A New Beginning

While I have been either away or busy for much of the summer, I will be resuming work on this blog over the next week or so.

When I started this blog six months ago, my goal was simply to start writing again after a ten year hiatus. At the time, one of my goals was to incorporate faith into a discussion of economics and public policy. And while I commented on faith issues from time to time, events (particularly the economic near death experience of the past year) and distractions in my own life seemed to steer this blog inexorably toward the low hanging fruit of comment on economic events and policy.

Hopefully, this will change over the coming weeks and months. While it is clear that catastrophe has been avoided, the ethical issues raised by the crisis remain, perhaps stronger than ever. For those whose faith is at the centre of their lives, these issues are particularly poignant.

If we can afford to subsidize the wealthy to the tune of trillions, it is surely now unconscionable to ignore the plight of the most vulnerable among us. This raises the question of what an economy is for and what role justice must play.

Stay tuned.

They're Back

If you want evidence that nothing has changed in the U.S. financial sector, you can do no better than Paul Krugman's column in this morning's NYT. For Krugman, Wall Street is once again serving a socially corrosive function by using inside information and superior technology for private profit. It is worth quoting this at length

Americans are angry at Wall Street, and rightly so. First the financial industry plunged us into economic crisis, then it was bailed out at taxpayer expense. And now, with the economy still deeply depressed, the industry is paying itself gigantic bonuses. If you aren’t outraged, you haven’t been paying attention.

But crashing the economy and fleecing the taxpayer aren’t Wall Street’s only sins. Even before the crisis and the bailouts, many financial-industry high-fliers made fortunes through activities that were worthless if not destructive from a social point of view.

And they’re still at it. Consider two recent news stories.

One involves the rise of high-speed trading: some institutions, including Goldman Sachs, have been using superfast computers to get the jump on other investors, buying or selling stocks a tiny fraction of a second before anyone else can react. Profits from high-frequency trading are one reason Goldman is earning record profits and likely to pay record bonuses.

On a seemingly different front, Sunday’s Times reported on the case of Andrew J. Hall, who leads an arm of Citigroup that speculates on oil and other commodities. His operation has made a lot of money recently, and according to his contract Mr. Hall is owed $100 million.

What do these stories have in common?

The politically salient answer, for now at least, is that in both cases we’re looking at huge payouts by firms that were major recipients of federal aid. Citi has received around $45 billion from taxpayers; Goldman has repaid the $10 billion it received in direct aid, but it has benefited enormously both from federal guarantees and from bailouts of other financial institutions. What are taxpayers supposed to think when these welfare cases cut nine-figure paychecks?

So in the face of the largest financial meltdown in eighty years and the most progressive administration in fifty, the financial sector has quickly once again set a socially destructive course. Or as Krugman suggests

Neither the administration, nor our political system in general, is ready to face up to the fact that we’ve become a society in which the big bucks go to bad actors, a society that lavishly rewards those who make us poorer.

We Can Stop Patting Ourselves on the Back

One of less endearing features as a country is our habit of looking south, feigning horror, and telling ourselves that no matter the problems here we are not that bad. A case in point is the economy.

We have been hearing for months that while our economy is experiencing a mild downturn (that is now over) we have not seen the cataclysm here that was seen in the U.S.. Unemployment rates are lower, housing prices steadier and our financial sector the apparent envy of the world.

Yet as the Economist noted toward the end of last week, Canada's manufacturing sector in Ontario, the heart of the Canadian economy, is in deep trouble. And it is about more than GM. As they note

Ontario’s problems go wider than cars. Recession has curbed demand for its minerals and forest products. Nortel, a telecoms firm that was once Canada’s leading high-tech company, recently entered bankruptcy. Bits of it are being sold off piecemeal. Two-thirds of the 370,000 jobs lost in Canada between October 2008 and June 2009 were in Ontario, most of them in manufacturing.

Ontario’s economy is still the biggest in Canada. But it is no longer the richest. Indeed Ontario is now classified as a have-not province, making it eligible for handouts from a federal fund to equalise public spending across the country. It has even been granted its own federally funded economic development agency.

And, according to uber-pessimist Garth Turner, our financial sector is again handing out zero down long term mortgages to people with little ability to pay, a practice that led to the EFF initiative in the last budget and a $65 billion dollar buyout of troubled mortgaged back asset from our supposedly sterling banks.

So while the recession may have ended with surprising quickness (if it has indeed ended) it leaves not only devastating damage to workers in its wake, but seems to already set the stage for the next one.

Some Comments on the Recovery

I have not commented on the economy for some time, and thought a few remarks would be appropriate.

The first is how prescient Minsky's work from twenty-five years ago has proved to be. Especially this time, the built in economic stabilizers of big government coupled with unprecedented monetary and fiscal interventions quickly turned around what initially looked like Great Depression 2.0. And it is quite likely that as the economy again takes flight, inflation and thus interest rates will become a problem.

Perhaps more worrisome, however, is that many of the underlying issues that precipitated this near death experience remain unresolved. While banks were relieved of many of the toxic assets that plagued their balance sheets, many others were simply defined out of existence through accounting rule changes and thus remain as a sort of potential cancer. And while there is much talk of reversing the deregulation of the past several decades, there has been very little movement to actually do so.

It would seem then, that in many ways we have avoided this cataclysm but have set the stage for the next. Like an addict whose health recovers quickly, we fool ourselves that it was not so bad and that we can carry on with only cosmetic changes.

