Indian attacks in Context

For those looking to really get a glance at the root causes behind the recent Mumbai attacks, and previous incidents, I would suggest this op-ed from the Globe and Mail.

It does an excellent job of putting the attacks in the broader context of Hindu-Muslim tensions - with dual flashpoints in Hindu nationalist extremism and Muslim instigators in Kashmir. However, it also adds the extra step reminding people that this is a pluralist, mostly peaceful democracy. Indeed, the pluralism is such that it is mind-boggling to most Americans.

One excellent quote, which provides the important context to keep in mind amidst the sensationalism of the media:

From this, you may believe that India has been overtaken by sectarian divisions and religious polarization. That also would be wrong.

This is, after all, a country whose people, 80 per cent of whom are Hindu, have overwhelmingly elected a government with a Prime Minister who is Sikh, a President who is Muslim and a governing party led by a Roman Catholic woman.

Most Hindus have no interest in the politics of religious nationalism. And most of India's 150 million Muslims have nothing to do with Islamic politics – they're the Muslims who rejected Pakistan, an Islamic state, during the Partition of 1947.

India has the honor of being, by far, the world's largest democracy - and has been a stable one for sixty years. This is not a country on the verge of collapse or instability from terrorist attacks. Indeed, relative to some of the disruptions from mass protests India has seen, this attack is a minor "flash in the pan." Small comfort to the victims, but true nonetheless. No government, no matter how stable and prosperous, can prevent all misfortune. India's stability, despite the persistent poverty of millions, is a testament to how (broadly) tolerant and accustomed to plurality its citizens are. Indeed, the best step we can take in preventing instability is to is to remove the poverty itself. After all, it is poverty that often breeds a bitter mindset and enables people to look for someone to blame.

Thus, I will end with another quote, this time from Suketu Mehta's recent op-ed in the NY Times:

But the best answer to the terrorists is to dream bigger, make even more money, and visit Mumbai more than ever. Dream of making a good home for all Mumbaikars, not just the denizens of $500-a-night hotel rooms. Dream not just of Bollywood stars like Aishwarya Rai or Shah Rukh Khan, but of clean running water, humane mass transit, better toilets, a responsive government. Make a killing not in God’s name but in the stock market, and then turn up the forbidden music and dance; work hard and party harder.

Good Op-eds on Economic Policy & My Take

There have been quite a few excellent op-eds on economic policy over the past few days, due in large part to Obama announcing his economic team.

Paul Krugman on financial crises and the need for regulation: Lest We Forget

David Brooks on forcing stimulus to have a long-term strategy: Stimulus for Skeptics

Dean Baker on the selection of the current economic team: Geithner at Treasury: Can He Learn?

For a bit more innuendo on why this economic team might be suspect, see this article in the Washington Post: Familiar Trio at Heart of Citi Bailout

My Take:
On the one hand, I am somewhat heartened to see that Obama seems to have something of a long-term strategy attached to stimulus - green technology, infrastructure, and patching the holes in the safety net. I will note one caveat there - he has also mentioned "aid to local and state governments" but has not mentioned what the aid would be used for. Might I suggest local public transit initiatives as an excellent option? Connected with a real rail infrastrucure (at least in California and East of the Missisippi), a good network of local public transit would do a lot to solving energy problems and building integrated markets. There are still a number of major cities that lack a real metro system, for instance (Philidelphia is but one example).

On the other hand, I am worried that Obama has been so cautious in his selection of his economic policy team. I expected to see a few old hands in top policy positions - particularly Geithner. But I was also hoping to see Obama do a little reaching out to the left - the source of his core support. In fact, his economic team is arguable more conservative than Bill Clinton's - after all, Clinton had Joeseph Stiglitz has his chairman of the Council of Economic Advisors. Christina Roemer is a solid choice, giver her expertise on the Depression, but having all of the other top positions held by centrist figures (Summers, Voelcker, Geithner, and Goolsbee) makes one wonder exactly how much debate there will be on economic policy.

Furthermore, all of these gentlemen (excepting Goolsbee), have had a hand in serious policy blunders. Summers is well-known for his part in the deregulation leading to this crisis - he was Treasury Secretary when the bank holding provisions of Glass-Steagall were repealed, and when the SEC avoided regulating credit default swaps (at the behest of Hank Paulson when he was at Goldman Sachs, among others). Voelcker spearheaded the end of stagflation, but he did so by strangling the US economy and raising interest rates to ridiculous levels. In doing so, he also sparked the debt crisis in the developing world, known as the "Lost Decade" in Latin America.

