Category: Current Affairs
What is the difference between LOLR to banks and LOLR to governments?
Draghi says yes to loans to banks, for a three-year period and with weak collateral, and no to loans to sovereigns, in accord with current EU law. (Admittedly his remarks require further parsing and so this interpretation is subject to revision.) What does the Modigliani-Miller theorem say?
A cash-strapped government will start a bank. A cash-strapped government will induce a domestic bank to lend more to it. A cash-strapped government will force a domestic bank to lend more to it. Remember the era of “financial repression”?
To some extent governments will internalize the value of this guarantee to banks. If you don’t think this guarantee to banks somehow transfers to governments, won’t ECB-guaranteed claims on the bank become the new safe domestic security, knocking out the market for the riskier sovereign stuff and thus mandating some kind of risk equalization to keep the whole show up and running?
Is this transfer of the subsidy to the sovereign a bug or a feature of the plan? Perhaps this is how the EU/ECB, viewed for a moment as a consolidated entity, will circumvent EU law to finance troubled governments. Is it possible that by changing collateral requirements they can alter the flow of funds to governments in a discretionary, ever-changing, and relatively non-politicized fashion? Does this satisfy the “too complicated for people to complain about” provision?
Three years. Given recent events, that feels like a very long time horizon. So as long as the available supply of collateral allows, banks would seem not so unwilling to advance funds to their governments, directly or indirectly, and that’s assuming they have a choice in the matter. The new game will be to generate lots of usable collateral, because the overall credit demands are going to be very high.
Will the “not very tough cops,” namely the ECB-backstopped domestic banks, help the national governments avoid reforms and avoid IMF-enforced toughness?
What does the endgame look like when the three years is up?
All of this is subject to revision, but it is my preliminary take on what happened today. The market doesn’t seem to have liked the announcement. Here are other reactions.
I thank Garett Jones for a useful conversation related to this post.
Compensation Now Legal for Bone Marrow Donation
Excellent news; yesterday the Ninth U.S. Circuit Court of Appeals issued a unanimous opinion stating that compensation for bone marrow donation, specifically peripheral blood stem cell apheresis, is legal because such donation does not fall under the National Organ Transplant Act (NOTA).
The case was simple and it’s outrageous that the government fought. In brief, a bone marrow donation used to require inserting a very big needle into the donor’s hip bone, a painful hospital-procedure often requiring general anesthesia. Today, however, donors typically do not donate marrow but hematopoietic stem cells which can be harvested directly from blood in a procedure that takes a little longer but is essentially similar to a standard blood donation. Compensation for blood is legal (blood is excluded as an organ under NOTA). The plaintiffs, led by the Institute for Justice, argued and the court agreed that there is no rational basis for outlawing one type of blood donation when a similar donation is legal.
I was shocked by the utter boneheadedness of one of the government’s arguments:
…the government argues that because it is much harder to find a match for patients who need bone marrow transplants than for patients who need blood transfusions, exploitative market forces could be triggered if bone marrow could be bought.
In other words, markets are forbidden just when they are most useful. It was in fact the patients with rare matches who brought this case. As the court noted:
…a physician and medical school professor…says that at least one out of five of his patients dies because no matching bone marrow donor can be found, and many others have complications when scarcity of matching donors compels him to use imperfectly matched donors. One plaintiff is a parent of mixed race children, for whom sufficiently matched donors are especially scarce, because mixed race persons typically have the rarest marrow cell types.
The patients with the most common cell types can afford to rely on the kindness of strangers. You don’t need a lot of kindness when there are a lot of strangers. The patients who are most difficult to match need to leverage altruism with incentive. It’s a lesson with many applications.
How cosmopolitan should Germany be?
Here is one report:
There may be a crisis in the eurozone, but the shopkeepers and stallholders on German streets are expecting another bumper season. The financial markets are in disarray, but consumer confidence in Germany is up.
Total unemployment is at a 20-year low. Here is another report:
…the Munich-based Ifo institute reported restrictions faced by German businesses in obtaining credit had relaxed this month – despite the weaknesses across much of the eurozone banking system.
The percentage of companies complaining about restrictive credit policies fell from 23.1 per cent in October to 22.4 per cent in November – one of the lowest figures recorded since the survey started in 2003, according to Ifo.
