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September 7, 2010

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"Being a Hegemon is a Thankless Task"

Posted: 07 Sep 2010 12:26 AM PDT

Harold James:

Recession Geopolitics: ...It is as if China's leaders were the star pupils in one of Kindleberger's courses. Throughout the crisis, the Chinese economy continued to grow at an amazing pace, in part as a consequence of massive fiscal stimulus. When anyone wants an example of how effective a Keynesian counter-cyclical strategy can be, internationally as well as domestically, they need look no further than China's four-trillion-renminbi stimulus of 2008-2009.
Apart from a six-month period after the September 2008 collapse of Lehman Brothers, in which trade finance stopped and the world did look as if it was close to Great Depression circumstances, China and other emerging markets helped those export-oriented industrial economies to recover. The surprising strength of the German economy, with more vigorous growth than at any time in the past 15 years, is due to the dynamism of emerging-market – particularly Chinese – demand, not only for investment goods, engineering products, and machine tools, but also for luxury consumer products. Germany's high-end automobile producers are now operating at full capacity.
China also followed Kindleberger's financial lessons. For a moment, it looked as if a contagious crisis, driven by fears of government over-indebtedness, would destroy the politically fragile compromise that European countries had carefully constructed over a 50-year period. The turning point in this spring's euro panic came when big holders of reserve currencies signaled that they saw the need for the euro as an alternative to the increasingly problematic dollar and the equally vulnerable yen. China started to buy European Union governments' bonds, and a high-profile Chinese team even went to Greece to buy under-priced real assets.
It was not just Europe that benefited from China's willingness to take on the mantle of "lender of last resort." The new-found dynamism of African economies is a consequence of the Chinese drive to build up and secure sources of raw materials.

But there is a problem with Kindleberger's argument. Kindleberger, a kind and well-meaning man, could never see that the world is never entirely grateful to the country that saves it. Being a hegemon is a thankless task. ...

Mostly just curious to see what reaction this will bring. Comments?

links for 2010-09-06

Posted: 06 Sep 2010 11:02 PM PDT

"Now The Real Work Begins"

Posted: 06 Sep 2010 08:56 PM PDT

David Warsh:

Now The Real Work Begins, by David Warsh: ...The experts' deciphering of the crisis is nearly complete. Now the real work begins.
The best account of what happened,..., still seems to me, as it did in April, is that of Gary Gorton, of Yale University, Slapped by the Invisible Hand: The Panic of 2007, which described the problem as the high-tech equivalent of an old-fashion nineteenth-century banking panic. Federal Reserve chairman Ben Bernanke shares my opinion, I was gratified to learn...
We can look forward to the report of the Financial Crisis Inquiry Commission, at whose hearings Bernanke was testifying last week. The FCIC's investigation, undertaken in the spirit of various Congressional inquiries, including the Report of the 9/11 Commission and stretching all the way back to the 1932 Pecora Hearings (which led to the passage in 1933 of ... the Glass-Steagall Act), is due to be submitted to Congress on December 15. ...
[Most analysts agree that] the culmination of a thirty-year pulse of financial innovation simply swamped regulators' abilities to cope with – or even at certain key points to understand – the nature of the unfolding crisis. This vast new infrastructure, known collectively as  the "shadow banking system," consists principally of the proliferation of investment instruments known as "securitization," on the one hand; and, on the other, the advent of  myriad other institutional investors including money market mutual funds. There is probably no reason to want to dismantle this system, or even to think any longer that it could be done. But new methods of regulation are definitely needed to prevent the industry from seizing up in panic again a few years hence.
Almost none of the structural problems involved are addressed in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Obama signed into law in July. Among a small circle of economists and market participants, the deciphering is nearly complete. But popular news media haven't yet tackled the task of translating their findings of malfunctions into political discourse. That probably won't begin in earnest before the FCIC report appears in December.
So perhaps the most interesting occasion on the calendar will be the meeting of the Brookings Panel on Economic Activity scheduled for September 16-17. Gorton and Andrew Metrick, also of Yale, are scheduled to present a paper there – "Regulating the Shadow Banking System" — that includes a concrete proposal to bring the securitization industry under the regulatory umbrella.
How? By chartering – and closely supervising – a new kind of bank (narrow-funding banks) whose sole business would be to buy asset-backed securities from their originators and use them to conduct the banking activities known as "repo" that were at the heart of the 2007-09 crisis.

