The Current on Welland

For the past two days, CBC's The Current has been airing a documentary on the small Niagara city of Welland.

This is a city where I lived as a child. In the late 1950s and early 60s, it was a thriving steel and manufacturing centre, with plentiful factory jobs and a robust economic base. When I moved back to Niagara in 1996 to teach at Brock University, it was a depressing model of rust-belt hopelessness. East Welland, where most of the plants had been located, had become a vast slum. The only thriving businesses appeared to be cheque-cashing stores and pornography.

Over the past decade, it has only gotten worse. The only growth business now is, according to the show, addiction treatment. As Robert Stone wrote so eloquently thirty-five years ago, when people encounter despair and hopelessness, they are naturally going to want to get high. It is not a drug problem -- it is a hope problem.

In a country that has just allowed the technological foundation of Nortel to move offshore when options existed, it is difficult to envision a rebirth of industrial centres like this. But we should remind ourselves that in the U.S. similar urban areas such as Pittsburgh, Cleveland and Indianapolis have done just that.

Some Common Sense from Roubini

Amid the ideological mudslinging about debts, recovery and inflation, here is some common sense from the person who has called this one right from the very start.

Here is Roubini's policy prescription from a brief article at Project Syndicate:

Clearly, the current fiscal path being pursued in most advanced economies – the reliance of the United States, the euro zone, the United Kingdom, Japan, and others on very large budget deficits and rapid accumulation of public debt – is unsustainable.

These large fiscal deficits have been partly monetized by central banks, which in many countries have pushed their interest rates down to 0% (in the case of Sweden to even below zero), and sharply increased the monetary base through unconventional quantitative and credit easing. In the US, for example, the monetary base more than doubled in a year.

If not reversed, this combination of very loose fiscal and monetary policy will at some point lead to a fiscal crisis and runaway inflation, together with another dangerous asset and credit bubble. So the key emerging issue for policymakers is to decide when to mop up the excess liquidity and normalize policy rates – and when to raise taxes and cut government spending (and in which combination).

The biggest policy risk is that the exit strategy from monetary and fiscal easing is somehow botched, because policymakers are damned if they do and damned if they don’t. If they have built up large, monetized fiscal deficits, they should raise taxes, reduce spending, and mop up excess liquidity sooner rather than later.

The problem is that most economies are now barely bottoming out, so reversing the fiscal and monetary stimulus too soon – before private demand has recovered more robustly – could tip these economies back into deflation and recession. Japan made that mistake in 1998-2000, just as the US did in 1937-1939.

But, if governments maintain large budget deficits and continue to monetize them as they have been doing, at some point – after the current deflationary forces become more subdued – bond markets will revolt. When that happens, inflationary expectations will mount, long-term government bond yields will rise, mortgage rates and private market rates will increase, and one would end up with stagflation (inflation and recession).

So how should we square the policy circle?

First, different countries have different capacities to sustain public debt, depending on their initial deficit levels, existing debt burden, payment history, and policy credibility. Smaller economies – like some in Europe – that have large deficits, growing public debt, and banks that are too big to fail and too big to be saved may need fiscal adjustment sooner to avoid failed auctions, rating downgrades, and the risk of a public-finance crisis.

Second, if policymakers credibly commit – soon – to raise taxes and reduce public spending (especially entitlement spending), say, in 2011 and beyond, when the economic recovery is more resilient, the gain in markets’ confidence would allow a looser fiscal policy to support recovery in the short run.

Third, monetary policy authorities should specify the criteria that they will use to decide when to reverse quantitative easing, and when and how fast to normalize policy rates. Even if monetary easing is phased out later rather than sooner – when the economic recovery is more robust – markets and investors need clarity in advance on the parameters that will determine the timing and speed of the exit. Avoiding another asset and credit bubble from arising by including the price of assets like housing in the determination of monetary policy is also important.

Getting the exit strategy right is crucial: serious policy mistakes would significantly heighten the threat of a double-dip recession. Moreover, the risk of such a policy mistake is high, because the political economy of countries like the US may lead officials to postpone tough choices about unsustainable fiscal deficits.

