Streetwise Professor

February 28, 2009


Filed under: Economics,Politics — The Professor @ 10:14 am

I agree with Paul Volcker that the vacancies at the upper levels of the Treasury Department at a time of financial crisis are shameful.  Indeed, I go further: it is a travesty.  In a sign of the impending apocalypse, I also agree with Krugman on one thing; a sense of despair over the failure to deal with the banking situation in a serious, hair-on-fire way.  

This raises the obvious question: Why?  One possibility is that this reflects an ongoing battle within the administration over the form of bank restructuring.  Perhaps between more Bolshi types who want to nationalize (with some viewing this as a way of seizing the commanding heights of the economy to fund lefty policy objectives) and those who want to take a more British approach and rely on guarantees extended to still-private banks.  (Is death an option?  Both alternatives are bad, as I’ve written before, and as Willem Buiter concurs.)  A failure to come to a decision as to the fundamental strategic direction that the administration will pursue could explain the failure to name the staff to implement it.

But there is a more disturbing possibility: that addressing the banking crisis simply is not an Obama priority.  I would have not thought this possible, until I read the transcript of an Obama interview with Jim Lehrer (H/T Mrs. SWP, who also gets credit for the title.)  In the interview, Obama said:

Let’s – you know, we’ll take, you know, the economy first and then we’ll take Afghanistan after that and then Iraq after that and Iran after that and, you know, the banking system somewhere out there, autos, you know. It would be wonderful if we didn’t have all the planes in the air at the same time. (Emphasis mine.)

“After that . . . and after that . . . and after that . . .the banking system somewhere out there.”  [BTW.  I counted five “you knows” in one paragraph.  Get the guy away from a teleprompter . . . .]

Somewhere out there.  

Roll that around in your mind several times.  Manana.  When we get around to it.  

Obama says that he wants to “take the economy first.”  But the first, most essential step to address the current economic difficulties is to address the banking system’s pressing problems.  Indeed, addressing banking problems is the first, second, third, . . . essential step to laying the foundation for restored economic health.  Yet Obama puts that way down the priority list.  Which is quite consistent with leisurely pace of staffing the upper ranks of Treasury.  And with the complete absence of any concrete conceptual approach, let alone plan.  

This blase attitude raises the specter of Obama fiddling while the banks–and the economy–burn because he is more focused on exploiting the current economic panic to reshape the economic and political landscape.  (Much as Nero supposedly welcomed, and perhaps started, the great fire in Rome because it cleared the way for him to build a grandiose new palace.  A fire, by the way, that Nero exploited to justify persecution of the Christians.)  

This alternative is so disturbing that I cannot accept it–yet–as the explanation for Obama’s otherwise inexplicably relaxed approach to the central economic difficulty the nation and the world face.    

But even if there is a more benign explanation for inaction, that is no excuse.  It also goes against the Roosevelt II meme, for the first thing FDR did on taking office was to tackle the nation’s acute banking crisis by declaring a bank holiday.  Obama could take that page from the FDR book–and throw out the rest.  Instead, he’s disregarding one of the few arguably reasonable steps taken in the New Deal period, and embracing all of the big government nostrums that prolonged the Great Depression.  

Pace Adam Smith, just how much ruin is there in a country?

February 26, 2009

That Makes It So Much Better

Filed under: Politics,Russia — The Professor @ 11:54 pm

The head of Russia’s Federal Archives has absolved Stalin and the USSR of genocide in Ukraine in the 1930s:

[T]he famine in Ukraine and elsewhere in the USSR was “the result of [Stalin’s] criminal policy” but that “of course, no one planned any famine” or singled out any ethnic group as its victim

Instead, he said, “the famine was the result of the errors and miscalculations of the political course of the leadership of the country in the course of the realization of collectivization.” And he insisted that he and his researchers had not found “a single document” showing that Stalin planned “a terror famine” in Ukraine.

Instead, Kozlov said, “absolutely all documents testify that the chief enemy of Soviet power at that time was an enemy defined not on the basis of ethnicity but on the basis of class,” in this case the peasantry which Stalin wanted to force to join collective farms throughout whatever means he could.

I’m sure all of the millions who starved, or were shot, or were brutalized, would feel so much better to know that they were not singled out for their ethnicity, but instead for their class.  Or to learn that they died because of “errors and miscalculations.”  Whoops!  Uncle Joe’s bad!  No hard feelings!  I guess it could have been worse: head archivist Kozlov could have said that the leadership just became “dizzy with success,” thereby committing mistakes that led to the deaths of millions.  Or he could have said “well, to make an omelette you need to break some eggs.”  

Several comments.