It’s fine to assert that a bigger and badder eurozone crisis will crush the German economy, and maybe it will, with reasonable probability I would say. But a lot of the Germans don’t think so, and I see a lot of — I’ll call it moralizing rather than wishful thinking — unjustified claims about this topic, every day now. Germany is selling more and more to developing nations. And if the euro evolves into a northern European currency it will be stronger but that is unlikely to destroy German exports. Switzerland is struggling in export markets, but for a long time they have succeeded with a strong safe haven currency. Germany has had a stronger currency in the past and they did well before the eurozone, believe it or not. Germany might rather have “the Swiss problem” than co-write loans to Italy. They just need to survive the transition. Keep in mind that, unlike with a TARP to U.S. banks, there are no realistic conditions under which Germany can simply foreclose on the fine nation of Garibaldi and Cavour.
Everyone is saying Germany should do the cosmopolitan thing and underwrite the weaker countries. I am a cosmopolitan but I have questions. Are those people consistent cosmopolitans? What should the United States be doing today for other countries? For Mexican immigrants (as opposed to American bondholders to Mexico)? For China? Are we doing it? Are you advocating it? I don’t see it. What are we doing for Mali? That’s real suffering, yet we ignore it without much guilt. Should we feel worse, if we had written and ratified a treaty specifying that we are not obliged to bail out Mali?
Here is one recent report about the plan the EU has in mind; we will see soon enough. Here is evidence that some kind of big plan — or at least a plan for a plan — is coming soon.
Some progress in Haiti
Haiti backers heralded some good news Monday for the earthquake ravaged Haiti: 44 miles of newly asphalted road, a new 605-acre industrial park in the north that will attract 65,000 jobs and a marquee hotel brand [Marriott].
“This is a very special day. It is truly a day of change,” Luis Alberto Moreno, the head of the Inter-American Development Bank said Monday.
The bank, which invests hundreds of millions of dollars in Haiti, is sponsoring a two-day investment forum in Port-au-Prince beginning Tuesday. So far, 1,000 people have registered, 500 of them business people from 29 countries.
Here is more and I thank B. for the pointer.
“6 ideas for the Ash Heap of History”
That is my article, though not my title. Here is an excerpt:
1. Illegal Mexican immigration is a growing threat. This sure doesn’t seem like a dead issue, as the rhetoric is alive and well among conservative Republican politicians; observe the reaction to Texas Gov. Rick Perry’s in-state tuition plan for illegal immigrant students. Even Democratic President Barack Obama has pursued deportations at a relatively rapid pace. Nonetheless, the reality on the ground is outracing the political debate. The annual flow of about 500,000 illegal Mexican migrants has slowed to about 100,000 a year; that’s a huge change. Mexico, meanwhile, is undergoing one of the most rapid demographic transitions in history as its fertility rate is just slightly over two per family, barely above America’s. Thirty years from now, the United States may have to compete to lure Mexican immigrants across the border.
2. Green energy will save us. Not anytime soon. Obama came into office vowing to bring about a “clean energy” nation, but the recession has turned priorities away from environmental causes. The United States seems further than ever from addressing its carbon problem. Americans now see the expansion of fossil fuel production as a higher priority than green energy, and this margin of difference has only grown since 2007. Rightly or wrongly, the Solyndra scandal has given solar power a bad name. Nuclear power seems to have lost its allure after the Fukushima disaster, as greens who once saw it as a possible carbon-light solution are now swearing off it. Perhaps a surprising technological miracle lies right around the corner, but the more likely outcome is that the political impetus for green energy will be largely dormant for some time to come.
3. Bank runs are a thing of the past. Sadly, bank runs are alive and well. They first resurfaced in the United States with a run on money-market funds and on the so-called shadow banking system in 2008. We’re now seeing gradual “silent runs” on European banks, as depositors wonder why they should keep their money in Greece or Portugal, leading the banks of those countries to wither. The withdrawals of these peripheral eurozone countries from capital markets are like another form of bank run, except the victim is a country rather than a bank. Expect more bank runs, not fewer, at least for the foreseeable future.
