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September 5, 2009

Economist's View - 4 new articles

"The Wait for Financial Reform"

Alan Blinder is worried that the will to reform the financial sector is fading:

The Wait for Financial Reform, by Alan S. Blinder, Commentary, NY Times: ...We are barely emerging from the greatest financial crisis since the 1930s. From last September to March, it was downright frightening. Yet by the time Congress left town for its summer recess, financial reform appeared to be losing steam. ... Why is the pulse of reform so faint? I see five main reasons:
IT'S YESTERDAY'S PROBLEM People have an amazing capacity to forget. Our financial system is now functioning much better than it was in March or last fall. ... You can see public attention shifting elsewhere... I want to scream, "Stop!" The financial regulatory system needs fixing, and to accomplish it, Congress will have to hold a lot of feet to a lot of fires. It's not clear that many members have the stomach for that.
LOST IN THE CROWD The problem of short attention spans has a first cousin: the overcrowded legislative agenda... There is a budget to pass, health insurance to reform, energy to cap and trade, schools to overhaul, two wars to watch over and others to avoid — and more. Amid all of this, the Treasury has sent Congress 16 pieces of financial reform legislation... What are the chances that these 16 bills will surface to the top of the legislative agenda?
THE MOTHER OF ALL LOBBIES Almost everything becomes lobbied to death in Washington. In the case of financial reform, the money at stake is mind-boggling, and one financial industry after another will go to the mat to fight any provision that might hurt it. ...
BUREAUCRATIC INFIGHTING Industry lobbyists are not the only problem. Regulatory deck chairs need to be rearranged, and various government agencies are scrambling to maintain or expand their turfs. ..The bureaucratic turf wars have grown intense...
A LACK OF FOCUS Perhaps worst of all, it's hard to keep the public engaged in something as complex, arcane and — frankly — as boring as financial regulation. ... Today, the electorate has a vague sense that it has been ripped off and that change is needed. But the sentiment is unfocused and inchoate — with these two exceptions: People clearly want greater consumer protection and restrictions on executive pay.
By no coincidence, those are the two pieces of financial reform that seem most likely to survive the Congressional sausage grinder. Don't get me wrong; we need both. But the two don't constitute the entirety of reform, or even its most important parts.
I'd attach greater importance to at least three major Treasury proposals that may wind up on the cutting-room floor:
First, we need a systemic risk monitor or regulator. ... In my last column, I explained ... why the Fed should get the job.
Second, we need a new mechanism to euthanize or rehabilitate giant financial institutions whose failure could threaten the whole system. ...
Third, something serious must be done to tame — though not to destroy — the derivatives markets. ...
And there is a great deal more... So let's get on with the job...

Here's my view on the tension between imposing regulation before the will to do so fades, and delaying to avoid upsetting already unsettled financial markets and to carefully consider the changes before putting them into place:

While it's possible that regulation will go overboard in response to the crisis, there are powerful interests that will resist regulatory changes that limit their opportunities to make money (and Nobel prize winning economists willing to back them up), so my worry is that regulation will not go far enough, particularly with people ... arguing that we should wait for recovery before making any big regulatory changes to the financial sector. They may be right that now is not the time to change regulations because it could create additional destabilizing uncertainty in financial markets, and that waiting will give us time to see how the crisis plays out and to consider the regulatory moves carefully. But as we wait, passions will fade, defenses will mount, the media will respond to the those opposed to regulation by making it a he said, she said issue that fogs things up and confuses the public as well as politicians, and by the time it is all over there's every chance that legislation will pass that is nothing but a facade with no real teeth that can change the behaviors that go us into this mess.

