Month: March 2013
If the Tea Party is to be disparaged for anything, it is not for being too conservative, too right wing, or too libertarian, but simply too immature, quick-triggered, and impatient for final answers. Traumatized by the collapse of the narratives that used to organize reality and armed with what appears to be access to direct democracy, its members ache for harsh, quick fixes to age-old problems, something they can really feel — as if fomenting a painful apocalypse would be better than enduring the numbing present.
That is from Douglas Rushkoff’s Present Shock: When Everything Happens Now.
And then, the pope quit. The pope! He left. He walked out on it all. I watched him fly away from Rome and I thought, “That’s it.” In the few moments of his flight, I left too. I decided I could no longer be a part of this church. It was over.
I realized I didn’t want this decision to be about leaving, but joining. I knew immediately I wanted to convert and become an Episcopalian. Why? If I were to trace this decision back, it would be to a summer I spent in Maine 11 years ago. Our closest church was Episcopalian, so I went there on Sundays. The vicar was a woman. Her sermons were eloquent, moving, compassionate and connected to the modern world. She spoke like my nuns.
There is more at the link.
Paul Krugman writes:
Let me make a broader point: we’ve now seen three island nations around Europe become huge international banking hubs relative to their GDPs, then get into crisis because their domestic economies don’t have the resources to bail out those metastasized banking systems if something goes wrong. This strongly suggests, to me at least, that we have a fundamental problem with the whole architecture (to use the preferred fancy word) of international finance.
…All of which raises the question, is the era of free capital movement just a bubble, fated to end one of these years, maybe soon?
Of course there is more at the link. The way I put this point is to suggest that the era of reliable deposit insurance may be coming to a close (and not for the better). What kind of international capital regulations would or could limit this problem is a topic deserving of much more attention. We can’t go back to Bretton Woods, numerous companies and developing economies already rely on international capital flows, and so what is actually on the table here?
In July 1992 Italy’s Socialist Prime Minister Giuliano Amato imposed a one-off levy on bank accounts. It was a mere 0.6% in comparison with Cyprus’s scheme, and it still left a lasting scar on the country’s financial psyche. In 1936 Norway experimented with a bank deposit tax, but it caused an exodus of cash from the country. There are also some Latin American examples (Brazil in 1992, Argentina at the turn of the millennium) but most were combined with capital controls, and were last-ditch efforts to rescue the financial system when all else had already been tried.
If you imagine Cyprus as a closed system, the levy is deflationary. Prices will fall, and for the purposes of argument, let’s say they fall ten percent (just a number).
That deflation likely will crush the economy, but many individuals will find the real value of their bank balance intact, at least when it comes to spending in the home market. In this regard much of the incidence of the levy is quite indirect. The most obvious effect is that purchasing power command over imports falls immediately.
From the first-order static effects alone, it is not clear that the chosen program hurts the poor more than would exchange rate depreciation under a floating rate system. That too lowers the command of bank balances over imports.
To the extent Cypriot bank deposits are proportional to wealth (a debatable proposition, and at sufficiently high levels of wealth the surplus may all go abroad), the initial levy is actually progressive in its impact, at least relative to taxes on income. Wealth inequality is usually much more pronounced than is income inequality, so a linear tax on a proxy for wealth will be more progressive, perhaps considerably more progressive.
Many of the most regressive effects will come from the second-order economic devastation, unemployment, and so on.
Of course Cyprus is not a closed system. Still, I would think in the short run and probably in the medium run too, foreign money and foreign labor and tourists are now somewhat afraid to enter Cyprus, thus there will be a persistence of the deflation. The deflation should be strongest on the side of the non-tradeables. Exporters are likely to do better than workers in the service sectors. The ongoing negative income effects, from the secondary consequences of the levy, will muddy predictions.
Since the levy has been a surprise, I do not see a “Ricardian” argument that the value of the bailout offsets the deflationary pressures. The bailout had been expected anyway, plus much of its value is reaped by parties other than Cypriot consumers. Nonetheless the “transfer” is running in two directions here, and not just one.
