Category: Current Affairs

China fact of the day

China’s major commercial banks have a funding issue outside Beijing’s control: They’re running low on the U.S. dollars they need for activities both at home and abroad.

The combined dollar liabilities at the big four commercial banks exceeded their dollar assets at the end of 2018, their annual results show—a sharp reversal from just a few years ago. Back in 2013, the four together had around $125 billion more dollar assets than liabilities, but now they owe more dollars to creditors and customers than are owed to them.

Bank of China BACHY -0.66% is by far the greatest contributor to the shift. Once the holder of more net assets in dollars than any other Chinese lender, it ended 2018 owing about $70 billion more in dollar liabilities than it booked in dollar assets. The other three lenders actually finished the year with more dollar assets than liabilities, though Industrial & Commercial Bank of China IDCBY -0.33% had a deficit at the end of 2017.

In its annual report, Bank of China says that its asset-liability imbalance is more than addressed by dollar funding that doesn’t sit on its balance sheet. Instruments like currency swaps and forwards are accounted for elsewhere.

But such off-balance-sheet lending can be flighty. As the Bank for International Settlements notes, the vast majority of currency derivatives mature in under one year, meaning they are up for constant renewal and could evaporate during times of pressure.

Here is the full WSJ piece, via Christopher Balding.

Who should Trump pick for the Fed Board of Governors?

That is the topic of my latest Bloomberg column, here is the opener:

First, we should not forget that the Federal Reserve system is actually a private corporation of sorts, albeit one with a unique government-backed charter. So if you are on the board of the Fed, you are not just a figurehead — you are responsible for parts of the company. You could be in charge of the Fed’s pension and benefit plans, for instance, or its payments system.

To be sure, running monetary policy for the entire nation, and to some extent the entire world, is more important than the smooth internal workings of the Fed. Still, those managerial responsibilities will impinge on a board member on a regular basis. If he or she screws them up, it will be harder to have high status within the Fed, and harder to keep one’s confidence and emotional equilibrium. Alternatively, a governor might become completely dependent on aides to perform those internal practical functions. That is not conducive toward broader autonomy on monetary policy front, either.

The bottom line is this: A good candidate for the Fed should have at least some practical managerial experience. You don’t have to be the next Bill Gates or Steve Jobs, but you should be just competent enough to forestall internal crises of bad management and to avoid losing face. For a lot of potential candidates, that is actually a pretty tall order, especially if they come from academia or have unorthodox backgrounds unrelated to finance.

And:

Of course the next board member will also be expected to have well-informed views, however you might define them, on monetary policy and regulation. But it would be a mistake to start with a set of agreeable or required views, and then use it to build a short list of advocates. It bears repeating: For a board member to be effective, political and bureaucratic skills are paramount. Without them, a board member may well end up as counterproductive, even when correct.

Recommended.

Solve for the (tri-state) equilibrium

New York recently approved congestion pricing, a plan to make it more expensive to drive into the heart of Manhattan. Officials in New Jersey are enraged and have griped, half-jokingly, that it will cost less to travel to California than to cross the Hudson River.

And they are vowing revenge.

The mayor of Jersey City suggested that New Jerseyans should toll New Yorkers entering their state.

Here is more from Emma G. Fitzsimmons at the NYT.

The ferry subsidy culture that is New York City

One of the new routes Mr. de Blasio announced this year — between Coney Island and Wall Street — is projected to require a subsidy from the city of $24.75 for every passenger, according to a report from the Citizens Budget Commission, a nonpartisan, nonprofit civic organization.

The commission said that the average subsidy for each passenger in the system’s first year of operation was $10.73, far more than the $6.60 subsidy the de Blasio administration originally estimated.

…Although it would cost $27.50 per person to ride the ferry from Coney Island to Wall Street, according to the Citizens Budget Commission’s report, the estimated 1,100 commuters will only pay $2.75.

Those are some high costs for a boat that sits on the water…here is the full story by Patrick McGeehan (NYT).

Will China capture the main benefits from Belt and Road?

Maybe not, that is the topic of my latest Bloomberg column.  Here is one excerpt:

I was struck by a recent deal between China and Montenegro that gave China the right to access land in Montenegro as collateral, in case Montenegro does not repay certain loans. This has upset people in Montenegro, and it makes China seem like an imperialist country with territorial designs. But there’s also a more benign interpretation: China is demanding land as collateral because it knows Montenegro is not creditworthy. The loan sent Montenegro’s ratio of debt to gross domestic product to almost 80 percent, from 63 percent in 2012.