Geithner, on the other hand, was a member of the team that ensured IMF austerity conditions would be attached to loans in the 1997-8 Asian crisis. In essence, he forced countries facing an outflow of investment capital to spend less on their economies and to raise their interest rates... and these were countries that had balanced their budgets for years (unlike the US). These policies are known as "pro-cyclical" in economics jargon, and they have the effect of exacerbating a pre-existing crisis. In fact, the country that recovered most quickly from the crisis was Malaysia, who ignored IMF advice and imposed controls on capital flight, cut interest rates, and increased spending. This is exactly the opposite of what the US is doing now, and the exact opposite of what economists recommend should be done in a crisis.

Whether these gentlemen have learned from the past twenty years of supposed "consensus" that led to this fiasco remains to be seen. Until I see proof that they have, however, I worry that any response to the current crisis will be luke-warm - too small and too short-term. That was the mistake FDR made in the Depression, and if we learn from history, we should not make the same mistake again.

Two worries about Obama

Given the amount that we have heard about "change" coming to Washington in the Obama administration, let me mention that for all my support for some of the President-Elect's new policies (e.g. renewable energy, infrastructure spending, and health care), and guarded optimism about others (e.g. higher education finance reform), I still have worries about his willingness to tackle the biggest issues in national politics - the two "complexes" that constrain policy the most. They are (1) the "military-industrial complex" (term coined by President Eisenhower) and (2) the "Wall Street-Treasury complex" (term coined by centrist Columbia Economist Jagdish Bhagwati).

Military-Industrial Complex:

To really understand this issue, let me refer you to three sources. The first is a recent article in The Nation that is an excellent primer on the problem. This article identifies two central concerns and challenges related to our military spending.

The first is simple and straightforward: we should not be spending money on weapons systems adapted to an outmoded geopolitical situation - namely the Cold War. Big culprits include the F-22 Raptor, the Ballistic Missle Defense System, and arguably most of the US nuclear arsenal. An excellent line-by-line report identifying key programs to be targeted for reduction was done by Foreign Policy in Focus, and is entitled "A Unified Security Budget for the United States, FY2009."

The second issue is more fundamental and concerns the position of the US in the world. We have, since WWII, become accustomed to using our military to project influence into the world. Part, though not all, of this is related to energy politics (one of the many reasons for renewable energy). Overall, we have over 700 bases and outposts stationed in foreign countries. Perhaps the most comprehensive coverage of this issue has been done by esteemed political scientist Chalmers Johnson, emeritus at UC San Diego. For a list of some of his fairly regular op-eds, see this page at AlterNet. More importantly, see the trilogy he wrote on US intelligence, military, and the potential decline of the American Republic - including parallels to Rome and Britain. The books can be found on Amazon, and are titled: Blowback, The Sorrows of Empire, and Nemesis.

As the article in The Nation mentions, Obama has signaled that he wants a shift out of Iraq and into Afghanistan, but he hasn't signaled that he is willing to take on the Pentagon's ever increasing budget requests or its unwillingness to phase out old programs - to say nothing of whether we should take a fundamental look at where we have bases and why. I voted for Obama because I think he understands that we're looking at a multipolar world. Unfortunately, I don't have any indication that he's willing to take on the established old guard at the Pentagon. Toning down our militarism is the central component to finding a new place in the world. We need to remove our "big brother" and "world policeman" mentality and return to a simple concern with our own national security. Besides, the only thing that will force more military responsibility on other countries is if we don't have the resources to do it all for them.

The Wall Street-Treasury Complex:

My problem here is much simpler - Obama's economic team is populated by old-guard economists, many of whom contributed to the rise of the "Washington Consensus" and the deregulation of financial markets that got us into this mess. When your house falls down, do you hire the same contractor who built it in the first place? I take a little hope that the Treasury Secretary is Tim Geithner, and having a respected hand there is important, but I would be much happier if the economic policy posts weren't completely filled with Robert Rubin's protégés. Rather than complaining about it too much myself, let me suggest two good sources. The first is this article from the NYTimes, and the second is this op-ed by Dean Baker at CEPR.

In short, it remains to be seen if change is really coming to Washington. Old habits die hard, and people are often loathe to unlearn ideas they formed over decades-long careers. Who will Obama listen to, and how will he synthesize their opinions? Is there enough diversity to ensure a proper balance? All of his advisors are bright, well-educated, and experienced - but it remains to be seen if they are stuck in their ways.