The FP Top 100 Global Thinkers
The new list has been published and I am pleased and honored to have made it. The non-economists include such figures as Obama, Merkel, Sarkozy, Bill Gates, and Mark Zuckerberg. The economists — plenty of them — include Krugman, Stiglitz, Reinhart and Rogoff, Roubini, Lant Pritchett, and Duflo and Banerjee. To engage in some superficial self-reflection, the striking thing about the list is that everyone on it is either a) more successful than I am, or b) has been to jail or is headed there. Somehow I expect to continue to evade both categories. Both Rogoff and I recommended the Frank Brady biography of Bobby Fischer. My entering PhD. class put three people on the list, Roubini and Banerjee being the other two.
Sentences to ponder
Bernard Connolly, a long and persistent critic of Europe, estimates that it would cost Germany, as the main surplus country in the euro area, about seven percent of its gross domestic product per year to transfer sufficient funds to bail out the deficit countries, including France.
That amount, he has argued, would far surpass the $400 billion World War I reparations bill forced upon Germany by the victorious western powers — the last payment of which Germany made just last year.
The article is here. I would not regard that as a very exact estimate, the point is that the correct estimate (which in any case still depends on choices to come) is not small. The consistently insightful Wolfgang Münchau (FT) tells us tonight that the Eurozone has ten days at most. Scott Sumner has a very good post on related matters. I still believe that “Germany isn’t just bluffing,” of course we’ll see soon enough. (This is not the NBA!) Best prediction is a “too little, too late lame partial eurobond” which won’t change anything. Welcome to the age of the perpetual financial crisis.
If I were “the eurozone” I would really, really, really want to have something ready before trading starts Monday morning. They don’t.
Doctors with Borders
It’s hard to know what is worse about a new paper in the British Medical Journal, the simplistic economics or the troubling ethics. The paper, The financial cost of doctors emigrating from sub-Saharan Africa, adds up the government-paid cost of educating a health worker in Africa and then multiplies that cost over ~33 years by an investment factor to find the “losses” to the educating country of educating a health worker who emigrates to Canada, the US, the UK, or Australia. The authors do this for nine sub-Saharan African countries with an HIV rate of 5% or greater or more than one million people with HIV/AIDS.
The numbers, by the way, are quite small since the cost of education in developing countries is low and because our laws make it difficult for workers to immigrate, thus the authors find just 567 doctors from Ethiopia currently practicing in the four western countries that they consider; n.b. 567 is the total number not an annual flow. (Note also that the authors gin up the costs by multiplying by an investment factor which adds virtually nothing to the analysis and confuses present and future value calculations.)
You can get an idea of the quality of this paper by asking why the authors chose to focus on countries with high HIV rates. The only reason for this is to suggest that doctors who emigrate and the countries that attract them are responsible for millions of deaths. See below.
Turning to the simplistic economics we have first the suggestion that there is a fixed number (flow) of health care workers so if the U.S. were to forbid Ugandan health care workers from emigrating to the United States this means more health care workers for Uganda. Not so; without the prospect of high wages earned abroad, investment in education (the major cost of which is born by the worker) will likely decline. The Philippines “exports” more nurses than any other country but also has far more nurses than one would expect for a country of its income class, on par with that of Spain, Hungary or Singapore. Here is Michael Clemens:
…there is no such thing as a fixed quantity of nurses to be “drained” from the Philippines or Africa, like petroleum from the ground. People — in this case mostly low-income women — react to global markets and change their career plans accordingly. Many Filipinas wouldn’t have become nurses if not for the migration opportunity, and thus are not ‘lost’ in any sense when they depart. Africans are starting to follow suit, opening career paths for professional women who would otherwise have few. This should not be discouraged through closed immigration policy, but rather taken advantage of — through the establishment of for-export nurse training programs as the Philippines has done en masse. Unlike petroleum, these women are human beings. They have rights and ambitions whose fruition in the United States is a beautiful thing.
Even on their own terms the authors calculations are faulty. Emigrating workers, for example, don’t leave immediately after they have finished their education (as the authors assume in their primary analysis), there are fixed costs to building an education infrastructure which can reduce the costs of education for non-emigrating workers and emigrating workers often send remittances back to the home country. Not all emigrating workers send remittances but wages for high-skill workers can be five or even ten times higher in say the U.S. than in a sub-Saharan African country so educating workers and sending them abroad could be a net benefit for the educating country just based on remittances. Indeed, many families make exactly this calculation. Finally, the authors don’t even try to measure externalities which is what they should be measuring.