First, why is it so hard for modern Russians, who bear no personal responsibility for the deaths of millions in the early-1930s, to pay some deference to Ukrainian (and, Cossack and Kazakh) pain and sensitivities?  The steadfast rationalization, minimization, and deprecation of the calamity is widespread among Russians, suggesting that they feel they would incur a substantial psychological cost to acknowledge the exceptional suffering inflicted on Ukraine, Kazakhstan and the Cossack/Tatar regions.  Why?  What does this say?  I don’t know exactly, but it can’t be good.  

Second, apropos “dizzy with success”.  That was Stalin’s sick excuse for ending the first attempt at collectivization in 1930.  That resulted in widespread famine and death, across all of the agricultural regions of the USSR, and even Stalin felt it necessary to back off.  Given the very recent experience, Stalin and the rest of the Soviet leadership had to know that there was a very high probability–arguably 1.00–that another collectivization effort would lead to another wave of mass death.   But he proceeded regardless.  Sorry, “errors and miscalculations” just doesn’t cut it.  (Doesn’t even cut it for the first collectivization attempt, given that early Bolshevik attempts to expropriate grain led to massive resistance, and unthinkable human carnage.)  It was not a mistake.  It was not an error.  It was a policy.  The outcome was predictable, yet pursued with bloody-minded purpose.  

I will put it more strongly.  It is a bald-faced lie to say, as Kozlov does, that  “of course, no one planned any famine.”  Given past experience, it was eminently predictable that a famine would occur as a result of the Soviet policy.  And, pray tell, Mr. (or is it Dr.?) Kozlov, how is it possible to say that no one “planned a famine” when they deliberately demanded that Ukrainian peasants turn over more grain than it was possible to produce?   Just because nobody wrote “We plan to cause a famine” you conclude nobody planned to cause a famine?  Like Orwell said, there are some things so absurd that only an intellectual could believe them.

Third, Robert Conquest has provided extensive documentation to support his claim that the attack on the Ukraine and the Kuban regions

was accompanied by a wide-ranging attack on all Ukrainian cultural and intellectual centres and leaders, and on the Ukrainian churches.  The supposed contumaciousness of the Ukrainian peasants in not surrendering grain they did not have was explicitly blamed on nationalism. . . .  

Thus, there are two distinct, or partly distinct, elements before us: the Party’s struggle with the peasantry, and the Party’s struggle with Ukrainian national feeling.

The war on the peasantry was driven by a mixture of ideology, and a insatiable desire to industrialize Russia.  But whatever the primary motivation, Ukrainian (and Cossack) nationalism was seen as an obstacle to achieving the goals of collectivization, and so it was attacked ferociously as well.  That is, there was a clear cultural component to the Soviet attack on the Ukraine.  

In this sense, the Ukrainian terror famine may have been qualitatively different from the Nazi holocaust, in that the primary motivation was not to kill Ukrainians just because they were Ukrainians.  But what of it?  A group of people happened to have economic resources the Soviet state coveted.  They also had a nascent national consciousness.  Stalin believed that to seize what he wanted, he had to crush Ukraine as a nation.  So he did.  

That is, at best the Holmador deniers can argue that the war against Ukrainian culture was a means not an end.  Does this make it any less genocidal?  How much does it matter, really, if it were true (and I do not concede this) that the Ukrainian famine was not motivated by hatred of Ukrainians, but merely had a cruelly disproportionate impact on them?

And, it would be possible, I think, to construct an argument very much along the lines advanced by archivist Kozlov that the Nazi Holocaust was also directed at a class, rather than an ethnicity; and hence, that the Nazi and Soviet efforts were NOT qualitatively different.  Nazi propaganda emphasized that Jews were capitalists, bankers, economic exploiters, and that their successive marginalization, expropriation, and elimination was necessary to free Germans from their predation.  That is, Kozlov’s argument could be adapted to excuse the Holocaust.  I’m sure there are skinheads/neo-Nazis in Germany who would be quite willing to do so.  

Put differently, in the Nazi worldview, there was an extremely high association between Jewish ethnicity and membership in the exploitive class, and similarly, in the Stalinist worldview, there was an extremely high association between Ukrainian ethnicity and membership in an “enemy” class.  In each case, distinctions between “class” and “ethnicity” are invidious, and obfuscate rather than clarify.  Attacking the class was attacking an ethnicity.  Attacking an ethnicity was attacking a class.  Drawing Jesuitical distinctions between class and ethnic motivations is a travesty.  

I will be very interested to learn Robert Conquest’s appraisal of Kozlov’s statements, and the material that the archives released.  

The obvious official desire of the modern Russian government to absolve the Soviet Union, and Stalin, of any culpability for genocide speaks volumes about that government, and about the popular attitudes which give that government broad support in these efforts.  The lengths to which the Russian government, and too many individual Russians go to defend the indefensible suggests that proprietary, possessive, and imperial attitudes towards Ukraine run strong and deep in Russia today.  That does not bode well for a peaceful reconciliation in the years to come.    



