banks and start the game all over again.  Without a significant primary surplus, the (temporary?) cessation of foreign borrowing would mean that the country has to cut government spending further.  Make a political judgment here but consider not defaulting; default may be unavoidable for Greece in particular but you can’t blame my plan for how deep in the hole they are.

Let’s sum up which problems have been addressed and which not.  The domestic banking system is saved, at least provided the new conversion rate is credible enough that no one expects a repeat of the depreciation.  It’s key to make that first announcement a real surprise, good luck!  A negative wealth shock will come anyway and my plan has accelerated the arrival of that shock; the best one can do is to combine it with monetary expansion and the positive export shock from devaluation.  To fix the external banks, the wealthier countries will need to exercise and perhaps improve their LOLR powers, but that is the case under any plan, not just this one.

Admittedly this plan makes the wealth loss in Ruritania quite transparent, which may be politically unpopular, but that transparency eases the economics of the transition.

Voila!  Rinse and repeat as necessary.  A lot of this would be eased by high inflation from the eurozone itself but a) that would involve collateral costs on the healthier economies, and b) in any case it doesn’t look like it will happen.  I’m sticking with what a small country can do on its own.

No need to write in the comments section that this is “illegal.”  Breaking the three percent deficit rule, as France and Germany did, was illegal too.  Ruritania will not be hauled before a court of law and I also predict Ruritania will not be ejected from EU per se.  Maybe their agricultural subsidies will be cut, let them eat floating exchange rates I say.

Markets in everything the culture that is Japan

Meanwhile, in Japan, a new fashion has women paying to have their straight teeth purposefully disarranged.

A result of tooth-crowding commonly derided in the United States as “snaggleteeth” or “fangs,” the look is called “yaeba” in Japanese or “double tooth.” Japanese men are said to find this attractive: blogs are devoted to yaeba, celebrities display it proudly, and now some women are paying dentists to create it artificially by affixing plastic fronts to their real teeth.

“It’s not like here, where perfect, straight, picket-fence teeth are considered beautiful,” said Michelle Phan, a Vietnamese-American based in Los Angeles, who wrote about the phenomenon on her popular beauty blog. “In Japan, in fact, crooked teeth are actually endearing, and it shows that a girl is not perfect. And, in a way, men find that more approachable than someone who is too overly perfect.”

Here is more, thanks to Jack Kessler for the pointer.

Yesterday was the 200th birthday of Franz Liszt

I don’t usually like to reprise previous posts, but here goes:

1. Franz Liszt: The “late, serious” pieces are important but I don’t think they are much fun to listen to.  I recommend the Transcendental Etudes, performance preferences here.  “Funerailles,” played by the young Lazar Berman.   “Years of Pilgrimage, the Swiss years,” by Aldo Ciccolini.  The Hungarian Rhapsodies, played by Cziffa or Robert Szidon.  Many of the opera transcriptions are subtler than they are made out to be, as creative examples of early mash-ups.  The B Minor Sonata is a bit too long but Clifford Curzon has a lovely version.  The organ music remains undervalued and the instrument well suited the composer’s chromatic tendencies.

The Alan Walker biography of Liszt is an excellent look at the nineteenth century and they are among my favorite biographies.  Has anyone written the book — in any language — on what the career of Liszt shows about the decline of mainstream classical liberalism?

I very much like the recent Liszt CD by Haiou Zhang; amazing that we can have such a pianist and hardly anyone has heard of him.

Assorted links

1. Physical bitcoins (!) (markets in everything, some are gold-plated)

2. Barter proceeds: (markets in everything) “An owner of dozens of wild animals who freed them before committing suicide this week was an avid gun collector who had traded weapons for a monkey, a leopard and a tiger cub, federal documents show.”

3. Might the Greek haircut reach 100 percent?

4. There is no Great Stagnation, “This report has really opened our eyes to the diverse uses of the bathroom.”

5. Dance your Ph.d., a nod to Stravinsky?

Update on eurozone negotiations

The Irish Times is a good source for an alternative perspective on eurozone developments.  They understand enough economics to get some key ideas right, yet they don’t simply adopt a “major country” perspective.  (I find German coverage especially difficult to parse.)  They are more explicit and less guarded than the FT, not always a virtue but worth trying on for size.  Anyway, their latest report from the front line is scary.  It starts with:

European Union leaders piled pressure on Italy today to hasten economic reforms to avoid a Greece-style meltdown as they began a summit to rescue the euro zone from the debt crisis.