Update: Cabinet announcements

Here's the most recent list of cabinet announcements:

Economy:
Treasury: Timothy Geithner (Current President of the NY Fed, helped craft bailout plan)

Chief of White House National Economic Council: Larry Summers (Treasury secretary under Clinton)

Chair of Council of Economic Advisers: Christina Romer (UC Berkeley Economist, specialist in Great Depression)

Chairman of Economic Recovery Council: Paul Voelcker (Former Fed Chairman who hiked rates in 1980s to get us out of Stagflation)

Staff Chief of Economic Recovery Council: Austan Goolsbee (U of Chicago economist, Senior Economist at Progressive Policy Institute)

Commerce: Bill Richardson (Governor of New Mexico, was a presidential primary candidate)

Foreign Policy:
State: Hillary Clinton (Senator from NY, primary candidate)

Defense: Robert Gates (at least as a transition for 1-2 years)

Homeland Security: Janet Napolitano (Governor of Arizona)

National Security Adviser: General James L. Jones (Retired Feb 2007 - former Supreme Allied Commander, Europe; Commander of the United States European Command; and Commandant of the Marine Corps)

Social Policy:
Health and Human Services: Tom Daschle (Former Senate Democrat Leader, published a book on Health Care recently, strong supporter of health care reform).

Director of Domestic Policy Council: Melody Barnes (Executive VP, Center for American Progress)

Director of Office of Management and Budget: Peter Orszag (Director of Congressional Budget Office; has focused particularly on health care)

Legal:
Attorney General: Eric Holder (Deputy AG under Clinton)

Cabinet so far

Cabinet announcements so far....

Attorney General: Eric Holder (Deputy AG under Clinton and career prosecutor, wants to restore independence to AG office)

Health and Human Services: Tom Daschle (Former Senate Democrat Leader, published a book on Health Care recently, strong supporter of health care reform).

Homeland Security: Janet Napolitano (Governor of Arizona, tough on illegal immigration)

Edit: National Security Adviser: Unconfirmed talk that it could be General James L. Jones (Retired Feb 2007 - former Supreme Allied Commander, Europe; Commander of the United States European Command; and Commandant of the Marine Corps)

Edit: Secretary of State: Hillary Clinton has apparently made up her mind to accept the post, and vetting is finished and OK (see Bloomberg article). Sources say she is set to be nominated after Thanksgiving.

Shadow Summit details

If anyone is looking for more specifics on what events are being held when and where at the Shadow Summit - here is a link: http://globaljusticeaction.wordpress.com/

Shadow Summit to G20 this weekend!

November 14-16 2008
Forum will be held November 15th at Luther Place, 1226 Vermont Ave NW
People's Summit Against the G20

While George W. Bush hosts a meeting to promote flawed top-down ideology, IPS and friends invite you to a summit for "the rest of us."

We know the global financial crisis cannot be fixed by those who created it. Join us this weekend for the People's Summit to demand new ideas, people over profit, and democratic control over resources.Nine events are planned for the summit this weekend. For the full schedule of events, please visit Global Justice Action. The weekend's activities will culminate in a People's Forum on Saturday, November 15 and will include:

* An introduction to the financial crisis and its foundation in global capitalism
* Breakout groups, with experts, to further explore energy, the housing crisis, and other factors that contributed to the financial crisis
* A fishbowl discussion on alternatives to capitalism, exploring local, national and global models
* A movement discussion and networking opportunities

The closing panel on international perspectives will feature:

* Martin Khor, Director of the Third World Network, and board member of the International Forum on Globalization
* Njoki Njehu, long-time Director of the Fifty Years is Enough Network
* Lidy Nacpil, Filipina activist and long-time leader of Jubilee South
* Moderator: John Cavanagh, Director, Institute for Policy Studies

Read the Global Call to learn more about the People's Forum and add your voice to those calling for a new, democratized economic system.

Sponsors: Bank Information Center, Casa de Maryland, Global Justice Action, International Forum on Globalization, Institute for Policy Studies, Jobs with Justice, Students for a Democratic Society, US Action, and the Washington Peace Center

Hank Paulson's Bailout Shift...

Apparently, the US Department of Treasury may be coming gradually to its senses. Earlier today, Hank Paulson announced that the focus of the bailout plan would shift, focusing more on direct capital infusions from the government (in association with private investors) rather than purchasing of toxic assets. Rather than bailing out the bankers, as we have all feared, this welcome move is intended to bolster liquidity in credit markets and insure reliable access to consumer credit, while granting the government direct authority to ensure that banks do their number one job: keep lending. For more on this change, see this article in the Financial Times and this one in the New York Times.