February 25, 2009

Russia in Central Asia–Be Careful What You Ask For

Filed under: Economics,Energy,Politics,Russia — The Professor @ 5:48 pm

There has been a lot of effort spent trying to figure out what Russia’s goals are in Afghanistan in the aftermath of its bribing Kyrgyzstan to deny American access to the Manas airfield in that Central Asian country.   One commonly heard theme is that the Russians are of mixed minds; they don’t want a Taliban victory, but they don’t want a solid American presence in Central Asia.   Ariel Cohen presents a far gloomier scenario:

Medvedev has announced that the U.S. needs to come to Moscow – not to the capitals of Eurasian independent states – to ask for transit to Afghanistan. Thus, Russia can first create a problem, and then provide a solution – at a price.

This is only the best-case scenario. In the worst case, Russia would benefit from a U.S. defeat in Afghanistan. First, it would be payback for the Soviet fiasco in the 1980s; second, and more importantly, such a defeat would highlight the collapse of NATO power, and with it, America’s global dominance.

Russia may mistakenly believe that, together with China and Iran, it can pick up the pieces in Afghanistan and prevent the Taliban from extending its influence over allies in Central Asia and the Caucasus. However, radical Islamists – not America – are the long-term systemic threat toward the “soft underbelly” of Russia’s south – a threat for which Moscow lacks answers.

To me, it is all about priorities, and what choices reveal about priorities.   Yes, from the Russian perspective a Talibanized Afghanistan is hardly desirable.   But it survived a decade of that before, and it is likely that the Russian military and policy establishments view that as a nuisance that can be survived again.   They realize that Afghanistan’s ability to project power is nil, and likely calculate that an Islamist threat can be contained.

For Russia, the big issue is the US.   Part of the reason is psychological.   Part of the reason is payback.   Part of the reason is hardwired imperial ambition.   A big part of the reason is energy, and keeping the United States away from Central Asian energy resources–resources that Russia (and Gazprom) desperately need to meet export commitments and domestic needs, especially in light of decling production and financial-crisis-constrained investment in new fields.

In brief, given a choice between a resurgent Taliban, and a deep American presence in Central Asia, for Russia the choice is clear.   Moreover, Russia is probably figuring it can have its cake and eat it too, by allowing the US to resupply via Russian territory.   This is a three-fer: it puts pressure on the Taliban, ties up the US in a difficult commitment thereby limiting its freedom of action elsewhere, and gives Russia the option to cause the US major pain down the road by cutting off this route, or raising dramatically the price of using it.   (There might even be an economic payoff from collecting transit fees from the US, but that is less certain given that it will cost Russia dearly to buy off the Central Asians.   But even here there may be an attraction to those making the decisions, because the cost of buying off may come out of the budget, but a good portion of the fees collected from the US might well flow into well connected pockets rather than the Russian state budget.)

The interesting thing to ponder is: What happens if Russia succeeds in keeping the US out of Central Asia?   As always, one should be careful what one asks for.   It will not be so easy to keep China out of Central Asia–because it’s already there.

China’s geographic position, unlike that of the US, is pretty symmetric to that of Russia.   China also has a great appetite for the region’s resources.   China also has substantial demographic advantages over Russia.   It also has economic leverage over Russia, and can put great pressure on Russia in other areas (e.g., Siberia). China is also not as constrained by diplomatic and civil niceties as the Americans (or the Europeans.)   Is Russia ready to go head-to-head with China if it succeeds in getting the US out of the way?   Methinks not.   But, in its myopia, its fixation on keeping the US out of its sandbox, Russia is (a) committing vast sums of money it doesn’t have, and (b) setting itself up for a confrontation in which the correlation of forces is not in its favor.

Good luck with that.

I should also note that there are reports that China is also attempting to pressure/cajole Central Asian states to give the US the cold shoulder.   Do you think that the Chinese are doing this, only to concede the region to the Russian orbit?   Methinks not again.

So, if China and Russia succeed in shutting out the US from the region–not a foregone conclusion–that merely sets up the final between these two countries.   I know who’d I put my money on.

So, contra Cohen, Islamism is not the main threat to Russia’s “soft underbelly.”   China is.   And China’s contact with Russia’s soft underbelly runs not just through Central Asia, but along the entire length of the Amur River to the Pacific.   And China is a full spectrum threat, whereas Islamists are not.   And, like Russia, China has a long memory, and an acute sensitivity to historical humiliations, many suffered at Russian hands.   Perhaps that is what should make Russia most nervous.

A Message from the O.G.

Filed under: Uncategorized — The Professor @ 12:36 pm

My daughter sent me this definition of Streetwise Professor from Urban Dictionary:

A street wise professor is like an O.G. but still on the streets doing what they have done for years. They are usually punks who have been around the scene to[o] damn long. So they end up teaching the younger generations how and why they do what they do.