"Economists and the Crisis"

This is from Philip Lane at the Irish Economy Blog:

Economists and the Crisis, by Philip Lane: As has been tracked by several previous posts on this blog, there is by now a considerable debate on what the crisis teaches us about the role of economists.
One dimension of this debate has focused on the failure by the economics profession to predict the onset of the crisis. A second quasi-related dimension relates to the failure to sufficiently appreciate the instability of the pre-crisis financial system. To some, these failures suggest that those economists who did not accurately predict the crisis should have no role in resolving the crisis and constructing the new post-crisis economic system. This debate is playing out at the global level and also in relation to the domestic situation.
These are all big issues and I do not attempt to provide a comprehensive set of answers here. Nevertheless, it may be useful to make a few points. I also mainly focus on the role of academic/research economists and the field of macroeconomics.
First, there is no doubt that the crisis has underlined a mis-allocation of research resources. Over the last 15-20 years, monetary economics in relation to the advanced economies has focused on the analysis of 'low-amplitude' business cycles. While business cycles were certainly shallow during this period, the social costs of rare-but-large crashes are so large that it is clear in retrospect that too few researchers were focused on the economics of large crises. (An exception relates to those who focused on emerging market economies, where a lot of analysis has been conducted of the recurrent crises that have affected these economies.)
One role for the economics profession is to attempt to forecast the future behaviour of the economy. This is mainly done by economists in policy roles (since policymaking requires projections of future economic performance) and economists in financial firms (since the return on financial investments also turn on future economic performance).
In fact, very few academic economists get involved in this task: to do it well really requires a lot of data resources and and the tracking of many variables, such that is a full-time task that is best conducted by large teams of economists. However, even if not involved in day-to-day forecasting, academic economists can play an important role by providing an independent voice and focusing on 'big picture' issues such as whether the forecasting models are well designed and taking a longer-term horizon for forecasting (most forecasting is concerned with quarter-by-quarter developments or, at most, a 1-3 year horizon).
In fact, the main contribution may not be in forecasting per se but in detailing possible contrarian scenarios in order to challenge the conventional wisdom. This can be very valuable but the limitation is that such 'Cassandra' warnings typically cannot be tied to a specific date and it is tempting for the mainstream to dismiss such warnings if they do not quickly come to pass. Moreover, if a forecaster's reputation depends on short-term performance, a bearish economist may quickly lose credibility if boom conditions persist and the day of reckoning is postponed.
However, the main goal in outlining low-probability but high-cost risk scenarios is not so much to alter 'central' forecasts but to encourage decisionmakers to adopt prudent strategies that are robust to the occurrence of the 'disaster' scenario. In fact, the ideal is that decisionmakers are sufficiently prudent that the risk of the disaster scenario recedes and those offering the Cassandra warnings never see their worst fears realised.
Certainly, we can point to several academic and non-academic economists who were assiduous in making warnings about the consequences of the lending boom and these deserve great credit.
For many others in academia, their research activities were directed towards other questions. In relation to policy-relevant macroeconomics, a major focus has been on conducting research on 'institutional design.' That is, rather that focusing on macroeconomic forecasting, many have opted to contribute to the design of policy frameworks that can deliver enhanced stability and lower the cost of crises should they occur. This includes work on: the zero-bound problem in interest rate policy; macro-prudential financial regulation; counter-cyclical fiscal policies; tax policies vis-a-vis the property sector; the establishment of insurance devices such as reserve funds and rainy-day funds and other mechanisms to mitigate macroeconomic risks. Work on such issues has intensified since the onset of the crisis, together with much innovative work in areas such as the design of 'non-orthodox' monetary interventions.
Accordingly, the state of macroeconomics is in flux. While there is much to regret concerning the course of pre-crisis research, it is also true that many of the technical innovations over the last 20 years are now being applied in exciting ways to design crisis-resolution policies. Indeed, it is somewhat ironic that the crisis has led to a tremendous resurgence in interest in macroeconomics: economics is much more interesting in 'bad times' than in 'good times'.
Another very promising development has been the enhanced integration of macroeconomics and finance. Many leading finance economists have responded very quickly to the crisis and have written superb analyses of various dimensions of the crisis and developed innovative new policies to restore financial stability and reduce the risk of future crises.
Many of these points apply equally to both the global and local economic situations. Regarding academic research on the Irish economy, I will point out a 'scale' problem - the small size of the Ireland means that it is difficult to build a successful academic career by focusing on the local economy, in view of the limited publication opportunities and the small size of the domestic profession. This is a problem.
Finally, some have argued that the crisis has shown the limitations of economics. At one level, this is certainly true and an important lesson for all types of decisionmakers is to recognise that the future is uncertain and relying on Panglossian forecasts (where no downside risk is ever realised) is not an appropriate risk management strategy. It is also the case that economics needs to learn more from adjacent disciplines (psychology, history and the other social sciences). However, the likely evolution is an 'adapted/enriched' economics rather than a fully-symmetric multi-disciplinary approach, since the technical basis for most economic policy analyses is predominantly driven by economic factors.

