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October 21, 2009

Economist's View - 6 new articles

What's Good for Goldman Sachs is Good for Everyone?

A spokesman for Goldman Sachs defends their pay practices:

...[A]ccording to a Goldman adviser, Wall Street's record pay is necessary "to achieve greater prosperity and opportunity for all":
A Goldman Sachs International adviser defended compensation in the finance industry as his company plans a near-record year for pay, saying the spending will help boost the economy. "We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all," Brian Griffiths ... said yesterday at a panel discussion hosted by St. Paul's Cathedral in London.
At the same time that Wall Street's pay has skyrocketed, pay cuts in other sectors "are occurring more frequently than at any time since the Great Depression."...

A defense of inequality and trickle down in one statement. That's a political winner. By the way, there's little evidence for either claim. Trickle down doesn't work, and recent increases in inequality have not led to higher economic growth than we had before.

"Russians Looked Only for the Agenda"

I'm not sure why this caught my eye:

I once heard from a Russian reporter about her early days on the job. "Whenever we read an article about the health dangers of butter, we would immediately run out and buy as much butter as we could find," she told me. "We knew it meant there was about to be a butter shortage." In other words, Russians looked only for the agenda, the motivation behind the assertion. The actual truth was irrelevant.

It seems that more and more I am also looking for the agenda behind what people write, even for news stories, academic communication (especially outside of journals), etc. I don't know if this is getting worse, or if I am simply finally waking up to the way things have always worked. Probably the latter.

Paying a Price for Global Macroeconomic Imbalances

Ben Bernanke recently expressed worries that continued large global imbalances could create the conditions for another crisis. Eswar Prasad has a proposal to reduce the danger. The idea is to have individual countries commit to particular objectives with regard to policies that could contribute to global imbalances, and then pay a price if they fail to meet those commitments. The argument is that this would "shift the discussion from contentious arguments about current policies to a focus on outcomes":

Global macroeconomic imbalances: G20 leaders must back up their rhetoric with deeds, by Eswar Prasad, Commentary, Financial Times: The financial crisis has taught us a painful lesson that global macroeconomic imbalances can wreak enormous damage on the world economy. Indeed, the centerpiece of the recent G20 Summit in Pittsburgh was agreement on a framework for balanced and sustainable growth to forestall a resurgence of imbalances as the economic recovery gets underway. ...G20 leaders gave the IMF a mandate to manage this framework by providing hard-nosed evaluations of their countries' macroeconomic policies.
Experience suggests that grand promises to implement policies that are in the collective global interest can't be taken seriously without an effective enforcement mechanism. ... The IMF has no real levers when it comes to the leading G20 economies, especially since they are the major shareholders in the institution. Moral suasion and name-to-shame approaches don't work well as the large economies tend to simply brush off external criticism of their policies.
There is a simple approach that has real consequences, would be straightforward to implement and allows G20 countries to make enforceable policy commitments. It involves Special Drawing Rights, essentially an artificial currency created at the IMF and distributed to countries in rough proportion to their economic size. The total stock of SDRs is now close to $300bn, a sizable chunk of money.
The scheme would work as follows. The G20, in consultation with the IMF, develops a simple and transparent set of rules for governments on policies that could contribute to global imbalances - for instance, that government budget deficits and current account balances (deficits or surpluses) should be kept below 3 per cent of national GDP. Each country posts a commitment bond amounting to a minimum of 25 per cent of its SDR holdings to back up its commitments to those objectives.
Since it is not easy, even with the best of policies, to turn around the factors underlying imbalances within a short period, commitments to policy objectives would be made over a five year horizon. ... Failure to meet the targets would mean a forfeiture of the bond... The actual cost would not be large. China, for instance, now has an allocation of 7bn SDRs and 25 per cent of that would amount to less than $3bn. Still, the symbolic effect of being levied an SDR penalty for running bad economic policies would be huge. ...
This approach would shift the discussion from contentious arguments about current policies to a focus on outcomes. For instance, China has consistently maintained that its current account surplus reflects structural problems in its economy and has nothing to do with its exchange rate policy. Who could quibble with methods so long as China commits to reducing its current account surplus and succeeds in putting its economy on a trajectory to get it below 3 per cent of GDP in the next 5 years...?
What happens to SDRs that get docked if countries don't hit their targets? These SDRs would be distributed among low income countries. To get incentives right, only those low-income countries that meet minimum standards in terms of their macro policies would be eligible for this redistribution. This way, the IMF could finally offer carrots to poor countries for good policies rather than just sticks for bad policies. Any SDR redistributions to small poor economies ... would be morally justified - instability caused by bad policies in the larger and richer economies tends to hurt these vulnerable and innocent bystanders disproportionately.
The G20 commitment to tackling global macroeconomic imbalances is laudable. G20 leaders must now be ... ready to pay the price for breaking their commitments.

Five years seems too short of a time period given the large adjustment some countries would have to make to get to a 3% target, but I can't imagine this being implemented in any case. They'd never get past the contentious, endless discussions over what the targets should be, how they should be defined, the acceptable range in each case, and so on.

I suppose we could think of this as a tax on excessive contributions to global imbalances (solving an externality problem that is present when individual countries do not consider the effect of their policies might have on other countries except to the extent that it feeds back on them). Maybe we could try a cap-and-trade system instead. Cap global imbalances at some level, and then have countries buy and sell permits in order to deviate from their allotment of the total (the initial permits could be distributed by auction with the proceeds distributed among countries in some way, or simply given away). Yeah, that'll work.