There are many tricks and traps in the analysis, and numerous other angles to consider. These issues were debated a good deal in the 1920s (see Jacob Viner, the section on the transfer problem), and also by Mill and Torrens in the 19th century.
“The Rocketry Golf Organization (RGO) Aimed its First Contest with Golf Pro, Shawn Kelly, vs. Doug Frost, at The Ridge Golf Course, Auburn, Ca., March 19 and 26, 2013
Rockets with plastic golf balls, replace driver clubs, as they fly to the green no matter how far. Shawn Kelly, golf pro, will compete against these rocket machines. Doug Frost, rocketry golfer, will have to putt out with a real golf ball and club.” -PRNewswire
For the pointer I thank the apparently excellent Brett Keller.
1. Against zippers.
These points are from scattered but I think reliable tweets, of course stay tuned for updates. The Cypriot Parliament wants more time to debate, so they will not be rubber-stamping the depositor haircut measure today, as had originally been the plan. In theory they are now voting Monday, although presumably that stands in doubt too. The German Parliament would not have passed the bailout at all, without the depositor haircut or something similar. This stance could cause other eurozone nations to reevaluate their future policies and also current bargaining strategies. The EU will not rule out “deposit assessments” for future bailouts. As I’ve written, the smooth running of this gambit would not be good news either but would lead only to a raising of the stakes with a replay of the basic game. Barclays thinks that significant bank runs elsewhere are unlikely; in my view the longer-run ramifications most likely operate through changing the incentives of other eurozone member governments, which now can expect a lower share of the surplus from any bargain. Morgan Stanley is less optimistic. Note that Cyprus had met the Maastricht hurdle before the crisis.
The broadest lesson of them all concerns the dangers of framing when you play the same game over and over again (attn: U.S. fiscal policymakers). German policymakers/voters have felt backed into a corner by repeated bailouts and that is when stupid choices start being made. This could go down as a blunder of historic proportions. It also shows that EU governance already is a disaster and profoundly anti-democratic in the worst sense of that term. A second general lesson is that modern politics cannot sustain wealth taxes very well, unless those taxes have a very long history (property taxes) or are extremely non-transparent, such as the lack of inflation indexing on U.S. capital gains levies; the intolerability of the deposit confiscation is closely related to the issues surrounding the stickiness of nominal wages.
Further update: Cypriot bank holiday further extended through Tuesday…And here are thoughts from Matt Yglesias.
Here is my latest New York Times column, more philosophical than usual, excerpt:
Economic analysis is itself value-free, but in practice it encourages a cosmopolitan interest in natural equality. Many economic models, of course, assume that all individuals are motivated by rational self-interest or some variant thereof; even the so-called behavioral theories tweak only the fringes of a basically common, rational understanding of people. The crucial implication is this: If you treat all individuals as fundamentally the same in your theoretical constructs, it would be odd to insist that the law should suddenly start treating them differently.
At least since the 19th century, the interest of economists in personal liberty can be easily documented. In 1829, all 15 economists who held seats in the British Parliament voted to allow Roman Catholics as members. In 1858, the 13 economists in Parliament voted unanimously to extend full civil rights to Jews. (While both measures were approved, they were controversial among many non-economist members.) For many years leading up to the various abolitions of slavery, economists were generally critics of slavery and advocates of people’s natural equality, as documented by David M. Levy, professor of economics at George Mason University, and Sandra J. Peart, dean of the Jepson School of Leadership Studies at the University of Richmond, in “The ‘Vanity of the Philosopher’: From Equality to Hierarchy in Post-Classical Economics.”
Professors Levy and Peart coined the phrase “analytical egalitarianism” to describe the underpinnings of this tradition. For example, Adam Smith cited birth and fortune, as opposed to intrinsically different capabilities, as the primary reasons for differences in social rank. And the classical economists Jeremy Bentham and John Stuart Mill promoted equal legal and institutional rights for women long before such views were fashionable. Their utilitarian moral theories placed individuals on a par in the social calculus by asking about the greatest good for the greatest number.