Any time I am stuck in a town on business I find the street wise professor to let me know whats up.”

O.G.–“Original Gangsta” for those of you who are not au courant–yeah, that’s me!   LOL.   I do own a pair of K-Swiss, but that’s about as far as the gansta thing goes.

Island of Stability–Not!, Part I’ve Lost Count

Filed under: Economics,Energy,Russia — The Professor @ 11:29 am

RIA Novosti reports that the Russian economy contracted 8.8 percent year-on-year in January.   That’s pretty bad, but in fact understates the steepness and intensity of the drop.

Consider the Russian economy was growing about 6 percent through August.   So, normalizing January 2008 GDP to 100, in August GDP was approximately 104.   Now, it’s 91.2.   This means that the drop from August to January is 12.3 percent.   Annualizing that gives an almost 30 percent per year rate of decline.

Economic Development Minister Elvira Nabiullina recently stated that the decline in January vs. December was 2.4 percent.   Annualizing that gives a 25 percent per year annualized decline.

To put things in perspective, the Japanese economy contracted at a 12.7 percent annualized rate in the fourth quarter of 2008.   The US economy contracted at a 3.8 percent annualized rate in the fourth quarter.   UK GDP fell at a 6 percent rate in that quarter.   For Germany, the figure is about 8 percent.   For the entire Eurozone, about 6 percent.   The OECD, 6 percent annualized.   Canada–can’t forget Canada!–well, didn’t forget, but can’t say, because its 4th quarter numbers are not out yet.   Ditto for Oz.

Given Nabiullina’s estimate of a 2.4 percent decline in January alone, it is heroic to put any faith in the government’s just revised estimate of a 2.2 percent drop in GDP for the entire year.   Given that the budget is based on a 2.2 percent number, that the projected deficit based on that number is 8 percent of GDP, and Kudrin has said that the country cannot afford a deficit of bigger than 8 percent of GDP without sparking greater than 14 percent inflation–well, draw your own conclusions.

For those (not naming names;-) who still believe that Russia is not among the nations hardest hit the global economic crisis, The Professor has some extra credit homework for you;-)   Find a country that has contracted more rapidly than Russia since August.

And, for those who persist in insisting that Russia is in better economic circumstances than the US, please choose a metric or metrics by which we can make the comparison.   Hint: Don’t use GDP growth.

In brief, the Russian economic condition is dire.

February 23, 2009

Hey Bobabrebop

Filed under: Economics,Politics,Russia — The Professor @ 6:08 pm

Willem Buiter  (former chief economist of the EBRD, LSE prof, well-known international economics advisor, FT blogger) is not renowned as a member of the anti-Russian cabal, but apparently he has joined our dark coven of delusional Russophobes who project their wishes for the country’s demise on their interpretation of reality:

Russia has gone from Himmelhoch jauchzend to zum Tode betrübt* in the space of less than a year.   With oil at $140 a barrel and $460 bn of foreign exchange reserves, Russia felt and acted like a would-be super power.   With oil at $40 a barrel and reserves draining fast in an unsuccessful attempt to stabilise the Rouble without raising interest rates, Russia looks increasingly like Venezuela with nukes.   Industrial production has collapsed and the public finances are under severe strain.   Russia’s industry has borrowed heavily abroad, in foreign currency, and on a short-term basis.   Its banking system can no longer fund itself in the international wholesale markets.   Russia 2009 looks more and more like Russia 1998.   Capital controls would be an obvious tool to regain control of the Rouble without having to engage in immediate heroic monetary and fiscal policy tightening.   Even if the anti-capital controls faction in the Russian leadership wins the ongoing argument with the pro-capital controls faction, events may well force the hand of the authorities.

Venezuela with nukes.  Is that a promotion from Burkina-Faso with missiles?  

Needless to say, I agree with Buiter’s analysis, and only wonder what took him so long to come over to the dark side;-)

For some weeks, I have been floating the idea that Russia would resort to capital controls given that the other policy choices available to the country–blowing through reserves to prop up the ruble, jacking up interest rates to achieve the same end, or letting the ruble drop considerably further–are very unpalatable. The possibility of capital controls had received very little attention in the press, but now there is a minor boomlet forming.  It has been mooted by an important business/political figure in Russia, and now Buiter, a solidly European establishment figure (not a neo-con American Cold Warrior) suggests that it is a highly likely outcome because of Russia’s dire economic circumstances.  Serious contemplation of capital controls is, as I’ve argued, a reflection of the fact that Russia inherently has fewer policy tools at its disposal than the US.  

The FT has another article that illustrates the acute Russian policy bind:

Western bankers are increasingly anxious about Russian companies’ ability to repay $500bn in foreign corporate debt after the government said this month it was suspending a $50bn bail-out programme as reserves dwindle.

