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April 27, 2009

Economist's View - 5 new articles

Governor Schwarzenegger's Press Conference

Since I was issued a press pass for the conference, on a tip, I went to Governor Schwarzenegger's press conference on the swine flu outbreak. I was the only one taking pictures with an iPhone. For the most part, it was as expected, they are testing new flu cases, monitoring the borders in San Diego and Imperial counties (though he made it clear there are no travel restrictions, at least not yet - the Mexican border is a Federal issue in any case), and they gave hygiene tips (wash your hands!). There are currently seven cases in California, an eighth is suspected, and they are looking at a dozen additional cases. One of the doctors present noted that the CDC has created a seed virus and is ready to move forward to create a vaccine if needed (there are currently 5 million does of anti-viral medication out there - a combination of Tami flu and Relenza (sp?) - 25% will come to California, and they will be concentrated in the counties where there are outbreaks.


But the news, I thought, was when he was asked to react to advice being given in Europe not to travel to America, California in particular. Instead of saying that wasn't necessary, that it was alarmist, he said that each country has to do what it thinks is best. He did not say the advice was bad, and he made a statement about how we cannot worry about the economic effects right now. That made me think he believes the problem is far bigger than what is reported above (otherwise, the probability of infection is minuscule, and the European advice isn't really needed). Even so, I'd guess he wishes he'd given a different answer.

Update: Bloomberg's version:

Avoid Travel to Mexico, U.S. Says as Outbreak of Flu Advances, by Tom Randall, April 27 (Bloomberg): Nonessential travel to Mexico should be avoided because of the outbreak of swine flu there that may be responsible for killing 100 people and sickening 1,000, U.S. health officials said.

A similar recommendation made by European officials against travel to the U.S., where 40 cases have been confirmed, is "premature," said Richard Besser, acting head of the U.S. Centers for Disease Control and Prevention in Atlanta. None of the U.S. cases has been fatal, and the government is distributing swine flu information to people arriving in the U.S., he said.

Both the U.S. and European travel warnings may be influenced by politics more than science, said Margaret Chan, director-general of the World Health Organization in Geneva. WHO doesn't recommend closing borders or restricting the movement of people or goods, Chan told leaders from United Nations agencies in a conference call today. The disease, also confirmed in Canada and Spain, has spread too far and would be impossible to contain by closing borders, she said.

"By definition, pandemic influenza will move around the world," Chan said in the call today. "Does that mean we are going to close every country? Does that mean we are going to bring the world's economy to a standstill?

"We know from past experience that transmission of influenza or the spread of new influenza disease would not be stopped by closing borders and would not be stopped by restricting movement of people or goods." ...

Travel to Asia plunged during the 2002-2003 outbreak of severe acute respiratory disease, or SARS. ... "When we talk about travel advisories, we cannot think of the old days when we were dealing with SARS," Chan said today. "It's a totally different ballgame now." ...

Health authorities in the U.S. recommended that nonessential travel to Mexico be avoided. The European Union also advised travelers to avoid areas affected by the outbreak. Australia, Japan, Singapore and South Korea are among countries screening travelers for fever, while Hong Kong raised its swine- flu response level to "serious" from "alert."

When asked whether Europeans should avoid traveling to California, Arnold Schwarzenegger, the state's governor, said: "That's probably a wise decision."

He said the risk of decreased tourism is outweighed by the importance of preventing the spread of the virus. ...

Government is Always the Scapegoat

The first session at the Milken Institute Global Conference:

Financial Recovery: When and How?


Mohamed El-Erian, CEO and Co-Chief Investment Officer, Pacific Investment Management Co. (PIMCO)

Steve Forbes, Chairman and CEO, Forbes Inc.; Editor-in-Chief, Forbes

Kenneth Griffin, Founder, President and CEO, Citadel Investment Group LLC

John Micklethwait, Editor-in-Chief, The Economist


Michael Klowden, President and CEO, Milken Institute

The Global Conference kicks off by addressing the questions at the top of everyone's mind this year. Just where are we in the financial crisis? Is it the top of the eighth inning, or are we still stuck in the bottom of the third, with many more twists and turns still in store? Our panelists will attempt to quantify how much has been broken and how much has been repaired. What more needs to be done to promote a recovery? Are government efforts to restore normal lending and stabilize the banking system having any effect? What might be the effects of stimulus spending? Have we allocated too much — or too little — to address the problems? What indicators will signal that a recovery is under way?

I was curious to see how the attitudes had changed relative to last year, if they had changed at all, e.g. whether there would be any self-reflection, acceptance that the financial sector would have to change. But, nope, not from this panel anyway. There was a lot of talk and worry about the growing role of government in the economy, that was viewed as the main cause of all the problems in the past, and of problems yet to come. There was very little about the financial sector must change in order to stabilize the system going forward, very little about what needs to be done to clean up their own houses.