Merriment and Diversion

Felix Salmon wonders what Hank Paulson was thinking. Me too:

The secret Paulson-Goldman meeting, by Felix Salmon: Andrew Ross Sorkin's new book is out today, and breaks some pretty stunning news, dating from the end of June, 2008. At this point, we're still months away from the now-famous but then-secret waiver, issued in mid-September, which allowed Hank Paulson to talk to Goldman Sachs; he'd promised not to do that when he moved from Goldman to Treasury.
But it turns out that Paulson just happened to be in Moscow at the same time that Goldman's board of directors was having dinner there with Mikhail Gorbachev. (You know, as one does.) Take it away, Andrew:
When Paulson learned that Goldman's board would be in Moscow at the same time as him, he had [Treasury chief of staff] Jim Wilkinson organize a meeting with them. Nothing formal, purely social — for old times' sake.
For f#&%'s sake! Wilkinson thought. He and Treasury had had enough trouble trying to fend off all the Goldman Sachs conspiracy theories constantly being bandied about in Washington and on Wall Street. A private meeting with its board? In Moscow?
For the nearly two years that Paulson had been Treasury secretary he had not met privately with the board of any company, except for briefly dropping by a cocktail party that Larry Fink's BlackRock was holding for its directors at the Emirates Palace Hotel in Abu Dhabi in June.
Anxious about the prospect of such a meeting, Wilkinson called to get approval from Treasury's general counsel. Bob Hoyt, who wasn't enamored of the "optics" of such a meeting, said that as long as it remained a "social event," it wouldn't run afoul of the ethics guidelines.
Still, Wilkinson had told [Goldman chief of staff John] Rogers, "Let's keep this quiet," as the two coordinated the details. They agreed that Goldman's directors would join him in his hotel suite following their dinner with Gorbachev. Paulson would not record the "social event" on his official calendar…
"Come on in," a buoyant Paulson said as he greeted everyone, shaking hands and giving bear hugs to some.
For the next hour, Paulson regaled his old friends with stories about his time in Treasury and his prognostications about the economy. They questioned him about the possibility of another bank blowing up, like Lehman, and he talked about the need for the government to have the power to wind down troubled firms, offering a preview of his upcoming speech.
How on earth did Paulson think this was OK? Goldman Sachs was a hugely powerful for-profit investment bank, and there he is, giving private chapter and verse on his opinions about the US and global economy, talking about internal Treasury matters, and previewing an upcoming (and surely market-moving) speech. All in secret, at a "social event" which somehow got kept off his official calendar. Oh, yes, and one other thing — the whole shebang took place in the Moscow Marriott Grand Hotel, in the context of Goldman directors joking about how all the Moscow hotels were surely bugged.
This is sleazy in the extreme, and will only serve to heighten suspicions that Paulson's Treasury was rigging the game in favor of Goldman all along. ...

Paulson didn't have this meeting out of fear or necessity... There was nothing in the way of extenuating circumstances which could possibly justify the secret rendezvous. This is definitely a situation where Wilkinson should have pushed back and said no way — but it's hard to say no to Hank Paulson. Whose reputation has now taken yet another serious lurch downwards.

"How Paulson Gave Goldman the Lehman Heads-Up"

More from Felix Salmon:

How Paulson gave Goldman the Lehman heads-up, by Felix Salmon: The secret Paulson-Goldman meeting wasn't the only time that Hank Paulson treated his buddies at Goldman Sachs especially well while at Treasury. In fact, it wasn't the only time he did so before he got the now-famous waiver.
A bit further on in the Sorkin book, while Paulson is trying to work out what should be done with an imploding Lehman Brothers, we find this:
If all that weren't enough to deal with, [Lehman president Bart] McDade had just had a baffling conversation with [CEO Dick] Fuld, who informed him that Paulson had called him directly to suggest that the firm open up its books to Goldman Sachs. The way Fuld described it, Goldman was effectively advising Treasury. Paulson was also demanding a thorough review of Lehman's confidential numbers, courtesy of Goldman Sachs.
McDade, though never much of a Goldman conspiracy theorist, found Fuld's report discomfiting, but moments later was on the phone with Harvey Schwartz, Goldman's head of capital markets. "I'm following up at Hank's request," he began.
After another perplexing conversation, McDade walked down the hall and told Alex Kirk to immediately call Schwartz at Goldman, instructing him to set up a meeting and getting them to sign a confidentiality agreement.
"This is coming directly from Paulson," he explained.
In many ways, this is worse than Paulson's meeting with Goldman's board: in this case, Paulson is forcing Lehman to open its books fully to a direct competitor, for no obvious reason. And in this case it's not at all obvious that Paulson got a sign off from Treasury's general counsel before doing so. ... If the Moscow meeting wasn't enough to precipitate some kind of Congressional investigation of Paulson, this should be.
Update: There's more, a few pages later:
As they were making yet another pass through the earnings call script, Kirk's cell phone rang. It was Harvey Schwartz from Goldman Sachs, phoning about the confidentiality agreement that Kirk was preparing. Before Schwartz began to discuss that matter, however, he said that he had something important to tell Kirk: "For the avoidance of doubt, Goldman Sachs does not have a client. We are doing this as principal."
For a moment Kirk paused, gradually processing what Schwartz had just said.
"Really?" he asked, trying to keep the shock out of his voice. Goldman is the buyer?
"Okay. I have to call you back," Kirk said, nervously ending the conversation, and then almost shouted to Fuld and McDade, "Guys, they don't have a client!"…
McDade, reasonably, was concerned about sharing information with a direct competitor: How much did they really want to divulge? At the same time, he felt they couldn't take a stand against a plan that he believed had originated with Paulson…
McDade, turning back to his preparations for the fast-approaching call, made his position clear: "We were told by Hank Paulson to let them in the door. We're going to let them in the door."

There are questions here that need to be answered about the relationship between the Treasury, Paulson in particular, and Goldman Sachs, who was, we are told, "effectively advising Treasury."

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