Bankers are queuing up to meet government officials in a scramble for clarity after Igor Shuvalov, first deputy prime minister, said during a closed-door briefing this month that Russia was going to switch focus from bailing out tycoons to supporting the banking system. “The issue is how much state support will the government provide,” said one international banker involved in talks.

The policy shift has sparked a high-stakes poker game between foreign lenders, the Russian government and the country’s oligarchs as some bankers angle for state guarantees in order to go ahead with restructuring deals, while the government resists as it runs out of funds. In the middle are the oligarchs who, in order to survive, must win restructuring deals on more than $130bn of debt due this year.

. . . .

If there are any large defaults, bankers say they could stay away from Russia for years to come. The stand-off could also determine the direction of the country’s economy as questions are raised over whether the oligarchs should keep their empires, and infighting escalates between liberals and conservatives in the government over Russia’s evaporating hard currency reserves. “We are at a turning point in Russia,” said another senior western banker.

The government is in shock, bankers say, after the central bank’s reserves sunk from $588bn at their peak last summer to $386bn in early February as it defended the rouble against a slide exacerbated by the government’s own policy: the step-by-step devaluation it launched to shield the population from a sharp fall. Businessmen took advantage of the situation to make lucrative one-way bets against the rouble and a lot of these funds ended up on the accounts of Russian commercial banks. Some bankers estimate up to $110bn could be held, but it is not clear how much of these funds have been siphoned off abroad.

VEB, the state agency via which the central bank had agreed to disburse $50bn in bail-out for companies’ foreign debt, has confirmed it has suspended the refinancing programme. “We are not taking any more applications,” it said.

. . . .

As the crisis deepens in Russia, the government also faces increasing domestic spending needs, leaving it uncertain how much cash it will have to help refinance corporate debt. One of the bankers involved in talks with the government, said: “They are trying to work out how much the budget deficit will be and how much money they will have to bail out companies … This is absolutely uncharted territory for them.”

But bankers say the continuing lack of clarity over which companies will receive state aid since the VEB programme was cancelled is complicating efforts to agree restructuring deals. “The lack of clarity is a disaster in terms of winning the backing of credit committees,” said one western banker. “People’s confidence levels are at bottom.”

Several familiar themes intersect in this story.  The first is the opaque, political mechanism for allocating state support.  This speaks to the “natural state” character of Russia, and the potential for conflict in such a state when the rents that hold factions together dissipate.  The second is how the institutional weakness of Russia makes capital suppliers very reluctant to deal with it in the current straitened circumstances, and how the country is at risk from being excluded from international capital markets for a very long time.  The third is that $600 billion may have seemed like a lot at one time, but is plainly inadequate to meet all of the competing demands in the ongoing existential crisis.  As I said to former farm boy Michel in an earlier comment, the sow has only so many teats.  Available resources are inadequate to satisfy the competing demands/needs of oligarchs, siloviki, the military, imperial ambitions, western bankers, and oh yeah, I almost forgot–the Russian people.  So VEB is pulling back for now while priorities are determined; resources tallied; battles fought; and decisions made–or not.  To switch metaphors, somebody–many somebodies, actually–is going to get pushed from the lifeboat.  And in a political system like Russia’s, that will be a very, very messy process.  




*The composite online translation seems to be something along the lines of “from sky high to death.”

February 22, 2009

What the Left Hand Giveth, the Left Hand Taketh Away

Filed under: Economics,Politics — The Professor @ 3:36 pm

Obama’s “fiscal responsibility” summit will preview his soon-to-be-released budget.   After leading a spending stampede on the stimulus, and starting another on the mortgage bailout, Obama now proposes to undo the fiscal consequences of this Bacchanal by–wait for it–raising taxes on businesses and the wealthy.

The phased, sequential nature of these steps suggests to the cynic in me that this was the plan: use panic and fear (rather than hope and change) to rationalize a massive spending increase; then use the resulting panic and fear over the resulting deficit to rationalize a major tax increase.   Funny how this works to implement the traditional left-Democrat tax-and-spend agenda.   Got to give the guy credit, in a way.   Like Rahm Emmanuel says, a crisis is a terrible thing to waste.   Obama has opportunistically exploited the current economic situation to implement what would likely have been a non-starter otherwise.   (Why couldn’t the stimulus package be incorporated into the normal budgeting process?)

Is it churlish of me to suggest that these two pieces of the agenda are logically inconsistent?   One the one hand, the Keynesian rationale of the stimulus bill means that deficit spending IS the stimulus.   By this logic, reducing the deficit through large tax increases undoes the effects of the stimulus.   Can’t have it both ways.   (Now, I disagree with the assumption that the deficit was all that stimulative for the very reason that people would expect that it had to be paid for through higher taxes sooner or later.   But that wasn’t the argument that Obama and the stimulators advanced.)