Bill O'Reilly is a Very Stupid Man

It is difficult to grasp the lunacy that sometimes results from political extremism of whatever stripe. Here is an example that just defies explanation. I present it without comment:

Toward an Independent Senate

Senator Elaine McCoy has a piece (pdf) in the latest Hill Times that presents a thoughtful and cogent argument for a Senate comprised primarily of independent (i.e. nonpartisan) Senators. The thrust of her argument is that, far from being simply a brake on a democracy that was particularly feared in the 19th century, it is a preventive measure against what John Stuart Mill famously called the 'tyranny of the majority'.

Canadians tend to view the Senate as an old boys club and/or a sort of pig heaven where old pols go to their just reward. Few recognize the volume and quality particularly of the committee work that comes out of the Senate. McCoy's argument, one that I agree strongly with, is that independence from partisan discipline can only enhance this work.

This, of course, flies in the face of her own party's plans to politicize the Senate through the appointment process and increased party identification and discipline. Our Senate serves us well, and though it could be made better, it will likely be made so by turning it into a replica of the Commons.

Freidman on Hope for Aging Boomers

Tom Freidman has a wonderful column in the NYT this morning on Tom Watson's recent performance in the British Open. The 59 year old Watson, paunch, hip replacement and all, beat out a spate of much younger golfers to almost win the tournament. In doing so, he gave hope to all of us who are unwilling to give in to t he limitations of late middle age, at least without one helluva fight.

As someone who is fighting some of those limitations and health issues, it is incredibly heartening to see examples of those who do not want to retire and reminisce on past glories. So maybe, in Freidman's words, 59 really is the new 30, if we want it bad enough.

The Risks of Interconnectedness

Economists' View has a post this morning on how the unrecognized interconnectedness of the financial sector helped to precipitate the frightening crisis we now seem (hopefully) to be emerging from. It is a fairly complex argument, so I will leave to readers whether they want to follow it through. But the upshot is that while the distribution of risk through various vehicles can and does reduce risk to individual investors under normal circumstances, in more exceptional times, it actually appears to leverage both individual and systemic risk upward because of unrecognized or unanticipated interconnections among borrowers and lenders. Or as the post notes

The people borrowing and lending the money had far more financial interconnections than we noticed or knew about - there was a lot of borrowing and lending among them that was hidden or ignored - and when the higher than expected number of borrowers defaulted, that meant some of the people expecting payments from the lenders were forced into default as well. In the example above, remember that the lenders only had the money short-term, they would need the money later to repay their debts and were just trying to make something on the accumulated balances in the intervening period. But with losses of $1,375 rather than the anticipated gain, they are short on funds and hence must sell assets, call in loans, reduce consumption, etc. to try to accumulate sufficient cash balances to pay what they owe. But not everyone will be able to come up with the money they need, especially as asset prices fall as they are put up for sale, loans dry up, etc., and that will cause more defaults and the problems will spread. Thus, as lenders and everyone else try to rebuild what was lost so they can pay their own bills, that causes even more difficulty, and the result is more defaults on loans, and a process that feeds on itself in a downward spiral of defaults and further problems.

The bottom line is that, while not all can be regulated, regulators need to have a much better sense of the underlying structure of the financial sector, and the potential systemic risks that arise from this structure.

Real Alternative Education?

I have long felt that the teaching profession is a guild that, while it serves teachers well, does not necessarily do so for students or the broader community. Yes it keeps rates of pay reasonable, and this is a good thing, as it attracts excellent teachers who might otherwise look to more lucrative work. But it also gives a group with a somewhat narrow and conformist view of what education should be and how it should be done almost total control.

So beyond the usual (and, lets face it, sometimes valid) complaint that it handsomely rewards sloth and incompetence there is the perhaps more powerful suggestion that this monopoly prevents the type of innovation that education seems to so desperately need. On The Atlantic's Ideas site, there is a thoughtful piece on abolishing teacher licensing and opening up the profession to those without degrees in education but with other university training. Key passage:

When it comes to hiring teachers, much of what we thought we knew turns out to be wrong. Performance on teacher-certification tests is a poor indicator of success in the classroom, and research shows that teachers who come from traditional schools of education aren't necessarily more effective than those from alternative certification programs, such as Teach for America. It's time we scrapped our outdated and inefficient system for recruiting and training teachers, and allow anyone with a college degree and a background check to teach.

The article proposes that rather than have graduates of education programs initially meet licensing standards after which they are effectively granted tenure, candidates with a wide range of qualifications, should be brought in as apprentices, as in a traditional trade, and trained and evaluated over the first several years of their careers. Malcom Gladwell, for one, suggests that

. . . an apprenticeship program that trains teachers and evaluates them while they're teaching, not before they begin. This isn't dissimilar to what many alternative certification programs do with their recruits, focusing on character and past accomplishments during selection, and then putting the novices through a grueling summer training program, with instruction and feedback that continues through the school year. Last year, an Urban Institute study found that high-school students taught by Teach for America educators in North Carolina actually performed significantly better on end-of-course assessments than those taught by educators with three or more years of experience. Yet even Teach for America participants are required to attend graduate courses at night and eventually do earn their certifications. By that time -- years into their teaching careers -- isn't a license something of a moot point?

Indeed, the Teach for America program has been a huge success, attracting graduates who want to dedicate the first few years of their career to giving something back. These young people bring their students a wide variety of life experience and a degree of enthusiasm that is so often missing in the classroom.

This is not an argument for abolishing collective rights for teachers and for the gains that they have made over the past two generations in pay and working conditions. But it is an argument for real diversity among those who have such an impact on our childrens' lives.

More . . .