On the other hand, Paulson has maintained that the focus on the bailout should be targeted at the financial sector, rather than giving aid to Detroit auto manufacturers. On the face of things, this might make sense, until you consider the fact that car manufacturers are major financial institutions in their own right. After all, every company-owned dealership extends credit to consumers to facilitate buying cars, and all those loans are kept on the books. It is more than a bit naive to assume that the auto industry, which employs a lot of workers in typically hard-hit "Middle America" (Michigan, Indiana, Ohio especially), can weather a credit crisis when the goods it sells are so dependent on access to consumer credit. Unfortunately, in typically narrow-minded fashion, still-President-for-now Bush has made his approval of any economic stimulus (including for automakers) contingent on Congress dropping opposition to the Colombia Free Trade Deal.

None of this is to argue that cars are a good thing, or that we should continue producing cars. However, even those long-sighted auto manufacturers like Toyota and Honda, with their hybrid marketing and fuel-efficient lines, have taken a sales hit over the past year or so. In the medium-term we need to get off of foreign oil, but real public transport (both local and interstate) takes time to build, and until then we need to keep our auto workers employed. The collapse of any of the Big Three would have a devastating impact on what manufacturing economy this country has left. The private car isn't going away anytime soon, and these companies have been hard-hit by an external shock. Like it or not, they need government assistance to retool (and even to prevent job cuts), and frankly enough of the burden to justify using government funds lies on the American taxpayers' historic aversion to rail and public transit in favor of cars and jets.

As I indicated in my letter to President-Elect Obama, the key here is to capture synergies. We need to provide funds to automakers, but those funds need to be contingent upon a significant retooling of their automobile lines - away from SUVs and towards fuel-efficient city vehicles, hybrids, plug-in hybrids, electric cars (like those being developed by Tesla Motors), and hydrogen fuel cells (Note: I do not include ethanol because it has devastating impact on food prices, particularly in the developing world). Then, when the President-Elect takes office, we can hopefully turn our attention to public transit infrastructure (light rail and high-speed rail, especially), green energy generation, and the supporting infrastructure for alternative fuels (especially hydrogen and public plugs for plug-ins/electrics).

Income inequality...

Throughout the election, Barack Obama was attacked as a "redistributor" and a "socialist" by the right. The implication is that a downward distribution of income from the wealthy to the middle classes is somehow a bad thing, and that all of the benefits of economic growth are equally shared. Those who perpetrate these claims are either (a) wealthy, (b) cronies of the wealthy or (c) bamboozled by rhetoric and lacking evidence or the skills to interpret the evidence.

As just one simple piece of evidence, from 1979-2004 the real (that is, adjusted for inflation), after-tax income of the top 1% of society rose by 176%. The top 20% of society saw an increase of 69%. The bottom 20% saw an increase of only 6%. No quintile below the top saw an increase of over 30%, and the pattern is distinctly regressive. Here is my source, and I would like to point out that the data used comes from the Congressional Budget Office.

So, either the wealthiest in our economy are suddenly much better entrprenuers than they were 30 years ago (given boom-bust cycles, I doubt it!) or they have benefited from a set of policies related to international trade and investment, as well as domestic welfare policies, that favor an upward redistribution of income at the expense of the lower and middle class. I might point out that Reagan was elected in 1980, and in the period mentioned there has been only one Democratic president, Bill Clinton. Even Clinton was hamstrung by a Republican Congress for much of his term, and was a pro-free trade, pre-free investment, financial deregulator and fiscal conservative.

Small wonder this election saw a mandate for change in Washington policies - indeed, its a wonder that Obama's victory was not a landslide. Sadly, this may be a testament to the pervasive and simplistic "free market" ideology long advocated by the right, and the manipulative anti-communist rhetoric employed to promote it. One wonders if John Maynard Keynes, the chief architect of the post-WWII international economic regulatory structure, would be labelled a socialist in today's politics! We need to move past such divisive ideology to get to the point where people understand (at least roughly) that economics is fundamentally about manipulating incentives to produce a beneficial outcome - and that the "free market" vs. "socialism" is a dangerous false dichotomy that hinders real progress in the USA.

Keynes, revisited...

In case people remain worried about the cost of economic stimulus + the bailout, and don't trust my economics, may I suggest an editorial by a Nobel Prize-winning economist? Paul Krugman's take on a stimulus package and the New Deal can be found here.