In other words, justifying the stimulus on Keynesian grounds completely undercuts the justification for reducing the budget deficit through tax increases.

And this fundamental inconsistency is what convinces me that the true motivation for Obama’s moves is not based on a logically coherent view of economics, but that they are instead motivated by a logically consistent political view.   That is, this inconsistency, and the vertigo inducing speed with which these fundamentally contradictory policies followed one after the other, are what convince me that Obama is engaged in a cynical, opportunistic exploitation of economic distress to implement a long denied leftist agenda.

Think of it.   Together the “stimulus bill” and the budget proposals: (a) profoundly shift the nature of the tax system, by dramatically increasing marginal tax rates and business taxes that are likely to have extremely perverse incentive effects, while at the same time implementing tax credits that are purely redistributive in their effects, and which have no salutary incentive consequences (quite the opposite, because they effectively raise marginal tax rates); (b) smuggle in an undoing of the welfare reform of the 90s; and (c) dramatically increase Federal spending as a fraction of GDP.

This is all playing out quite along the lines of what I had foreseen in my “the worse, the better” post-election post.   (Which John Fund of the WSJ Political Journal characterized as a “rant.”   Rant?   Moi?   I was the voice of sweet reason!   And, perhaps, prophesy.)   The main difference is that it has been executed more cynically, and cagily, than I had anticipated.

The main question is whether this audacious agenda will engender significant popular opposition.   Too early to tell whether the tax/budget policies will do so, but it is interesting to see the nerve that the mortgage proposals struck.   Whereas the tax proposals are difficult to grasp in their complexity, pretty much everybody can understand, intellectually and viscerally, the fundamental unfairness of the mortgage bailout.

I think that a focus on the complete intellectual inconsistency of the step-on-the-gas-slam-the-brakes nature of the stimulus and tax/budget efforts would also generate considerable opposition, though probably not of the same, personal intensity.   The disconnect between the we-need-deficit-spending-to-fight-depression-but-we-need-vastly-higher-taxes-to-close-the-deficit is so stark that it will inevitably raise questions about the sincerity, and hence the true motivation, of these policies–and of the politician who is championing them.

February 21, 2009

The Pricing Issue Cannot Be Avoided, Even in a Nationalization

Filed under: Economics,Politics — The Professor @ 12:08 pm

Alan Greenspan has come out in favor of bank nationalization.  He said:

Speaking to the FT ahead of a speech to the Economic Club of New York on Tuesday, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism.

The former Fed chairman said temporary government ownership would “allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

But he cautioned that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.

“You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”

Greenspan–and most of the advocates of nationalization–miss the point when he/they say that government seizure of the banks sidesteps the pricing problem.  This is especially true in Greenspan’s case, when he states that it is necessary to protect the interests–and thus the value of–senior debt.

Yes, it is true that by seizing some banks, and stripping out their assets, you don’t have to price them.  But, the value that the current claimants of the seized institutions receive in a nationalization implicitly prices the bad assets, along with all of their other assets and liabilities in the bargain.  Greenspan wants to conserve some of the value of senior debt.  Presumably this would entail wiping out junior debt, preferred equity, and common equity.  That effectively puts a price on the value of the seized institutions.  The individual assets and liabilities are not being priced, but by pricing the claims on the firm, you are assigning a value to all its assets and liabilities.

Indeed, the pricing issue is even more complex in a nationalization, because you are pricing all of a seized bank’s assets and liabilities, including, for instance, the franchise value arising from its deposit business and the information it possesses about borrowers.  Once you pick the compensation (which could be zero) that current claimants receive, you have effectively priced everything.  (A constitutional hurdle may require some compensation.  The 5th Amendment requires compensation for all property seized for any public purpose.)

The pricing issue is thorny primarily because of its distributive consequences.  Pricing individual assets or portfolios of assets in transactions between banks and the government determines an allocation of wealth, or more accurately, a probability distribution of wealth allocation, between the taxpayers and those with claims on the banks.  (It also affects the allocation of wealth among the bank claimants.)  But nationalization, nationalization light, guarantees, what have you, also imply a distribution of wealth between taxpayers and bank claimants.

One possible objection to arms length, voluntary transactions between the government and the current asset owners is that due to information asymmetries, the current asset owners will have an advantage in negotiations, and as a result the transactions prices will favor them.  This would result in a wealth transfer from the taxpayers to the current asset owners.

Conversely, a related objection to nationalization–a transaction forced by the government on unwilling private claimants, at a price dictated by the government–is that the government would have an advantage that would permit it to extract wealth from the holders of bank debt and equity.