Sound complicated? It is. Fanciful?  Probably not. It was strict standards for collateral that stabilized national banking in the nineteenth century. The new market will be designed by experts, as opposed to a popular reform. Even so, get ready for more stories  than you will want to read about the mechanics of big-league financial intermediation. ...

Finding ways to prevent runs in the repo market is an important component of financial market stabilization. [Note: There are citations to several accounts of the crisis in the article, including "HTML clipboardthe work of Markus Brunnermeier, of Princeton University, whose early article in the Journal of Economic Perspectives, "Deciphering the Liquidity and Credit Crunch of 2007-08" is, like the rest of that rejuvenated journal, now available free online.]

The Bush Tax Cuts and Infrastructure Spending

Posted: 06 Sep 2010 10:16 AM PDT

The Economist asks:

Should the Bush tax cuts be extended?

Here are the answers, including one from me:

Tom Gallagher Yes, but only for a short period
Michael Bordo Yes, their benefits outweigh their costs
Alberto Alesina Maintain the cuts and reduce spending to trim deficits
Guillermo Calvo Yes, as the rich will drive recovery
Mark Thoma Only some, and the saved revenue should be recycled
[All Responses.]

Given the reports this morning that the administration's is about to propose a six year plan to rebuild infrastructure, I may want to rethink this part of my answer on what to do with tax revenue gained from allowing high end tax cuts to expire:

There are other possibilities as well. For example, since it doesn't look like the recession is going to end anytime soon, there's still time for new infrastructure projects. And having them kick in down the road when other types of stimulus fade away would provide insurance against backsliding. But, as with most alternatives, it's very unlikely that anything like this could pass Congress.

I still think that Congress is unlikely to go along. As for the proposal itself, here are a few details:

Obama to unveil infrastructure plan, Reuters via FT: Washington – President Barack Obama will announce on Monday a six-year plan to revamp the United States' road, railways and runways with a $50bn up-front investment to jump-start job creation, the White House said.
The plan is one of several economic initiatives that Mr Obama is due to unveil this week aimed at generating some desperately needed US job growth and limiting predicted Democratic losses in November 2 congressional elections. ...
The argument ... is this: Democratic policies have stopped the bleeding and produced some economic growth. Yes, more needs to be done, but Republicans would bring back ideas, he will argue, that propelled the country into the deepest recession in 70 years. ...
Administration officials said he will propose making permanent the business tax credits for research, which the White House projects will cost $100bn over 10 years and would be paid for by ending some corporate tax breaks.
Other items that could also be talked about by Mr Obama are a payroll tax holiday, extending tax cuts for the middle class and increasing money for clean energy. ...

It's a bit late, and it's much too small, but I see this as a positive evolutionary step in the administration's approach to these issues. It's good politics as well. In fact, since the small size means it won't do much on its own to improve the employment situation, and given the timing of the proposal (why not six months or a year ago instead of near an election?), gaining political advantage is likely the main thrust of the initiative.

But, while it may not do much in the short-run, it does have attractive features in the longer run. There's talk, for example, of an "infrastucture bank." It doesn't have the automatic stabilization properties I talked about here, but it provides a good institutional foundation for countercyclical infrastructure policy in the future either through an automatic mechanism that ramps up infrastructure spending when the economy turns downward, or using discretionary authority. And, as argued here, infrastructure is a good investment in any case. But, again, no matter the merits, it seems unlikely that this will be approved by Congress. But I won't mind at all if I'm wrong about that.

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