Dear President-Elect Obama...

Dear President-elect Obama:

You've been elected, and with a broad mandate, but the devil is in the details. How will you deliver?

You ran on a platform advocating change and unity, bringing accountability to government, and rejuvenating a suffering middle and lower class. However, most of the concrete policies you specified in your campaign are rather moderate, aimed at targeted small interventions, and seem to lack a cohesive vision. In one sense, this is good, because it grants you flexibility to respond to changing circumstances. In another sense, however, it is worrying - particularly given the broad array of challenges facing you.

Perhaps the most important point is this: do not let the size of recent financial bailouts or the government deficit distract you from deeper goals. Please remember the wisdom of Sir John Maynard Keynes, the great British economist: target a deficit in times of trouble towards sustained employment and economic renewal, so that you can increase revenues and balance the budget in times of economic health. In crafting your economic stimulus package, you would do well to remember your commitment to the middle and lower class, to the most vulnerable in society. Furthermore, you should try to aim at finding positive synergies that allow you to harness the crisis stimulus for longer-term goals. This is particularly relevant in terms of environmental, social welfare, and infrastructural objectives.

To illustrate, consider the following example. Lagging infrastructure in the United States is most apparent in two areas: energy and transportation, particularly rail transport. At the same time, we are embroiled in two wars abroad, at least one of which (Iraq) is significantly tied to oil. These two categories of infrastructure represent an enormous opportunity to achieve multiple objectives and follow through on the message of change and pro-lower class growth that propelled you to the White House.

Investing in the construction of rail transport - particularly high speed passenger rail - would provide hundreds of thousands of jobs to an industry deeply hurt by the burst of the present asset bubble, while reducing our long-term dependence on foreign oil, reducing harmful greenhouse gas emissions, and reducing America's long-term dependence on wasteful automobile, jet, and truck transport. Along similar lines, the provision of federal subsidies to local and state governments promoting mass transit systems, would have a similar impact. Such measures might run into some opposition (particularly from oil and auto industries), but that type of opposition could easily be cast as relying on corporate self-interest rather than the public good.

A very similar case can be made for clean energy subsidies and construction, particularly smaller scale technologies with less potential harm which can be utilized in local settings, maximizing the safety and security of our energy infrastructure while minimizing the long-distance transport of oil and coal. Wind (particularly in the Midwest and Appalacians) and Solar (particularly in the southwest) both provide excellent alternatives, and should be supplemented with other locally applicable solutions - such as tidal power and geothermal. Other initiatives, such as clean coal and nuclear should be explored, but have a larger number of detrimental side effects - coal mining and radioactive waste both cause ecological issues if mismanaged. Once again, these initiatives provide jobs and have the potential to reduce american utility bills, to the benefit of the middle class. They may be opposed by the coal and oil lobbies, but these lobbies again have selfish corporate profits as their interest, not the public good or the long-term health of our economy.

Lastly, please remember your commitments to social welfare, health care, and education. Please remember that all commitments should be funded with a progressive tax structure aimed at minimizing inequality (while maintaining incentives to entrepreneurs) and minimizing speculation. Measures like a small tax on financial transactions, or a Tobin tax on currency transactions, have minimal impact on long-term investment and savings (or normal business operations), but a substantial impact on "casino capitalism." Furthermore, these progressive tax measures could be earmarked to pay for health care and unemployment insurance, both of which would achieve substantial demand-side fiscal stimulus in their own right.

Mr. President-Elect, you have set yourself lofty goals. However, you have also signaled a willingness to play political hardball. You have a Vice President who is a major figure in the Senate and wields enormous respect. You have a Chief of Staff who is a similarly high-ranking member of the House of Representatives, and is a close political ally. You have built a mass movement that can be mobilized to provide support for your initiatives, and have tremendous personal charisma to rally the people. Coupled with an appropriate political strategy that begins with decisive and successful immediate action - through a stimulus plan that captures the synergies between many of your goals - you could achieve long-lasting and visionary success for this country.

In short, Mr. President-Elect, you have tremendous potential. Please do not waste it.

Financial Crisis: Revisited

Hey folks, since I finally finished my series on the financial crisis, and since we now have a new administration - I thought I would re-post the links.

Financial Crisis Part I: The Antebellum - details the fairly immediate domestic historical causes of deregulation and the housing bubble. There is more that could be said here about the impact of international globalization, portfolio account liberalization, parallels with the East Asian crisis of 1997, and if the IMF has a role - but for now I'll leave those issues alone.