Do Corporations Have a Right to Free Speech?

The Supreme Court is going to decide if corporations have First Amendment rights that allow "direct, unlimited corporate participation in campaigns." Let's hope the decision is that they don't:

Corporate free speech? Since when?, by Jim Sleeper, Commentary, Boston Globe: ...Theodore B. Olson, George W. Bush's solicitor general until 2004 ... is now the lead advocate for Citizens United, a nonprofit corporation that produced "Hillary: The Movie'' to swift-boat Senator Clinton's presidential campaign.
"Hillary'' didn't get much distribution because campaign-finance laws ... and court rulings ... bar corporate-funded ads from elections. But now the Supreme Court will review Citizens United v. Federal Election Commission on Sept. 9. Free-speech absolutists, from the National Rifle Association to the American Civil Liberties Union, support Citizens United 's claim that FEC restraints were unjustified.
But if they win, free speech will be drowned out... Corporations are creations of the republic, not its equals or superiors. We citizens charter them, protect them legally, subsidize them, and even bail them out - and punish them when, as with Pfizer Chemical, their profit-maximizing violates drug-safety rules. We couldn't do that if a level playing field of "robust speech'' were overwhelmed by corporate speech...
That's what's at stake in the Supreme Court's worrisome readiness to consider overturning restrictions the republic was wise enough to enact. If Olson's business clients want to smear Clinton, let them do it openly, not from behind the fa├žade of a corporation claiming First Amendment rights. ...


Will Deep Pockets Always Win? It's In Roberts's Court., by Robert G. Kaiser, Commentary, Washington Post: ...This year or next the court could ... remake the American system by permitting a flood of corporate money into our electoral campaigns..., such a decision would create vast new opportunities for a particular class of Americans..., corporate elites. ...

Until this summer, the barriers preventing the use of corporate and union funds in political campaigns -- the oldest dating to 1907 -- were "firmly embedded in our law"... Could the court really allow corporations and their agents -- the Chamber of Commerce, say, or coalitions of companies created for the purpose -- to campaign openly for or against individual candidates for federal office? Yes, it could. Campaign finance reformers are afraid that the two newest conservative members of the court, Chief Justice John Roberts and Justice Samuel Alito, may be eager to overturn a long line of precedents. ...

How would the political world be changed by legalized corporate campaigning? There would be a vast increase in the influence of corporations. ... Not surprisingly, corporate interests have always done well in Congress. More than a quarter-century ago, then-Sen. Bob Dole ... told the Wall Street Journal: "When these political action committees give money, they expect something in return other than good government."

"We may reach a point," Dole predicted, "where if everybody is buying something with PAC money, we can't get anything done." Dole was prophetic. Congress has failed to legislate on urgent issues for years -- think of health care, climate change, immigration, Social Security and Medicare. The organized interest groups that surround those issues rely on money to defend their positions and frustrate new initiatives. This is the wall our new president ran into this summer.
What is now called "corporate" money in our politics is raised from the shareholders and executives of the companies that maintain PACs. Unions similarly collect PAC contributions from their members. Executives and their families can make personal donations. These are the only legal ways for corporate executives and companies to contribute to campaigns. The law sets limits on how much both PACs and individuals can raise and give...
A decision to allow direct, unlimited corporate participation in campaigns would nullify the impact of those rules. American corporations ... would obviously have enough money to blow the roof off campaign spending standards.
But the most dramatic effect of eliminating legal restrictions on corporations' spending could come not in campaigns but in the realm of lobbying. Fred Wertheimer of Democracy 21 ... explained: "Just imagine the impact on a member of Congress in the midst of deciding what to do on health care or climate control or banking legislation if the member knew that dozens of companies in affected industries each could spend millions of dollars . . . on full-scale campaigns to defeat or elect the member." ...

links for 2009-09-05

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