So the game so far this year, if one session is any indication, is to blame the government for the problems we have, and to point to the government as the biggest potential impediment to the recovery. I don't know if this is a conscious strategy or not, but it seems clear that blame the government is the defense against more regulation.

Forbes is a good example. He said unionization, the government takeover of banking and insurance, the stimulus program, regulation of the financial sector, and other government intervention will potentially stall the recovery. It was government that created this mess, he blames the Fed's low interest rates for the bubble (though later he blamed mark to market, fear of regulators causing assets to be undervalued, and the Fed allowing the dollar to fall too far, but the theme was always that government is the problem), and he says that if the government doesn't get out of the way, the recovery will be very slow. He had one main recommendation for ending the crisis: The Fed should aggressively buy MBS starting now. The fact that they haven't is the reason we are still having problems (so, it's the government's fault).

Griffin also blames government, even brings up the "how many people did we lift out of poverty defense" of financial innovation. But here's the argument that caught my attention. He says the the typical household does not understand all the ways it benefited from the financial sector over the last few decades. Thus, when we socialize losses, as we must do, we are merely taking some of those gains back - households are still better off overall. How is this the government's fault? Instead of explaining this to households so they'd understand, they have stoked populist anger, and that will lead to government reactions that will make things worse.

I shouldn't say that there was no attention at all to how the financial sector must change. In fact, one of the last questions asked was exactly that, "How must financial sector change?" Griffins answer was representative. He said that existing regulations are fine, but they weren't enforced. Thus, we need regulators to enforce what is there, not new regulation . In fact, he'd like some of the existing regulation to go away, and he cited California state law as an example. California has non-recourse laws, and he said this was a very large part of why we had the bubble. Without those laws, things aren't nearly so bad. He also blames Fannie and Freddie for the crisis, and says it proves regulation doesn't work.

The last question they were asked is "The one thing we should do to end the crisis faster." My notes on their responses:

El-Erian: Innovation got ahead of infrastructure. Don't kill the innovation, instead update the infrastructure. This was the closest anyone came to0 admitting that the financial sector must undergo change.

Forbes: The Fed should get more aggressive on MBS. Don't turn the US into Europe.

Griffin: Foster innovation by removing the government from picking winners and losers. The sooner we do that, the faster we'll recover.

Micklethwait: Sort out the good/bad banks as fast as possible, the fight for liberal, free market capitalism. Agrees with Griffin that government should explain how common person benefited from financial innovation so they'll feel better about helping to clean it up.

So there you have it, you don't know what's good for you. The financial sector is fine, so get out of the way, leave them alone, and let them make your lives better once again.

Needless to say, I see things a bit different. [I should edit this, but it will have to do as is ... off to the next session...]

Paul Krugman: Money for Nothing

Will bankers escape new regulation and get off with "nothing more than a few stern speeches"?:

Money for Nothing, by Paul Krugman, Commentary, NY Times: ...Sanford Weill, the former chairman of Citigroup,... insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.

Soon after..., the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. ... All of which explains why we should be disturbed by an article ... reporting that pay at investment banks ... is soaring again — right back up to 2007 levels.

Why is this disturbing?... First, there's no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks. ...

So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it's hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.

Consider a recent speech by Ben Bernanke ... in which he tried to defend financial innovation. His examples ... were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?

Still, you might argue that ... it's up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It's a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a "welfare." ...[G]iven all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

Furthermore, paying vast sums to wheeler-dealers isn't just outrageous; it's dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we're seeing similar rewards offered to people who can play their risky games with federal backing. ...

Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren't plausible: with employment in the financial sector plunging, where are those people going to go?

No, the real reason financial firms are paying big again is simply because they can. They're making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it's eat, drink and be merry, for tomorrow you may be regulated.

Or maybe not. There's a palpable sense in the financial press that the storm has passed: stocks are up, the economy's nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.

We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people's money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.

links for 2009-04-27

"What's the Grand Old Party to Do?"

Here's one of the session's I plan to attend at this year's Milken Institute Global Conference:

What's the Grand Old Party to Do? The Future of the Conservative Movement


Andrew Breitbart, Publisher, and Big Hollywood; Columnist, Washington Times Jonah Goldberg, Columnist, The Los Angeles Times Amy Holmes, Political Analyst; former Senior Speechwriter for Senate Majority Leader Bill Frist Kathryn Lopez, Editor, National Review Online Byron York, Chief Political Correspondent, Washington Examiner


William Bennett, Former U.S. Secretary of Education; Author, America: The Last Best Hope

The Republican Party has suffered major losses in the last two elections. Democrats are now in control of Congress and the presidency. Polls show the GOP's popularity at near-record lows. And the recent spat over who is the leader of the party — Rush Limbaugh? — showed that Republicans have some work to do in order to restore the party's focus and popularity. In this panel, leading conservatives will offer their views on how to rebuild the GOP.

The rest of the sessions I'll attend are mostly economics and finance related, but this one caught my eye. I'll let you know how it goes.

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