Financial Crisis Part II: The Conflagration - details the majority of the major banking collapses (I wrote this before Washington Mutual collapsed and merged with JP Morgan Chase). It also gives a sketch of the bailout and impact on national debt, trying to keep things in perspective. I think, in retrospect, that my critique was a bit conservative in this section, and the move towards actual equity shares in the banks is a good one, because it confers additional and more sustained oversight. One thing to keep in mind: the social role of the financial sector is not to make profits, it is to provide stability, transparency, and liquidity to producers and consumers alike - so that the economy continues to function. It needs to do this efficiently, but we need to remember that financial profits do not generally reflect actual productivity increases or the health of the real economy. In fact, when fueled by speculative investment, they typically prop up bubbles like the one we just saw. If there is any segment of the economy that should be stringently regulated, even to the point of quasi-nationalization, it is the banking sector (I do make this point in part III).

Financial Crisis Part III: A New Regulatory Framework - details my take, based partly on analysis from Dean Baker at CEPR (who, incidentally, is one of the few economists who has legitimately predicted all of this for years), on how we can input smart and targeted regulation to prevent the excesses of speculative activity, provide public oversight, and root the calculus of financial companies in long-term sustainable profits - rather than short-term bubble-burst activity.

So - for those who missed it the first time, or who are new readers, or only read part of it - there is my take on what we should do (roughly).

To come later - I will probably try and provide a framework for the Obama administration - how we should be focusing on changing or restructuring our society to be more dynamic, sustainable, and capable of providing legitimately equal opportunity for all.

Cabinet scuttlebutt

Here are a few more articles on potential cabinet members: CBS discusses most open posts, specifically on foreign policy
we have this article from the Hindustan Times, and Reuters reports that former Clinton Secretary of Treasury Robert Rubin has ruled out a return to the post.

I'm going to mention a few of my preferences here, though I won't guess on many, because a lot of this is behind-the-scenes chatter and hard to predict:

(1) Treasury - NOT Rubin or Larry Summers - this whole financial crisis run-up started under the Clinton administration, so returning to the people who were wrong is a bad idea. Also, Summers has a big mouth and a large ego, and got into trouble at both the World Bank and Harvard for them. Paul Voelcker, former Fed chairman, is a possibility, but he is too much of an anti-inflation-hawk for my tastes and bears the stigma of the 1980s debt crisis. He's also getting old. Tim Geithner, current chair of the NY Fed, is a solid possibility because he was involved in crafting the bailout and can hit the ground running. Warren Buffet is seen as an outside shot - I might like that idea because Buffet is big on business fundamentals and stability, and agaisnt the over-financialization of our economy that has happened in the past few years. He's not a banker, which some take as a minus, but I see as a solid plus - the Wall Street-Treasury complex needs to take some time off.

(2) State - Bill Richardson is my pick, and almost a prediction. I think he's been angling for the role since the primaries. Plus, with a resurgent Latin America starting to have a voice in international affairs, a Hispanic secretary of state can go a long ways in casting a friendlier face. Richardson campaigned hard amongst latinos and broke with the Clintons to endorse Obama, so Obama also owes him a favor. He's also an old hand as Ambassador to the UN and has negotiated with Kim Jong-Il. It is worth noting that whoever is in charge of State will probably butt heads with Joe Biden.

(3) Defense - Personal choices are to stay with Robert Gates or to bring Colin Powell back into the fold. Gates is one of the best/most moderate people in the Bush administration and has openly stated that Defense needs to yield to state; that the US needs to focus less on hard power and overextending resources and more on soft power as other countries become global players. Plus, he can hit the ground running. Colin Powell is one of the most respected people in the US, including internationally, and his credentials are peerless: Chairman of the Joint Chiefs and Secretary of State under both Democrat and Republican administrations. He also underastands that military intervention is a last resort, and is not afraid to speak his mind - but does so in a calm, balanced, quiet, and respectful manner. Whoever is in DoD needs to be able to bridge the aisle and bring consensus on an orderly withdrawal from Iraq.

(4) Energy - I like the gubernator for this one - Arnold Schwarzenegger is another moderate Republican, who has done a lot as governor of California. He's promoted alternative energy, and has also been a proponant of improving US rail infrastructure. One project approved on election day was the first leg of funding for a bullet train in CA connecting Sacramento to LA. High Speed rail should be our #1 priority for infrastructure - it provides jobs, reduces oil consumption, reduces carbon footprint, and can streamline air travel so that we don't need to fly within a 800-1000 mile radius. Another potential place for Arnold, following this, is Dept of Transportation. See this link for the rail project.

