Category: Current Affairs

From Megan McArdle.  Austan Goolsbee may be going elsewhere.  This could be either good or bad news; in any case the goal is to maximize his influence.  The name Cecilia Elena Rouse is being floated for the CEA position.

Addendum: Alex posted earlier this year about Rouse’s important paper finding that education vouchers increase the quality of public schools.  Rouse was also an adviser for Kerry.  MR archives know all!

Here is a run-down from Brad DeLong.  In addition to the analyses of particular names (I generally agree in the cases I can judge, though I would reappoint Bernanke, if only to limit market uncertainty), get this:

Trade Czar-nominee-designate-leekee. This will, I think, turn out to be
a much more important job in the Obama-Biden administration than people
recognize. Trade agreements are a principal way that we deploy our
foreign policy soft power. And trade sanctions are, I think, going to
be a principal tool in the construction of the system of global
governance to fight global warming.

Exports constitute nearly 40 percent of China’s GDP–far too high a figure. (By comparison, in the U.S., exports account for about 10 percent of GDP most years.) And the global financial slowdown is already taking a terrible toll. Some 10,000 factories in southern China’s Pearl River Delta area had closed by the summer of 2008. Gordon Chang, a leading China analyst, estimates that 20,000 more will shutter by the end of this year. In the third quarter of 2008, Beijing also reported its fifth consecutive quarterly drop in growth,
and several private research firms expect a sharper slowdown next year.
Additionally, unemployment is skyrocketing; in Wenzhou, one of the main
exporting cities, about 20 percent of workers have lost their jobs, Reuters recently reported.

Here is more.  By the way, here is an article on China’s retreat from environmental concerns.

I thank Clifton Chadwick for the pointer.

If reports are true and Barack Obama is really going to tap widely
respected CBO Director Peter Orszag to head up the Office of Management
and Budget (it’s like the CBO, but for the White House, so it makes
sense) then I believe that would make him the highest-ranking blogger in the history of the United States of America.

Here is more.  Orszag, of course, is a very good economist.

The U.S. Navy said pirates commandeered a Saudi-owned supertanker
bearing more than $100 million worth of crude a few hundred miles off
the Kenyan coast, an attack that sharply increases the stakes in an
effort by governments and militaries to protect the world’s
energy-supply lines.

U.S. Navy officials said the hijacking was unprecedented for its
distance from shore and the size of its target — a ship about the
length of a U.S. aircraft carrier. The attack appears also to be the
first significant disruption of crude shipments in the region by
pirates.

Here is the story.  Here is Peter Leeson’s paper on pirates.  I don’t yet see it on Amazon, but stay tuned for Peter’s forthcoming book The Invisible Hook. 

I thank Brad Williams for the pointer.

Addendum: From another article:

The pirates’ profits are set to reach a record $50 million in 2008,
Somali officials say. Shipping firms are usually prepared to pay,
because the sums are still low compared with the value of the ships.

President-elect Barack Obama continues to name members of his transition team.
Among the latest announcements are that the National Science Foundation
agency review will be led by Jim Kohlenberger – who was senior domestic
policy adviser to Vice President Al Gore, where he focused on science
and technology – and Henry M. Rivera, a lawyer. For the arts and
humanities transition team, Obama has selected Bill Ivey, director of
the Curb Center for Art, Enterprise, and Public Policy at Vanderbilt
University and former chairman of the National Endowment for the Arts;
Anne Luzzatto, who served in the Clinton administration as a special
assistant to the president and who has more recently been vice
president for meetings and outreach at the Council on Foreign
Relations; and Clement Price, the Board of Governors Distinguished
Service Professor of History and director of the Institute on
Ethnicity, Culture, and the Modern Experience at Rutgers University at
Newark.

Here is the link.  Those names are not huge surprises and of course you will again see the imprint from the Clinton administration.

I think it would be a terrible mistake to simply write a check to the
auto industry without demanding major, major restructuring of its labor
contracts. Without that the money will simply go down a rat hole and
the automakers will just be back again in a year or two asking for more
money. Obama has a strong hand to play here and I hope he uses his
leverage. With bankruptcy as the only alternative to federal aid, he
can drive a very hard bargain with the auto workers. If he caves and
just writes a blank check, everyone will know he can be rolled and he
will pay a heavy political price for it. If Obama shows toughness on
this issue, I think it will pay enormous dividends for him down the
road.