There is more at the link of course, such as:
Often, economists spend their energies squabbling with one another, but arguably the more important contrast is between our broadly liberal economic worldview and the various alternatives — common around the globe — that postulate natural hierarchies of religion, ethnicity, caste and gender, often enforced by law and strict custom. Economists too often forget that we are part of this broader battle of ideas, and that we are winning some enduring victories.
I did not have the space to cover some additional questions of interest. These include:
1. Will the move away from rational choice models, and toward a broader and larger empirical social science, including behavioral and neuro elements, nudge economics away from this heritage?
2. How much of the civil libertarian core, common among many economists, stems from the socioeconomic background of (many) current economists rather than from the economic method?
3. How do Indian economists poll on the caste system, relative to their socioeconomic peers?
4. How much will the extreme influx of non-Westerners into American and British graduate programs in economics affect the discipline in the years to come?
2. How to enjoy your iPhone much much more, as taught by the Japanese. Or try this link here: http://en.rocketnews24.com/2013/03/15/this-bubble-wrap-iphone-case-will-keep-you-satisfied-365-days-a-year/
6. The story of a writer, numerous pieces of wisdom therein, recommended.
Week-to-week, holiday-adjusted, how much will Cyprus gdp go down? Is it the case, as it seems so far, that the small (and large) depositors take a whack and the senior credit holders are spared? Does that set a precedent for future bail-ins?
How much nicer will the other EU countries be to Merkel now? To her face? Behind her back? How many more votes does she win in September?
What counts as “good news” or “bad news” coming out of Cyprus? Let’s say things go badly. That could cause market panic and contagion and of course misery among the Cypriots (and Russian oligarchs). Depositors might pull out of Greek and Spanish banks to a much greater extent.
Alternatively, let’s say the economic transition from the “Cyprus deposit tax” is relatively smooth and orderly. Will not some other countries start wondering whether their transition out of the euro also would be relatively smooth and orderly? Keep in mind that, as it stands, Cyprus is suffering deflationary effects, bank closure costs, capital controls, yet without getting the redenomination benefits and independent monetary policy benefits of leaving the euro. If that appears “OK” (do note however that Cyprus is spared the burden of creating a new currency), won’t the notion that leaving the euro is practical after all start to spread? Which could cause bigger bank runs than if the Cypriot transition goes badly?
Can good news end up being bad news? Or vice versa? What would Jeff Ely say? What would Garo Yepremian say?
…the destination of choice for Russian money looking to escape into an EU jurisdiction is now apparently Latvia
There is much more, which is an excellent overall survey of the Cyprus situation. Here two additional sentences of interest:
If the infliction of losses on small depositors has a purpose, it’s probably to reassure the Russians that they are not being discriminated against. Yes, I may have thrown up a little in my mouth typing that.
There is, by the way, a local bank holiday Monday, although on Twitter I already am seeing reports of queues forming in front of banks in Cyprus and the “drying up” of ATMs.
File under: “No longer too small to fail.”
1. A Lost Lady, by Willa Cather. A knockout, and oddly neglected these days.
2. The Dinner, by Herman Koch. It sold millions in Europe, but I don’t find snark about rich Dutch people that interesting.
3. Wave, by Sonali Deraniyagala. Smart reviewers love this memoir of a woman who lost her family in the tsunami, but it didn’t have enough structure to grab my attention.
4. John Stuart Mill, Autobiography and Bentham and Coleridge. Of course these are re-reads. Especially when read in conjunction, they are two of the best books on how to think, as well as gripping stories in their own right.
5. Amour, the new movie by Michael Haneke. I can’t review it without introducing spoilers, but it’s one of the two movies this year I have been recommending. The other is the Chilean film NO, a fantastic account of how, even in the strangest of circumstances, democracies filter policy outcomes, as indeed autocracies do too (in different ways).