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The posts below are backup copies from the new site.

June 26, 2009

Economist's View - 4 new articles

"The Second Derivative is Bad"

John Hempton is "feeling just that little bit less certain" that the rate of deterioration in the economy has slowed:

The second derivative is bad, Bronte Capital: I have been firmly in the "second derivative is good" camp for some time. Green shoots were few and far between – but the economy no longer appeared to be in free-fall. ...

The data I considered most persuasive was the delinquency data at Fannie and Freddie. It gets worse every month, but until the last data point it was getting worse at a decreasing rate (especially if you adjusted for the foreclosure moratoriums they implemented).

Today I am more worried. My favorite data point (rate of increase of Freddie Mac delinquency) has deteriorated – especially in their insured portfolio. Its not sharp deterioration – and it is possible – even likely – that Freddie Mac will have end credit losses considerably lower than the bears anticipate. But as a second derivative bull I am feeling just that little bit less certain.


"China Crosses the Rubicon"

According to this analysis, China's economic interests are having a big impact on its strategic plans. It also makes it sound as thought Russia and China could be be headed for conflict over border regions. I'm not sure if this will generate much discussion or not, but I'm curious what you think about this:

China Crosses the Rubicon, by Wen Liao, Commentary, Project Syndicate: For two decades, Chinese diplomacy has been guided by the concept of the country's "peaceful rise." Today, however, China needs a new strategic doctrine, because the most remarkable aspect of Sri Lanka's recent victory over the Tamil Tigers is ... the fact that China provided ... both the military supplies and diplomatic cover ... needed to prosecute the war. ...

So, not only has China become central to every aspect of the global financial and economic system, it has now demonstrated its strategic effectiveness in a region traditionally outside its orbit. ... What will this change mean in practice in the world's hot spots like North Korea, Pakistan, and Central Asia?

Before the global financial crisis hit, China benefited mightily from the long boom along its eastern and southern rim, with only Burma and North Korea causing instability. China's west and south, however, have become sources of increasing worry.

Given economic insecurity within China in the wake of the financial crisis and global recession, China's government finds insecurity in neighbouring territories more threatening than ever.

Stabilizing its neighbourhood is one reason why China embraces the six-party talks with North Korea, has become a big investor in Pakistan..., signed on to a joint Asia/Europe summit declaration calling for the release ... of Burmese opposition leader Daw Aung Suu Kyi, and intervened to help end Sri Lanka's 26-year civil war.

The calculus behind China's emerging national security strategy is simple. Without peace and prosperity around China's long borders, there can be no peace, prosperity, and unity at home.

China's intervention in Sri Lanka, and its visibly mounting displeasure with the North Korean and Burmese regimes, suggests that this calculus has quietly become central to the government's thinking.

For example, though China said little in public about Russia's invasion and dismemberment of Georgia last summer, Russia is making a strategic mistake if it equates China's public silence with tacit acquiescence in the Kremlin's claim to "privileged" influence in the post-Soviet countries to China's west.

Proof of China's displeasure was first seen at the 2008 summit of the Shanghai Cooperation Organization... The group's Central Asian members ― Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan ― would not have stood up to the Kremlin without China's support. At this year's just-concluded SCO summit, the pattern continued. ...

From China's standpoint,... the Soviet collapse was the greatest strategic gain imaginable. At a stroke, the empire that had gobbled up Chinese territories for centuries vanished. The Soviet military threat ― once so severe that Chairman Mao invited President Richard Nixon to China to change the Cold War balance of power ― was eliminated.

China's new assertiveness suggests that it will not allow Russia to forge a de facto Soviet Reunion and thus undo the post-Cold War settlement, under which China's economy flourished and security increased. ...

China's strategic imperatives ... are twofold: to ensure that no rival acquires a dangerous "privileged influence" in any of its border regions; and to promote stability so that trade, and the sea lanes through which it passes (hence China's interest in Sri Lanka and in combating Somali pirates), is protected. ...

China's newfound assertiveness, rather than creating fear, should be seen as establishing the necessary conditions for comprehensive negotiations about the very basis of peaceful coexistence and stability in Asia: respect for all sides' vital interests.

In recent years, such an approach ran counter to America's foreign-policy predisposition of favouring universalist doctrines over a careful balancing of national interests. With the Obama administration embracing realism as its diplomatic lodestar, China may have found a willing interlocutor.


Paul Krugman: Not Enough Audacity

Will Obama give away too much in an attempt to get health care reform legislation through congress?:

Not Enough Audacity, by Paul Krugman, Commentary, NY Times: When it comes to domestic policy, there are two Barack Obamas.

On one side there's Barack the Policy Wonk, whose command of the issues ... is a joy to behold. But on the other side there's Barack the Post-Partisan, who searches for common ground where none exists, and whose negotiations with himself lead to policies that are far too weak.

Both Baracks were on display in the president's press conference earlier this week. First, Mr. Obama offered a crystal-clear explanation of the case for health care reform, and ... a public option competing with private insurers. "If private insurers say that the marketplace provides the best quality health care, if they tell us that they're offering a good deal," he asked, "then why is it that the government, which they say can't run anything, suddenly is going to drive them out of business? That's not logical."

But when asked whether the public option was non-negotiable he waffled, declaring that there are no "lines in the sand." ...

The big question here is whether health care is about to go the way of the stimulus bill. At the beginning of this year,... Mr. Obama made an eloquent case for a strong economic stimulus — then delivered a proposal falling well short of what independent analysts ... considered necessary..., presumably,... to attract bipartisan support. But ... Mr. Obama was able to pick up only three Senate Republicans...

At the time, some of us warned...: if unemployment surpassed the administration's optimistic projections, Republicans wouldn't accept the need for more stimulus. Instead, they'd declare the whole economic policy a failure. And that's exactly how it's playing out. ...

The point is that ... policy has to be good enough to do the job. You might think that half a loaf is always better than none — but it isn't if the failure of half-measures ends up discrediting your whole policy approach.

Which brings us back to health care. ...[R]eform isn't worth having if you can only get it on terms so compromised that it's doomed to fail. What will determine the success or failure..? Above all,... successful cost control. We really, really don't want to get into a position a few years from now where premiums are rising rapidly, many Americans are priced out of the insurance market despite government subsidies, and the cost of health care subsidies is a growing strain on the budget.

And that's why the public plan is an important part of reform: it would help keep costs down through a combination of low overhead and bargaining power. That's ... a conclusion based on solid experience. Currently, Medicare has much lower administrative costs than private insurance companies, while federal health care programs ... pay much less for prescription drugs than non-federal buyers. There's every reason to believe that a public option could achieve similar savings.

Indeed, the prospects for such savings are precisely what have the opponents of a public plan so terrified. Mr. Obama was right: if they really believed their own rhetoric about government waste and inefficiency, they wouldn't be so worried that the public option would put private insurers out of business. Behind the boilerplate about big government, rationing and all that lies the real concern: fear that the public plan would succeed.

So Mr. Obama and Democrats in Congress have to hang tough — no more gratuitous giveaways in the attempt to sound reasonable. And reform advocates have to keep up the pressure to stay on track. Yes, the perfect is the enemy of the good; but so is the not-good-enough-to-work. Health reform has to be done right.


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