What is most ethically troubling is that the authors implicitly treat people as if they were the property of the state. Thus, an emigrating physician is a loss even though the physician improves his life prospects and those of his children. Development is about making people better off not about making geographic units “better off.”
Lest you think that I exaggerate consider that the lead author of this paper is also the lead author of an editorial in the Lancet that advocates making it an international crime to hire African workers.
Although the active recruitment of health workers from developing countries may lack the heinous intent of other crimes covered under international law, the resulting dilapidation of health infrastructure contributes to a measurable and foreseeable public-health crisis….There is no doubt that this situation is a very important violation of the human rights of people in Africa.
…Active recruitment of health workers from African countries is a systematic and widespread problem… the practice should, therefore, be viewed as an international crime.
Yes, you read that correctly: recruiting African workers with prospects of higher wages and a better life is a “very important violation of the human rights of people in Africa.”
Addendum: See this excellent paper by Michael Clemens for more on these issues.
Is the end near?
I am seeing reports of 7.7 on the Italian ten-year bond, over eight percent on the two-year bond, 6.5 percent on the six-month note, and so on. Here is one account.
Maybe these markets simply will shut down soon. There is so much talk about what the Germans should do, but I don’t see the viable options. With Germany’s own credit status now in doubt, eighty percent debt to gdp ratio, massive welfare state, and unfavorable demographics, are they supposed to endorse — going to endorse — ten or fifteen percent price inflation for a few years’ time, all with no guarantee of reforms in the economically weaker countries? And is that inflation then followed by a subsequent deflation? Or does it continue forever? And would Germany have to move to a regime of wage flexibility for the professions too? How politically feasible is that? I don’t see how the Germans benefit from going down this road, even if you think, as I do, that the alternatives are quite dire.
Honduras is doing much worse than Portugal, and is a much smaller country. I don’t see the United States even considering significant aid to Honduras. If you’re going to play the “who is in a formal political agreement?” card, note that the current EU agreement explicitly specifies that, fiscally speaking, countries are pretty much on their own.
The motto “no monetary union without a fiscal union” isn’t wrong, but more to the point is “no fiscal union without a common electorate.”
I don’t see anybody who has put a successful reform option on the table. I do see a lot of articles and Op-Eds trying to create a moral equivalence between Germany and the periphery, followed by proposals which ignore the question of what is a sustainable political equilibrium in Germany. Germany can’t just plop down the money, or turn on the monetary spigot, and get back to where it was.
Gratitude
PsycNet: The effect of a grateful outlook on psychological and physical well-being was examined. In Studies 1 and 2, participants were randomly assigned to 1 of 3 experimental conditions (hassles, gratitude listing, and either neutral life events or social comparison); they then kept weekly (Study 1) or daily (Study 2) records of their moods, coping behaviors, health behaviors, physical symptoms, and overall life appraisals. In a 3rd study, persons with neuromuscular disease were randomly assigned to either the gratitude condition or to a control condition. The gratitude-outlook groups exhibited heightened well-being across several, though not all, of the outcome measures across the 3 studies, relative to the comparison groups. The effect on positive affect appeared to be the most robust finding. Results suggest that a conscious focus on blessings may have emotional and interpersonal benefits.
Estimates about China
Is it really time to gear up that trade war?:
Li Daokui, an academic adviser to the central bank’s monetary policy committee, has said previously that since the trade surplus might account for less than 1.6 percent of GDP in 2011, the yuan might depreciate in two years.
“Capital outflows are evidence that the yuan is overvalued, not undervalued,” Bloomberg News cited Tim Condon, Singapore-based head of Asian research at ING Groep NV, as saying.
“We think the suggestion of outflows is a near insurmountable obstacle to any exchange-rate reform like widening the yuan trading band.”
But Zhuang said that the outflows would create a better environment for China to let market forces determine the exchange rate, because successful currency reform must be based on the possibility of fluctuations in both directions.
The story is here and hat tip goes to Mark Thorson.