(5) Council of Economic Advisors - A few people who should be included and listened to: (a) Amartya Sen (Nobel Prize 1998 on Famines, at Harvard, also on the IMF Governance Reform panel), (b) Joeseph Stiglitz (Nobel Prize twice, at Columbia, known for alternatives to globalization, and understands Latin American cooperative movements), (c) Dani Rodrik (arguable the best development economist for understanding how institutions impact the economy, also at Harvard) - along the lines of Rodrik, other possibilities include Nancy Birdsall at the Carnegie Endowment or Arvind Subramanian at the Peterson Institute, (d) Paul Krugman (Nobel Prize for work on trade this year, might be a bit vitriolic at times, but also understands the need for careful governance of globalization), (e) Maybe Jeffery Sachs at Columbia or William Easterly at NYU - both are known and respected internationally, but they also hate each other, so they might be better as people to consult on a part-time basis.

One last comment is this - to bring real change, Obama needs to start listening closely to the alter-globalization movement, best represented by the International Forum on Globalization (IFG). Some of those organizations are listed on my sidebar.

Thoughts on Staffers?

So, assuming no gigantic upsets and Obama wins the election, any thoughts on potential cabinet posts? Here's a list of the names being circulated in top Democrat circles: http://dyn.politico.com/printstory.cfm?uuid=542710E6-18FE-70B2-A8A346B36828470E

John McCain: Maverick or Miscreant?

Thus far in my political blogging, I've questioned only John McCain's policies. I have, and still do, believe that his ideology is fifteen to twenty years out of date. Furthermore, though he clearly knows foreign policy, despite the occasional gaffe (though I'm dubious on his Middle East knowledge), he lacks any real understanding of economics. Plus, I've felt throughout this campaign that McCain has been willing to say anything it takes to get elected, including flip-flopping far more than Kerry dreamed of.

However, one thing I have not done is question the man's character. Frankly, I bought the media aggrandizement of his time as POW and thought his recent political career showed his commitment to fighting corruption - as McCain led the fight against torture, against the more extreme of President Bush's judicial appointments, and for campaign finance reform. Yet, I have recently read a lengthy biographical article that makes me question these assumptions - after all, I have never done any serious research on McCain's past. Could it be that the good Senator is little more then the volatile, petulant son of military brass?

Probably not, regardless of his past there is likely some truth about the media spin that his years as a POW created a resolve to serve his country. Besides, there are always those willing to slander you, perhaps because of a grudge, perhaps for personal reasons. However, it is also likely that there is more than a grain of truth in the claim that McCain was a spoiled, misogynistic, alcoholic military brat whose entire career was mediocre, and whose advancement came almost entirely on the coattails of four-star general lineage.

I suggest you read the article, and decide for yourself.

My Picks... Election 2008 Map Prediction

<p><strong>><a href='http://projects.washingtonpost.com/2008/pick-your-president/'>2008 Election Contest: Pick Your President</a></strong> - Predict the winner of the 2008 presidential election and enter to win a $500 prize.</p>

Well, I'm being a little optimistic on a few states, but this is my pick for how the election unfolds. I was close on the Democratic primary - I only missed on Indiana in my private picks - so I thought I'd share these. I will admit that I know the Democratic mindset better than Republican, so I might be a bit off. Here's my reasoning on a few key states:

Pennsylvania: New York/New Jersey border will be heavy Obama, and I think middle america here can overcome their reservations.

Ohio: No geographic "Obama-friendly" borders, the rust belt still suffers from some racism, and Hillary won the primary.

Indiana: Home of the KKK, went slightly Hillary in the primary. Large swaths of the countryside are also fairly religious and conservative. Should go McCain.

North Carolina: Large African-American population and massive victory for Obama in the primary indicates a good chance of turnout carrying this state for him. I predict enthusiasm and organizational skills win the day for Obama here.

Virginia: Demographic changes in Northern Virginia, Mark Warner's Coattails, an Obama victory in the primary, and solid organization imply that Obama should squeak out Virginia as well.

Georgia: This should be closer than the polls suggest, and a significant African-american population and strong organization help Obama, but I think that Georgia's "southern Republican" mindset will win the day.

Florida: With Lieberman stumping for McCain, and Obama lenient towards Palestine and favoring talks with Raul Castro, I see the Jewish and Right-wing Cuban votes going McCain. Florida may go McCain by a solid margin.