Via Brad DeLong, Bruce is now blogging.  And if you want some provocation, here is Kevin Drum on the idea of a GM bailout. And Felix Salmon has some interesting ideas.

Gordon Tullock is a smart man:

When the government said it would spend $700 billion to rescue the nation’s financial industry, it seemed to be an ocean of money. But after one of the biggest lobbying free-for-alls in memory, it suddenly looks like a dwindling pool.

Many new supplicants are lining up for an infusion of capital as billions of dollars are channeled to other beneficiaries like the American International Group, and possibly soon American Express.

Of the initial $350 billion that Congress freed up, out of the $700 billion in bailout money contained in the law that passed last month, the Treasury Department has committed all but $60 billion. The shrinking pie – and the growing uncertainty over who qualifies – has thrown Washington’s legal and lobbying establishment into a mad scramble.

The Treasury Department is under siege by an army of hired guns for banks, savings and loan associations and insurers – as well as for improbable candidates like a Hispanic business group representing plumbing and home-heating specialists. That last group wants the Treasury to hire its members as contractors to take care of houses that the government may end up owning through buying distressed mortgages.

The real lesson here is about the massive fiscal stimulus on its way.  Beware, and don’t be tricked by people simply postulating how the money "should" be spent.

China on Sunday announced a huge economic stimulus package aimed at bolstering its weakening economy and perhaps helping fight the effects of a global economic slowdown.  In a sweeping move at a time when major projects are being put off
around the world, Beijing said it would spend an estimated $586 billion
by 2010 on wide array of national infrastructure and social welfare
projects, including constructing new railways, subways, airports and
rebuilding communities devastated by an earthquake in southwest China
in May.

Here is the story.  Most of this money they would have spent anyway, so what is the net change in the stimulus?  And over how many years is this sum spent?  I think of this as mostly a public relations move.  China wants to tell other countries it is doing lots and it wants to tell its own citizens that it feels their pain and is pro-active.

Is there a gentle way to glide down from 10 to 5 percent growth?  I tend to doubt it.  Are you prepared for a China with negative economic growth for a few years (or more)?  I tend to doubt that too.

Matt Yglesias has interesting commentary; I guess now we’ll see how much an economic surplus is worth when the core macro problem is something other than lack of aggregate nominal demand.

Addendum: Here is further comment.

First came the bailout. Now comes talk of a bailout from the bailout.

Here is the article.  Felix Salmon offers related commentary.  This reminds me of problems in public utility theory.  To get optimal cooperation, the regulator allows the regulated firm to set price above marginal cost so that the regulated firm has some incentive to obey.  But what do you do when the regulated firm is essentially wiped out?

Thrainn Eggertsson writes to the FT:

The government of Iceland has now been offered foreign loans that roughly equal the country’s gross domestic product.  The annual interest payments, say 3-4 per cent, approximately correspond to the country’s annual economic growth.  Additionally the loans must be paid up.

I believe Thrainn is being generous with that growth estimate.  Then he compares Iceland to Germany in 1919 and predicts similar consequences (I don’t think he means that as a threat, however).  Instead, I wonder what it is like for a country to be truly, permanently bankrupt.  And a further difficulty lies on the horizon.  Circa 2000, fish accounted for 70 percent of the country’s export earnings.  Here are many articles on dwindling cod stocks, the number one item sold by Icelandic fishermen.

I genuinely cannot imagine what the endgame looks like.

Dow up 889. 

Austria’s bank exposure to emerging markets is equal to 85pc of GDP
– with a heavy concentration in Hungary, Ukraine, and Serbia – all now
queuing up (with Belarus) for rescue packages from the International
Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for
the UK, and 23pc for Spain. The US figure is just 4pc. America is the
staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America,
almost twice the lending by all US banks combined ($172bn) to what was
once the US backyard. Hence the growing doubts about the health of
Spain’s financial system – already under stress from its own property
crash – as Argentina spirals towards another default, and Brazil’s
currency, bonds and stocks all go into freefall.

Broadly speaking, the US and Japan sat out the emerging market
credit boom. The lending spree has been a European play – often using
dollar balance sheets, adding another ugly twist as global
“deleveraging” causes the dollar to rocket. Nowhere has this been more
extreme than in the ex-Soviet bloc.