I’m probably all for the reforms under discussion, but in this context they take far too long and along the way there is not enough political commitment.  That this is the lead item is a sign that a) there are no really good intermediate measures under discussion, and b) the Italians need to be forced to do the right thing.  Neither is good news.  I’ve already discussed how and why Italy, with its numerous and decentralized distortions, does not have easy access to a “big bang” solution.  And this:

Diplomats said they wanted to maximise pressure on Rome to implement structural labour market and pension reforms to boost Italy’s economic growth potential and reassure investors worried about its huge debt ratio, second only to Greece’s.

After the TGS experience of Japan, it needs to be recognized that perhaps a major country simply won’t grow much for twenty years or more.  Yikes, and wake up!  When interpreting this sentence, beware of rhetorical political posturing vis-a-vis Germany, but this too was hardly encouraging:

“Between now and Wednesday a solution must be found, a structural solution, an ambitious solution, a definitive solution,” Mr Sarkozy said. “There’s no other choice.”

A proposal for bank recapitalization, plus a further tweak on the ever-worsening Greece deal, and a lot of promises for Italian reforms, doesn’t even represent kicking the can down the road.  It’s more like smashing your foot on the can.

Addendum: I agree fully with this assessment.

Some additional reasons why Iceland has done well

I agree with much of Paul Krugman’s recent posts on Iceland, here and here.  But there are neglected factors behind the Icelandic recovery, namely real shocks.

Note that Iceland is a small, open economy and fish accounts for 40 percent of Icelandic exports.  It does not hurt that Norwegian cod prices have risen 20 percent over the last year; I cannot find a separate figure for Icelandic cod prices but that is a likely major factor behind the Icelandic resurgence.  Here is a separate, brief report on the boom in the Icelandic fishing sector.  Especially when it concerns small countries, always look first for the real shocks.

As an aside, there seems to be a system of fairly flexible wages for the major export:

The lay system of remuneration is used extensively in fisheries. Under this system, fishermen are paid a share of the catch value, perhaps after subtracting some costs, rather than a fixed wage. There may, however, also be a fixed wage element, so that fishermen get a share of the catch value in addition to the fixed wage, or a fixed wage as a minimum in case the fishing trip turns out to be unrewarding.

That is a Norwegian source about fisheries worldwide and not Iceland-specific, and here is another general source on compensation for fishermen with a similar message; can anyone speak to Iceland in particular?

Krugman writes: “And nominal wages are downwardly rigid. That’s simply a fact, true always and everywhere.”  But that is an overstatement, especially when an output-linked and value-linked bonus system is in effect.

Iceland has had both currency flexibility and, it seems, a higher than average degree of wage flexibility in the major export sector, automatically built in at that.  (If further and more targeted sources contradict this portrait I will gladly report the update.) That real wage flexibility may or may not be a major factor in the Icelandic comeback (only 4,000 fishermen in the whole sector, and the fisheries already do their accounts in euros), but it does show the standard theory of optimum currency areas should not be applied here without considerable caution.

Finally, note that a flexible exchange rate does not bring all of the wage-reducing benefits of yesteryear.  Workers are employed increasingly in domestic services (health care, education) and many export sectors are less labor-intensive than before, at least in the West.  With the progress of mechanization and globalization, the ability to cut your real wages rapidly for your exports is arguably diminishing in value.  The relevant rigidities are becoming increasingly domestic, it would seem.

Report from the front line

Chancellor Angela Merkel said on Saturday that the European Central Bank has just one mission — to ensure monetary stability.

Merkel said in a speech to her Christian Democrats in Braunschweig on Saturday that treaties prevent the ECB from taking on any other tasks, such as those such as the U.S. Federal Reserve have.

That could be a clever Straussian feint and bluff, but with what probability?  I don’t think so, I think it is for real.

Marginal Revolution, articulated

The minivan driver who knocked Wang down, and then ran over her deliberately, has since surrendered to the police, but offered a curious explanation for his action. He said he had been talking on his mobile phone when he hit the girl, but decided to run her over because it would have cost him less to pay off a dead girl’s parents than to pay for her hospital expenses.

“If she had died, I would have been required to pay only about 20,000 yuan (about Rs 1.5 lakh) in compensation, but if she were injured, it would cost me hundreds of thousands of yuan in hospital expenses,” he said.

Here is more and for the pointer I thank Karthik S.

The culture that is (was) Germany

There are still some students on university campuses who reminisce about the old days. One of those so-called “eternal students” can be found at Christian Albrecht University in the northern city of Kiel. He registered as a student in medicine when Konrad Adenauer was still chancellor and the Berlin Wall hadn’t even been planned yet. Even though he is in his 108th semester, the university does not have the power to throw him out. As one university spokesman explains, the rules for majors that require students to take a state examination, such as medicine, do not contain provisions for ejecting long-term students.

Yet those days are coming to an end, here is much more.