To put that in context, let’s say you heard of a loan shark who threatened to break the fingers of borrowers who did not repay. You would sooner infer that was a risky, so-so investment rather than a sure winner.

In essence, China is playing the role of loan shark, and that is not obviously the way to get ahead in today’s world. If China did claim some land in Montenegro as recompense for a bad loan, it might find holding the asset to be more trouble than it’s worth, much as Amazon decided to depart from a deal with New York because of hostility in parts of the city and state governments. If China tried to sell the land, a potential new buyer could never be sure of having enforceable title to the property.

Another problem with Belt and Road, at least from a Chinese point of view, is that China is dealing with many countries that are much smaller in terms of their GDP. There’s a tendency for small countries to renege on deals in hopes that big creditors won’t bother to make an example of them. You might think that smaller countries are easier for China to push around, and there is some truth to that. At the same time, both China and the small countries know that the small countries are not entirely masters of their fates, and so punishment strategies can be counterproductive or occasion more resentment than it is worth. Has the U.S. found it so easy to induce Honduras and Guatemala to stem the flow of migrants toward the border?

And this:

China has proven remarkably poor at supplementing Belt and Road with soft power persuasive techniques using diplomatic and cultural influence. This is no accident, nor does it reflect some kind of stubborn unwillingness of the Chinese to learn to wield soft power tools. Rather, the problem is structural. Since the Chinese government does not derive legitimacy through normal democratic channels, much of its diplomacy and foreign policy have to be channeled to please domestic audiences, whether the citizens or coalitions within the Communist Party. The necessary internal presentation shapes incentives for Chinese foreign policy, and that in turn alienate the other countries China is dealing with.

There is much more at the link.

The new who gives a damn politics

It’s also worth noting that talk is going around DC that the US and China may keep the original $50B in tariffs, but that the Trump Administration has asked the Chinese to move theirs away from targeting the GOP base to less politically sensitive sectors, even proposing alternative industries to the Chinese side.

That is from Bill Bishop, who edits the email newsletter Sinocism, which I find essential and pay real money to read.  Here is additional Bloomberg coverage.

UK fact of the day

Unless Labour and the Conservatives can cobble together a Brexit deal that is supported by parliament, then Britain’s election-weary voters will have their fifth nationwide election in only six years.

That is from Matthew Goodwin in The Times, there is also Matthew’s book National Populism: The Revolt Against Liberal Democracy.  Remember how we used to praise parliamentary systems for their decisiveness?

Solve for the equilibrium

This one concerns China:

A person familiar with the negotiations said Myanmar’s government reached out to the U.S. to request help reviewing the contract [with China] to ensure it didn’t include any hidden traps. This person said other Western countries, including the U.K. and Australia, provided similar assistance.

The negotiations “were very much Burmese-led but armed with the advice of the Americans and others as well. We were able to go to the Chinese [and say], ‘This part is OK, this part is problematic in terms of debt,’” the person said, referring to the country by its previous name.

The Myanmar port deal is part of an economic and diplomatic influence campaign known as the Belt and Road Initiative, a signature effort by Chinese President Xi Jinping to dot the globe with Chinese-funded infrastructure projects.

Here is the full WSJ story by Ben Kesling and Jon Emont.

U.S.A. fact of the day

As President Trump threatened to shut down the U.S.-Mexico border in recent days, his Department of Homeland Security nearly doubled the number of temporary guest worker visas available this summer.

The Homeland Security and Labor departments plan to grant an additional 30,000 H-2B visas this summer on top of the 33,000 they had already planned to give out, the agencies confirmed.

The H-2B visa allows foreign workers to come to the United States legally and work for several months at companies such as landscapers, amusement parks or hotels. About 80 percent of these visas went to people from Mexico and Central America last year, government data shows…

With the additional visas, the Trump administration is on track to grant 96,000 H-2B visas this fiscal year, the most since 2007, when George W. Bush was president.

Here is more by Heather Long at WaPo, via Anecdotal.

When are national apologies a good idea?

That is the topic of my latest Bloomberg column, noting that lately Mexico has been demanding an apology from Spain for colonialism.  Here is one bit:

Some features of good apologies are sincerity, overall compatibility with what the apologizer now stands for in other contexts, and a broad social willingness to accept that something indeed has been settled for the better.