The region has borrowed $1.6 trillion in dollars, euros, and Swiss
francs. A few dare-devil homeowners in Hungary and Latvia took out
mortgages in Japanese yen. They have just suffered a 40pc rise in their
debt since July. Nobody warned them what happens when the Japanese
carry trade goes into brutal reverse, as it does when the cycle turns.
. . .

Just in case you were wondering.  Here is the link.  By the way, this is further evidence that the driving force behind the earlier boom was the global savings glut, and sheer giddiness, not the excessively loose monetary policy of Greenspan’s Fed.  The ECB has pursued a relatively tight monetary policy since its origin.  It also will be interesting to see what trouble arises in Spain, since Spanish banking regulation has been considered a model of how to keep these problems under control.

And here’s Romania fact of the day:

Romania raised its overnight lending to 900pc to stem capital flight…

Alex is a very good truth-tracker but on credit I remain stubborn in my belief that there is a credit crunch.  Here is one report:

How is trade finance coping with the credit crunch

Badly. Steve Rodley, director of London-based shipping hedge-fund Global Maritime Investments, puts it bluntly: "The whole shipping market has crashed." The trouble is that credit is the lifeblood of commerce, but it is built entirely on trust. And that has evaporated. As such, many ship owners can’t get banks to issue letters of credit, particularly on cargoes of price-volatile commodities that no longer look like adequate collateral. Even those who can get letters of credit are finding that their counterparties may no longer trust the credit rating of anything other than large, well-established banks, many of which are now charging big premiums. Letters now cost three times the going rate of a year ago, according to Lynn.

Here is another report.  Here are other reports.  Or read this account:

What’s more, the dollar-denominated trade finance lines that exporter companies rely upon to do business are drying up in dramatic fashion amid the global credit crunch. In Brazil — the world’s top exporter of beef, iron ore, sugar and coffee and the No. 2 exporter of soy — total outstanding trade lines have fallen by half this month to around $18 billion.

Here are simple and in my view decisive quantitative indicators of the current domestic credit crisis.  Or here is another report:

According to experts interviewed by Bloomberg, "letters of credit and the credit lines for trade currently are frozen," and as a result, "nothing is moving".

Or here is a recent survey of U.S. retailing CFOs:

Some 41 percent of US retailers are seeing tight credit as a result of
the crisis in the banking sector, and many will cut staff and reduce
buying as a result…

Many other surveys paint a similar picture.  I can only repeat my earlier words that immediate credit flows are demand-driven and they do not measure bad credit conditions concurrently because they stem from prior bank commitments.  To suggest, as commentator Tom does (and Alex endorses), that we have no credit crisis until lines of credit are exhausted, is in my view sheer logomachy (I like that word).  Nor is my view "convenient" or unfalsifiable as was suggested.  Here is Wikipedia on lagging indicators and yes it tells you that standard forms of credit fall into this category and this has been understood for some time.  Look instead at the currently informative pieces of the evidence and you will see that they point in a very consistent direction. 

It is true that many credit channels have not shut down.  But the ones
that are shutting down are enough to cause a severe global recession.   

Addendum: I added this comment to the discussion: "People, financial markets and financial institutions around the world
are falling apart. I’m not pulling this stuff out of a hat or from a
few crazy journalists. There is massive disintermediation going on
right now, much of it in the shadow banking system. I am trying not to
be dogmatic but it is hard for me to see on what grounds anyone would
deny this."

From all the hullabaloo I thought he had granted the death of capitalism but no.  Here are his prepared remarks.  Here is part of the Q&A.

He did admit that risk models had failed by selectively overweighting periods of euphoria and that the credit default swaps market had exploded in our face.  He also knows that there are hundreds of trillions of dollars in open positions in other derivative markets and most of them have worked relatively well in this crisis; his words indicated as such.  He also stressed that capitalism has had a string of forty years of numerous successes and that recent experience is an outlier.  He is still not sure what to make of the current failure.

Greenspan also said: “Whatever regulatory changes are made, they will pale in comparison to
the change already evident in today’s markets,” he said. “Those markets
for an indefinite future will be far more restrained than would any
currently contemplated new regulatory regime.”

His policy recommendation was the modest one of requiring banks to keep a share in any mortgage.

I don’t agree with all of his detailed points (e.g., too much emphasis on subprime securitization), but I thought the overall ideological "flavor" of his remarks was essentially correct.  For differing, and yet not totally different, point of view, here is John Quiggin on Greenspan.  Here is the Ayn Rand Center on Greenspan.