In particular, the temptation for governments to use inflation to reduce the real value of public and private debts may become overwhelming. In countries where asking a legislature for tax increases and spending cuts is politically difficult, monetization of deficits and eventual inflation may become the path of least resistance.

Sterile debates about debt and deficits are worse than useless. All industrialized nations, including Canada, have used fiscal policy (deficits) to avoid economic catastrophe. The key, as Roubini is kind enough to point out, is how (and if) we exit from this.

The Nouveau Poor

As always, the Onion gets it:


Report: Growing Ranks Of Nouveau Poor Facing Discrimination From Old Poor

Given this and the Daily Show, do we really need network news?

Illich on Health Care

I was scouting around tonight looking for Ivan Illich's writings on renunciation and found this on health, illness and mortality and the freedom to address these on our own terms:

Illich states the following:

"I demand certain liberties for those who would celebrate living rather than preserve "life:"

- the liberty to declare myself sick;

- the liberty to refuse any and all medical
treatment at any time;

- the liberty to take any drug or treatment of my
own choosing;

- the liberty to be treated by the person of my
choice, that is, by anyone in the
community who feels called to the practice of healing, whether that person be an
acupuncturist, a homeopathic physician, a neurosurgeon, an astrologer, a witch
doctor, or someone else;

- the liberty to die without diagnosis.

I do not believe that countries need a national "health" policy, something given to their citizens. Rather, the latter need the courageous virtue to face certain truths:

- we will never eliminate pain;

- we will not cure all disorders;

- we will certainly die.

Therefore, as sensible creatures, we must face the fact that the pursuit of health may be a sickening disorder. There are no scientific, technological solutions. There is the daily task of accepting the fragility and contingency of the human situation. There are reasonable limits which must be placed on conventional "health" care. We urgently need to define anew what duties belong to us as persons, what pertains to our communities, what we relinquish to the state. ..."

We need to ask ourselves in other words what we have received in return for ceding power and vast resources to a medical monopoly that orders so much of our lives.

Freedom, as Illich so passionately argued, begins with renunciation of needs. How much are we enslaved by our need to escape the limits of fragility and mortality? And how much of life do we miss in trying to perfect and prolong it?

The New Literacy?

From the Stanford Study of Writing comes news that the internet isn't lobotomizing us electronically after all. As Clive Thompson of Wired reports, young people are writing more than ever before as their communications become ever more text based. And the same is true those no longer in school. Key passage:

"I think we're in the midst of a literacy revolution the likes of which we haven't seen since Greek civilization," she says. For Lunsford, technology isn't killing our ability to write. It's reviving it—and pushing our literacy in bold new directions.

The first thing she found is that young people today write far more than any generation before them. That's because so much socializing takes place online, and it almost always involves text. Of all the writing that the Stanford students did, a stunning 38 percent of it took place out of the classroom—life writing, as Lunsford calls it. Those Twitter updates and lists of 25 things about yourself add up.

It's almost hard to remember how big a paradigm shift this is. Before the Internet came along, most Americans never wrote anything, ever, that wasn't a school assignment. Unless they got a job that required producing text (like in law, advertising, or media), they'd leave school and virtually never construct a paragraph again.

But is this explosion of prose good, on a technical level? Yes. Lunsford's team found that the students were remarkably adept at what rhetoricians call kairos—assessing their audience and adapting their tone and technique to best get their point across. The modern world of online writing, particularly in chat and on discussion threads, is conversational and public, which makes it closer to the Greek tradition of argument than the asynchronous letter and essay writing of 50 years ago.

In his recent book, A Better Pencil, Dennis Baron argues that computers and related communications technologies have enhanced both our opportunities and abilities to write. If we take the time to think about this, far more of our communication takes place through writing, and perhaps even more important, we are less and less consumers of the written word and more and more producers. This is undoubtedly a good thing.