Sentences to ponder
Newly appointed Prime Minister Mario Monti must reform a country where free-market ideas don’t have a political base. Labor laws are, along with pensions, the third rail of Italian politics—literally deadly. Pietro Ichino, the senator who has spoken out strongly for labor reform, has lived under police protection ever since two professors of industrial relations were assassinated by left-wing terrorists because they advised the government on how to cut through the tangled labor laws.
Here is more, interesting throughout, hat tip goes to @GeekStats.
The Shock of Modern Slavery
The great Nicholas Kristof has another difficult to, must-read piece today on human trafficking. Including this arresting statistic:
By my calculations, at least 10 times as many girls are now trafficked into brothels annually as African slaves were transported to the New World in the peak years of the trans-Atlantic slave trade.
FYI, at its peak the trans-Atlantic slave trade was on the order of one hundred thousand per year. Figures on human trafficking differ widely but one million is on the lower end so Kristof’s estimate is sadly reasonable.
Capitol Gains
I have written several times before (e.g. here and here) about how Washington insiders, politicians and staff, use their knowledge of behind the scene deals to profit in the stock market (see also Megan McArdle’s recent piece from which I stole the headline). Last night 60 Minutes reported on the story based on new research in Throw Them All Out a forthcoming book by Peter Schweizer.
Here is one bit from the transcript:
In mid September 2008 with the Dow Jones Industrial average still above ten thousand, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were holding closed door briefings with congressional leaders, and privately warning them that a global financial meltdown could occur within a few days. One of those attending was Alabama Representative Spencer Bachus, then the ranking Republican member on the House Financial Services Committee and now its chairman.
Schweizer: These meetings were so sensitive– that they would actually confiscate cell phones and Blackberries going into those meetings. What we know is that those meetings were held one day and literally the next day Congressman Bachus would engage in buying stock options based on apocalyptic briefings he had the day before from the Fed chairman and treasury secretary. I mean, talk about a stock tip.
While Congressman Bachus was publicly trying to keep the economy from cratering, he was privately betting that it would, buying option funds that would go up in value if the market went down. He would make a variety of trades and profited at a time when most Americans were losing their shirts.
Even though the Congress is exempt from insider trading law, many of 60 Minutes’s findings are hugely damning, which you can tell just by looking at the stunned faces of John Boehner and Nancy Pelosi when Steve Kroft questions them about their special dealings. The video is here.
Shining a light on solar subsidies
In Why they call it Green Energy: The Summers/Klain/Browner Memo I discussed the Shepherds Flat wind project, a $1.9 billion dollar project subsidized to the tune of $1.2 billion. Today, the NYTimes has a good piece on an even bigger subsidy sucker, a $1.6 billion CA solar project that is nearly 90% subsidized by taxpayers and ratepayers leaving a nice profit but virtually no risk for its corporate backers. The grateful but perhaps overly voluble CEO of the corporation building the project had this to say:
As NRG’s chief executive, David W. Crane, put it to Wall Street analysts early this year, the government’s largess was a once-in-a-generation opportunity…
“I have never seen anything that I have had to do in my 20 years in the power industry that involved less risk than these projects,” he said in a recent interview. “It is just filling the desert with panels.”
I suspect that he might have continued, “it was like taking candy from a baby,” but that is just a suspicion.
There are good reasons for taxing all sources of carbon and subsidizing cleaner energy sources (especially R&D) but huge subsidies targeted on a handful of corporations without “skin in the game” are a recipe for waste, corruption and abuse. We can only hope that this was just a once in a generation opportunity.
Addendum: The NYTimes usually has great info-graphics but today’s experiment made it more difficult not easier to get to the key information.
Hat tip: Daniel S.
Addendum 2: It’s telling that so many people want to shift the debate away from the advisability of particular solar and wind subsidies to whether I or others have been consistent about coal, oil and nuclear subsidies.
For the record, in this very post I discuss taxing carbon, obviously including oil and coal, so it is clear that I do not favor subsidizing those energy sources. Also, careful readers (most MR readers!), will see that I am especially worried about “huge subsidies targeted on a handful of corporations,” both of those clauses are important. In this case, for example, we are talking about nearly 90% subsidies and they are targeted on a case by case basis; put these two things together and you get waste, corruption and abuse. For these reasons, I am less worried about subsidies to green energy that leave private firms with lots of skin in the game and that are open to any firm.