In other words, any policy choice has distributive implications.  That is, assets and liabilities are valued, one way or the other.  It cannot be avoided, finessed, sidestepped.  Those who prefer one approach to another, are expressing a preference for one distribution of wealth between bank owners and taxpayers, and another.

Moreover, in a world with frictions and transactions costs, wealth distribution can have efficiency effects.  Taxes are distorting, so policies that transfer wealth from taxpayers to bank owners tend to increase deadweight losses from taxes.  However, in a world with informational frictions and transactions costs, undercapitalized banks offer inefficiently low levels of intermediation, creating other deadweight costs.  Similarly, nationalization can lead to distortions due to the politicization of lending and investment decisions.

These are all thorny, difficult issues.  There is no immediately “right” policy.  However, it is better to approach the problem based on a recognition of the distributive and efficiency implications of alternative approaches, rather than to propose a policy based on facile, not to say puerile, analyses like Greenspan’s.  His statement that nationalization avoids pricing problems is just plain wrong, and is arguably all the more dangerous because it offers the false promise of avoiding the issue of that has derailed all previous attempts to solve the crisis.  Nationalization doesn’t avoid the pricing problem; it assigns prices by fiat.

Listening to Greenspan of late makes me wonder whether he’s lost it, or never had it in the first place.  I’m leaning towards the latter interpretation.

February 20, 2009


Filed under: Economics,Politics — The Professor @ 5:30 pm

Today’s FT has this mind boggling headline: “Summit to tackle ballooning US deficit.”  It reads: “Mr Obama will host a bipartisan summit on fiscal discipline next Monday that will aim to address America’s long-term struggle to control entitlement costs in healthcare and social security.” Fiscal discipline!  What a concept!

When reading this, my first thought was: “Did I sleep for a very long time?  Is it April First?”  But no, the dateline on the article is February 20, 2009.  So I guess it’s a real story.

What’s next?  Madonna leading a summit on virginity?  Octuplet lady convening a conference on family planning?  I mean, talk about locking the door after the horse is well and gone.  

I would feel better if this newfound commitment to the old time religion had occurred before a $800 billion fiscal stimulus bill, $300 billion mortgage bailout proposal, a potentially immense commitment to banks, and to automobile companies, and other mendicants.  Moreover, given the statement about “control[ling] entitlement costs in healthcare” I suspect that a newfound commitment to “fiscal discipline” may just be a cover to justify massive (additional) government intervention under the guise of economy.

But even putting aside that possibility, this summit is an absurdity, and the fact that it is apparently being proposed with a straight face is a testament to very deep cynicism.  This is talk the talk, after the money has already walked.  It merely adds insult to injury.



February 19, 2009

A Natural Experiment on the Theory of the Natural State

Filed under: Economics,Energy,Politics,Russia — The Professor @ 11:51 pm

Well before the financial crisis, back in fact when Russia was back!  off its knees! I wrote several extended posts identifying what I believed to be a key vulnerability of the country’s political system.  Applying the theory  advanced by North, Wallis, and Weingast (their book is forthcoming next month), I argued that Russia is a “natural state.”  Relatedly, I analogized the Russian state to a cartel of violence specialists.  Both approaches emphasize the vital role of rents in maintaining the stability of the system.  Competing cliques (or clans) of violence specialists maintain an uneasy peace only because this allows them to divide rents, rents that in Russia derive primarily from natural resources, especially oil and gas.  I noted that both theories predict that the stability of this type of system is quite precarious.  More specifically, declines in rents eliminate the “glue” that holds the system together.  Thus, even when oil was going from $80 to $100 to $140, I made the conditional predictions that when prices fall, the system would be subject to stress; that the stress would be greater, the greater the fall in resource rents; and that there was inherently a large probability that the system would collapse in a flurry of infighting in the event of a large decline of rents.  

At the time I made the predictions, the conditions under which its predictions would be testable seemed remote, so I cannot be accused of designing my theory to fit contemporary facts.  The conditions are remote no longer.  They have arrived, and in a more severe form than I would have thought reasonably likely.  

So, now Russia presents a natural experiment to test my theoretical predictions.  Of course the system has not collapsed, and ardent Russophiles (you know who you are!) derisively dismiss even the possibility.  We’ll see.  I have noticed in the past several days, however, an accelerating stream of stories that suggest that inter-clan conflict is heating up in Russia.  

In past days I linked to, and wrote about, stories regarding Kudrin’s increasingly tenuous position.  Today’s FT has another article that suggests that the heat on him is increasing dramatically.  Both Moscow mayor Luzhkov and Russian Railways head (and silovik)  Vladimir Yakunin have publicly and viciously excoriated Kudrin.  (Interestingly, Yakunin openly called for currency controls, something that I opined might be in prospect, but which had not received widespread attention.)  According to the FT:

A senior Russian official on Tuesday called for the immediate imposition of exchange controls to ensure the foreign currency spent supporting the rouble was not taken out of the country.