Bill Kristol -- Meritocrat

Via Andrew Sullivan, this apocryphal story of rags to riches (sort of) from Paul Campos of the Rocky Mountain News:

"I remember back in the late 1990s, when Ira Katznelson, an eminent political scientist at Columbia, came to deliver a guest lecture. Prof. Katznelson described a lunch he had with Irving Kristol during the first Bush administration.

The talk turned to William Kristol, then Dan Quayle's chief of staff, and how he got his start in politics.

Irving recalled how he talked to his friend Harvey Mansfield at Harvard, who secured William a place there as both an undergrad and graduate student; how he talked to Pat Moynihan, then Nixon's domestic policy adviser, and got William an internship at the White House; how he talked to friends at the RNC [Republican National Committee] and secured a job for William after he got his Harvard Ph.D.; and how he arranged with still more friends for William to teach at Penn and the Kennedy School of Government.>

"With that, Prof. Katznelson recalled, he then asked Irving what he thought of affirmative action. 'I oppose it,' Irving replied. 'It subverts meritocracy.' "

What can I say?

Moral Hazard and Future Crises

In a column in yesterday's Washington Post, Simon Johnson and James Kwak argue rightly (and obviously) that the greatest lasting impact of the financial crisis that began with the Lehman collapse a year ago is the moral hazard greatly increased if not created by public bailouts. For Johnson and Kwak, there are three sources of moral hazard:

First, bank employees and managers had asymmetric compensation structures. In good years, they stood to make huge amounts of money; in bad years, even if the bank lost money, they would still make healthy sums. This gave employees the incentive to take excessive risks because they could shift their potential losses to shareholders.

Second, shareholders had the same payoff structure. Banks are highly leveraged institutions; every dollar contributed by shareholders is magnified by 10 to 30 dollars from creditors. This meant that in good years, shareholders benefited from profits that were juiced by leverage, but should things go wrong, they could shift their potential losses to creditors. As a result, paying bank executives in stock did not mitigate their behavior; in fact, the most senior executives at both Bear Stearns and Lehman had and lost enormous amounts of money tied up in their companies.

Third, creditors had only limited incentives to watch over major banks. Ordinarily, creditors should demand high interest rates on loans to highly leveraged institutions. However, the expectation that large banks would not be allowed to fail made creditors more willing to lend to them.

Not mentioned is the increased capacity of financial institutions to hide non-performing assets through accounting rule changes. There is little incentive to declare market values and/or take write-downs when the assurance of public rescue exists. Bonuses and dividends continued to be paid, tacitly backed by the public purse.

Nor is Canada immune from this. Recall that our banks were able to unload $65 billion of questionable loans on the federal government, encouraging them in the future to reap the profits of such loans while offloading losses on the public.

The Jimmy Carterization of Obama?

It is hard to disagree or even begin to argue with Willem Buiter's FT column this morning on the disappointments of the Obama administration. The honeymoon is over. It is no longer enough to not be George Bush. Not only has Obama failed to deliver on moral reconciliation following Bush or on a real change of direction in foreign policy, his administration seems to have completely dropped the ball on financial reform. As Buiter notes

The US officials supposed to lead the systemic reforms of the domestic and international financial system are the same people who failed to recognise the emerging disfunctionalities that produced the crisis, who indeed were responsible for creating some of these disfunctionalities, who failed to prevent the crisis, who re-fought the battle of the 1930s (and insist on taking great credit for doing so) and left us with the moral hazard nightmare legacy of the end of the first decade of the twenty first century.

On the fiscal side, Barack Obama is presiding over the biggest peace-time government deficits and public debt build-up ever. According to my back-of-the-envelope calculations there is about a 10 percent of GDP gap between the medium and longer-term spending plans of the Obama administration and the taxes the Congress is willing and able to impose. The reality that you cannot run a West-European welfare state (with decent quality health care, decent pre-school, primary and secondary school education for all), rebuild America’s crumbling infrastructure, invest in the environment and fulfill your post-imperial global strategic ambitions while raising 33 percent of GDP in taxes, has not yet dawned on the Obama administration or on the American people at large.