And:

OK, so how about Spain and Mexico? I am skeptical of this proposed apology, partly because it seems like a political maneuver by President Andrés Manuel López Obrador to garner political support and distract from his likely failure to successfully reform Mexico’s economy. The current Spanish government also is not a close descendant of the conquistadors, as it is a full-blown democracy and the conquest was almost 500 years ago. One can acknowledge the massive injustices of the history without thinking that current Spanish citizens necessarily should feel so guilty. And (until recently) Spain-Mexico relations have not been problematic, so it is not clear exactly what problem this apology is supposed to solve.

The current demand for an apology is a distraction from the enduring injustice of Mexico’s segregation. If Spaniards found their own reasons for wishing to apologize, that would be a good result. But on this demand, they are correct to give it a pass.

I also consider the United States, Australia, New Zealand, and Rwanda.

Brexit day has come and gone

I must have read two hundred tweets about how dysfunctional the British government is, or what a bad leader Theresa May has been.  Really?  That has yet to be demonstrated.  I’ve all along been “vote Remain,” but I also recognize Remain works only if British membership in the EU has a certain amount of internal legitimacy.

What might a process of testing that legitimacy look like?  Long, extended confusion, lots of back and forth, indecisiveness, and inability to form a durable majority for any other option, perhaps?

Right now the chances of Remain seem to be rising, or perhaps some version of Norway plus, and those are among the better options.  I am hardly distraught, noting that I genuinely do not have a strong sense of what will happen next.  I am pleased to see that not one of the seven versions of Brexit could command a majority.

Is it really so tragic and terrible to have all this — whatever comes to pass — revealed only at the last moment?  Isn’t that often how optimal search looks?  Isn’t it how the “to Remainers all-holy EU” so often does its business?  Alternatively, how smooth, open, and transparent did the American constitutional convention actually run?

I’m not predicting triumph or victory here, only that I don’t yet see that anything has fallen off the rails.  Nor is the British pound being hammered in the markets.  Nor do I know many (any?) people who could have done much better than Theresa May.

But now is the time to pay more attention again, these are the proverbial last five minutes of the basketball game…

Elizabeth Warren on food and agriculture

That is the topic of my latest Bloomberg column, here is on excerpt:

The most striking feature of her team’s plan, called “Leveling the Playing Field for America’s Family Farmers,” is what it doesn’t call for: namely, an abolition of farm subsidies, a reform favored by virtually all economists. Those payments often run more than $20 billion a year, and are typically considered an inefficient form of crony capitalism.

And:

Warren’s document asserts that “food prices aren’t going down.” That’s true but misleading. When the Federal Reserve is targeting near 2 percent inflation, most prices in the economy will rise steadily over time. The link behind that claim, to a U.S. Department of Agriculture report, offers some recent data, but it is hardly damning: In 2018, it notes, retail food prices rose 0.4 percent. “This was the first increase in 3 years, but the rate was still below the 20-year historical annual average of 2.0 percent.” Or how terrible are these numbers, from the same report: “In 2019, price growth may continue to remain low at the grocery store. Food-at-home prices are expected to rise between 0.5 and 1.5 percent, as potentially the fourth year in a row with deflating or lower-than-average inflating retail food prices.”

A look at the longer-term historical data also shows slow, steady inflation in the food and beverage sector, rather than a recent crisis of price spikes. Food price inflation does become higher after 1973, but that is probably due to higher energy prices and the more general productivity slowdown that has plagued the U.S. economy.

In this context, Warren’s lengthy complaints about monopoly and market power in the food sector just don’t seem that persuasive. Furthermore, America’s food sector has been remarkably innovative in terms of product choice and rising diversity of options.

Warren also calls for greater agricultural protectionism and the banning of foreign investment in American farmland.  And she is supposed to be the leading policy thinker in the race?  People, this is not good, and furthermore it is the same tiresome “tested by social media let’s bash the corporate villains” set of cliches.  My close:

If American voters want to be inspired, then opposing seed-company mergers won’t be nearly enough.

Tabarrok on Bail

I spoke recently at Brookings on the movement to eliminate cash bail. I think we hold too many people pre-trial and the use of judicial aids such as algorithms could safely increase the number of people released prior to trial as well as reduce the variance and disparity of treatment. Nevertheless, I think eliminating cash bail is a poorly thought out idea that may very well backfire. The proponents of eliminating cash bail also present a misleading picture of who is held on bail, the focus of my remarks at Brookings.

I was the only one at the event to oppose eliminating cash bail and I think the audience was a bit shell-shocked. Certainly, not everyone on the panel agreed with my comments. The American Bail Coalition posted the clip from CSPAN but otherwise had nothing to do with my remarks which begin around 35 seconds in.