The remarks from Vladimir Yakunin, the head of state-run Russian Railways and a close associate of Vladimir Putin, the prime minister, were seen as a thinly veiled attack on Alexei Kudrin, the liberal finance minister and the man behind recent efforts to defend the rouble by drawing $200bn (€159bn, £141bn) from the country’s currency reserves.

Mr Yakunin said “temporary” restrictions should have been introduced when the central bank started defending the currency last year. Having failed to act then, the authorities should act now, he said in an interview with the Financial Times. “It’s never too late, and better late than never.”

While Mr Yakunin did not name names, he pointed the finger at Mr Kudrin saying such measures were the “responsibility of the fiscal authorities”.

Mr Yakunin’s comments come amid a growing dispute in Moscow about the huge sums lost slowing the decline in the rouble. With foreign exchange reserves plummeting from an August peak of $597bn to $383bn this month, there is spreading unease among officials about who might be held responsible for the losses.

There are also fierce arguments between liberals and conservatives over policy, with conservatives wanting more public spending in the economy and complaining that funds have been wasted on ill-judged currency interventions.

Luzhkov blamed Kudrin for amassing large reserve funds, rather than spending money on infrastructure.  

Relatedly, commentor Michel pointed me to this Forbes article:

The growing queue for state bailouts among businessmen and the resultant political infighting are the key reason why Russia has no new budget for 2009 almost two months into the year.

When the country’s main financial document is finally ready in two or three weeks, as the Finance Ministry pledges, Kremlin watchers will have a rare chance to identify favourites by looking for cash winners in often opaque budget books.

Should there be too many lucky cash recipients, the government will be left hoping the oil price does not come down further, pushing the deficit out of control and resulting in a further devaluation of the rouble and a spike in inflation.

‘The budget will give us an idea of who managed to win the race,’ said Audit Chamber member and former parliamentarian Vladimir Semago, who saw Russia cut budget spending many times in the 1990s.

‘And besides the wide road and front staircase (for money) to Prime Minister Vladimir Putin, we will see a narrow path, a small door and a short flight of stairs with no handrail yet to President Dmitry Medvedev,’ said Semago.

. . . .

Russian firms, which borrowed heavily to fuel growth and must redeem over $100 billion in foreign debt in 2009, were shocked when the government this month halted its $50 billion direct refinancing programme after disbursing only $11 billion.

They must go now to commercial banks. As some of the biggest lenders will enjoy support from the anti-crisis budget, the struggling empires of the likes of aluminium tycoon  Oleg Deripaska  still bear hopes they won’t be allowed to go under.

‘There is a lot of noise, but all the money that is being disbursed to fight the crisis ends up in 10-15 resource companies anyway,’ said Alexander Lebedev, a businessman rare in his willingness to criticise the Kremlin.

This suggests to me (and to Michel) that the Kremlin and the RF White House recognize that there isn’t enough money to go around.  The impending social demands arising from rising unemployment and the shrinking pool of rents to spread around to the violence specialists and favored oligarchs means that Putin et al have to make choices, to cut some people and companies loose.

Put differently, Russia’s governing elite is facing a classic lifeboat problem.  There’s not enough food and water for everybody.  For some to survive, others are going to have to perish.  But who?  And who decides?  

This is the situation in which cooperation turns to conflict and competition.  Nobody wants to go over the side willingly.  What is there to lose by fighting?  Passivity leads to certain doom.  Sure, conflict is costly, and dissipates rents, but its better to survive and get a piece of a smaller pool than perish and get nothing.  So, it becomes every man for himself, and devil take the hindmost.

In the past I likened Kudrin to Horatius at the Gate, and said that if he went, there would be a free-for-all among the siloviki to grab the monies he husbanded in the seven fat years.  That would represent the watershed, the event that would accelerate the slide into conflict and chaos, as silovik battles silovik, clan battles clan to grab as much as possible as quickly as possible.  

The very public attacks on Kudrin, heretofore considered a close ally of Putin suggest that day is approaching.  Now three major public attacks have been mounted against him, by the special investigator, by Yakunin, and by Luzhkov.  These people would feel bold enough to make these attacks against Kudrin unless they already sensed that he was extremely vulnerable, perhaps having lost Putin’s confidence.  For Putin, not one to take responsibility, a scapegoat is a necessity.  And Finance Minister Kudrin is a tailor made patsy for an economic and financial crisis that is swallowing Russia whole.  (The only other alternative explanation is that these are attacks on Putin himself.  The implications of that would be even more dire.)    

In sum, this is playing out pretty much as the natural state/cartel theory predicts.  Moreover, the attacks on Kudrin suggest that the climax is approaching.  Rapidly.

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