Even more damning for Buiter is that in the face of continued economic stagnation, the administration seems to be abandoning commitments to open trade -- the very thing that deepened and cemented the depression eighty years ago.

This is an administration that appears to want to please everyone even at the expense of a coherent policy direction.

Of Accountants and Dead Parrots

Holding forth on the causes of last years financial crisis has lately become something of a cottage industry. Developments in economics and finance are usual suspects as are incentive structures that encourage excessive and even foolish risk-taking. Without doubt there is some truth in all of these claims.

Last Thursday, Floyd Norris reminded us of a much more pedestrian cause: changes to accounting standards that allowed financial institutions to appear healthier than they really were and that allowed them to take positions that they otherwise would not have been able to. As Norris tells it

The accountants let us down.

That is one of the clear lessons of the financial crisis that drove the world into a deep recession. We now know the major banks were hiding dubious assets off their balance sheets and stretching rules if not breaking them. We know that their capital was woefully inadequate for the risks they were taking.

Efforts are now being made to improve the rules, with some success. But banks have persuaded politicians on both sides of the Atlantic that the real problem came not when their financial inadequacies were obscured by bad accounting, but when they were revealed as the losses mounted.

“There were important aspects of our entire financial system that were operating like a Wild West show, huge unregulated opaque markets,” said the man whose job was to write the accounting rules, Robert H. Herz, the chairman of the Financial Accounting Standards Board.

“The crisis highlighted how important better transparency around that system is,” Mr. Herz added in an interview this week. “I would hope that would be a major lesson learned or relearned.”

Unfortunately, some seem to have learned exactly the opposite lesson. Accounting rule makers at FASB and its international equivalent, the International Accounting Standards Board, have been lambasted for efforts to improve transparency by forcing banks to disclose what their dodgy assets are actually worth, as opposed to what the banks think they should be worth.

Both boards have tried to resist, but have been forced by political pressure to back down on some specifics. In the case of FASB, the retreat took a few weeks after Mr. Herz was ordered to act at an extraordinary Congressional hearing. The international board was given a long weekend to retreat, with the European Commission threatening to impose its own rules if the board did not cave in. Both boards tried to reduce the damage by forcing more disclosures, but it is unclear how much good that will do. Neither was willing to defy the politicians.

As so many have argued for so long, changes to fair value accounting methods largely concealed the condition of the financial sector. As Norris notes

The banks have argued that market values can be misleading, and that their own estimates of the eventual cash flow from assets are more realistic than what they — or others — will now pay for those assets. The rules already allowed them to ignore so called “distress sales” in assessing fair value, but the banks pushed to broaden that exemption in the United States, while in Europe they got the regulators to allow them to retroactively stop calculating market value for assets they said they did not intend to sell.

Behind the scenes, there is a battle pitting securities regulators — who instinctively favor disclosure — against banking regulators, who fear there are times when disclosure could make a bad situation worse.

The securities regulators argue that accounting should do its best to report the actual financial condition of a company. If the banking regulators want to allow banks to use different rules in calculating capital — rules that would not require marking down assets, for example — then they can do so without depriving investors of important information.

But that information could scare those investors, and set off the kind of panic that brought down Lehman Brothers a year ago.

It is the job of banking regulators to keep their institutions healthy, and that effort can only be helped by accounting that reveals problems early. But if the banks do get into trouble, some regulators would prefer to maintain the appearance of prosperity while efforts are made to fix the problems quietly.

The brings to mind the Monty Python classic about the dead parrot



As with the parrot, no amount of subterfuge will permanently disguise the facts.

Panitch on the Relevence of Marxism

I finally had a chance to view Leo Panitch's Big Ideas lecture from earlier this year on marxism in light of the financial crisis. There is not much I can add to what I said earlier. But I can recommend this video for those who want a cogent analysis of what we have been through over the past year and what it means for progressive politics.



Enjoy!