Charter city offer

The governor of the Northern Mariana Islands, a U.S. territory in the western Pacific Ocean, said he is willing to lease some of the islands to China as long as it’s not for military purposes.

“If you are interested, I am offering these islands to China,” Governor Benigno Fitial told a group of Chinese governors and provincial Communist Party Secretaries at a conference in Beijing. “Lease these islands so that I can have enough financial resources to provide for more full employment for my people.”

Here is more.  For the pointer I thank Umung Varma.

Sentences to ponder

Contrary to some recent claims:

…Obama has brought in more money from employees of banks, hedge funds and other financial service companies than all of the GOP candidates combined, according to a Washington Post analysis of contribution data. The numbers show that Obama retains a persistent reservoir of support among Democratic financiers who have backed him since he was an underdog presidential candidate four years ago.

Obama also has raised more money from Romney’s former firm, Bain Capital, than has Romney.  There is more at the link.

The culture that is Russia (England)

From Jessica Crispin:

Edward Docx has a charming account of his recent visit to Russia for a literary festival, and the scuffle he accidentally started when he explained the Man Booker to the Russian writers.

I begin to explain that the chair of the judges is Dame Stella Rimington and that she is an ex-head of the security services in Britain. And—bam!—that’s it: now everyone is laughing. Oh, the west, they guffaw. Oh, England, they chortle. Oh, hypocrisy. Oh, MI5. Oh, MI6. Even the FSB would not dare! You mean, they splutter, that the winner of your most famous literary prize is judged by the security services? It seems I could not have told them a more perfect Anglo-Russian joke if I tried.

I try to explain that they are mistaken, that Dame Rimington is retired and is a now an author herself. Yes, someone cackles, like Putin is retired from the KGB!

Fuck it, someone else suggests, we should set up an international prize for the security services. We should judge the FSB versus the CIA versus MI5 versus FBI and Mossad. We should proudly declare we know nothing whatsoever about security but say that we intend to make the award based on who we feel has the most zippy-looking offices as seen from street level. Had I ever been in the boy scouts? Yes, for a day. Well, then, certainly I was qualified. Let’s set it up tonight. A famous meta-realist falls off his chair.

Reading the essay I’m reminded of the… is it Bruce Chatwin?… quotation that the famed Russian hospitality is mostly just the Russian love for seeing a foreigner drunk.

Assorted links

1. Quantum derivatives.

2. What should go next to the produce, I think about this question a lot, and more info here.  And Arnold Kling on the new Kahneman book, and Daniel Kahneman on the hazards of confidence, and David Brooks on the childhood of Kahneman.

3. Preferring to buy things from white people.

4. £250,000 prize for solving the problem of how to leave the eurozone, pdf is here.

5. Uh-oh (photo).

The Mexican Mafia

The Mexican Mafia is a fairly small prison gang (perhaps 150-300 made members) and it has significant operational control only within prisons in Southern California yet the Mexican Mafia is extremely powerful. In fact, the MM taxes hundreds of often larger Southern California street gangs at rates of 10-30% of revenues. How can a prison gang tax street gangs? In Governance and Prison Gangs (also here), a new paper in the APSR, David Skarbek explains the structure, conduct and performance of the Mexican Mafia.

The key to the MM’s power is that most drug dealers will sooner or later, usually sooner, end up in prison. Thus, the MM can credibly threaten drug dealers outside of prison with punishment once they are inside prison. Moreover, prison is the only place where members of many different gangs congregate. Thus, by maintaining control of the prison bottleneck, the MM can tax hundreds of gangs.

One of the most interesting aspects of Skarbek’s analysis is that he shows–consistent with Mancur Olson’s stationary bandit theory–that as the MM grew in power it started to provide public goods, i.e. it became a kind of government. Thus, the MM protects taxpayers both in prison and on the street, it produces property rights by enforcing gang claims to territory and it adjudicates disputes, all to the extent that such actions increase tax revenue of course. The MM is so powerful that it often doesn’t even have to use its own enforcers; instead, the MM can issue what amounts to a letter of marque and reprisal, a signal that a non-taxpaying gang is no longer under its protection, and privateers will do the rest.

The MM even internalizes externalities:

In addition, the Mexican Mafia regulates drive-by shootings…because any particular street gang only suffers a portion of the increased attention of law enforcement from drive-by shootings, each street gang has an incentive to do too-many (Buchanan 1973). In 1992, Mexican Mafia members sent notes throughout the prison system and Sureño neighborhoods that any gang member participating in an unauthorized drive-by shooting would be killed. Shortly after the Mexican Mafia announced this rule, drive by shootings declined.

The Mexican Mafia has much to teach us about crime and governance.