New Mexico: Bill Richardson wins the state for Obama.

Nevada: Close call - I think general Obama enthusiasm and the California border should help, here. I don't know much about Nevada.

Colorado: I'm optimistic, I think Obama will pull through based on momentum and turnout, even though strong conservative elements suggest a good core turnout for McCain.

Overall - I think the polls are underestimating turnout and enthusiasm in the Democratic party. This won't be a blowout election, but Obama should win by a clear margin.

Financial Crisis: Part III – A New Regulatory Framework

One thing that is clear, following the debates last night, is that the candidates are a little sketchy on the precise reforms that are necessary to prevent another crisis. In Part II of this series, I cataloged the damages of the past few months, and proceeded to explain that we need to accept the reality that a large bailout, like it or not, is necessary for our country’s renewed financial health. The candidates, fortunately, seem to accept this reality. However, they seem unsure on exactly what we should do in terms of long-term reform. In this post, the third and hopefully final post on what I think needs to be done to resolve the crisis; I provide a set of suggestions on how we can reform our governance of financial markets to prevent a recurrence of the current situation. As I mentioned in the last post, some of my suggestions take a cue from Dean Baker at CEPR, though I do differ from him in a few areas.

Before I move into the diagnosis, however, here is a brief comment on my take on the candidates’ economic philosophies. From what I heard last night, I think that Senator Obama’s general philosophy coincides with my impression of specific measures that need to be taken, while Senator McCain seems to still oppose additional regulation in favor of finding bureaucrats to use as scapegoats for a crisis that they could not fully prevent. As I explained in Part I of this series, the Republican Congress of 1999 removed key regulations and handicapped regulators in dealing with this crisis. Blaming regulators for not having the tools at their disposals is nothing if not counterproductive. We need to fix the problems, not look for yet another person who we can blame.

Building with Bricks, Instead of Straw

So, exactly what should we do to prevent another catastrophe? Here are five potential reforms that could have a great deal of impact in reducing volatility and the bubble-bust cycle.

First, all forms of traded assets need to be traded on public exchanges regulated by either the Securities Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). Believe it or not, not all of the instruments that are traded happen on these exchanges. Debt swaps, which are a major part of this situation (mortgage packages are debt securities, after all), are traded off of the exchanges. This makes it very difficult for regulators to access reliable information on the volume and volatility of trading.

Second, Fannie Mae and Freddie Mac need to be subject to more stringent oversight, and perhaps should remain renationalized. Their job, after all, is to repackage mortgages to maintain market solvency. They are a market facilitator, not a profit-focused institution, and a focus on short-term profits is a good part of what got us into this mess. At minimum, there should be two conditions: (1) Fannie and Freddie should be limited in size (in terms of the percentage of the mortgage market they are backing), and (2) Restrictions placed on the riskiness of mortgages that are backed by the institutions. Limiting their size ensures they don’t become overburdened and carried along with asset waves, and limiting the riskiness of their investments ensures they remain solvent and prevents Wall Street from gambling with taxpayer money.

Third, we should establish a public administrative body to assess the riskiness of investments, much as Moody’s and Standard and Poor do now. One of the chief problems leading up to the crisis was the incestuous and corrupt nature of the rating organizations. In essence, they were “in cahoots” with the investment bankers. This public organization should work in tandem with the Federal Reserve. In fact, one key measure that could be put in place to add some teeth to the body would be to place a risk premium on the interest rates charged by the Fed, if a bank allows its balance sheet to sour. A declining credit rating could also automatically trigger negotiations and intervention by the Fed. This could operate in much the same way as debt covenants between private corporations and banks do today. A side benefit of this system is that it forces banks to lend more conservatively, which could stem the trend of Americans piling up their debt until they can barely make minimum payments. It could help reinvigorate a culture of saving now and spending later, rather than the opposite trend that has appeared in today’s consumer culture. High domestic savings rates are almost universally accepted as signs of a healthy and sustainable economy.

Fourth, we need to find a way to break into what has been dubbed the “Wall Street-Treasury Complex” by Columbia economist Jagdish Bhagwati. Hank Paulson, for example, was CEO of Goldman Sachs from 1999-2006 – presiding over the height of the bubble – before becoming Secretary of the Treasury. Preventing this is even more important with respect to the Federal Reserve. Federal Reserve members should go through a full appointment process, requiring the “advice and consent of the Senate” (see Article II, Section 2, paragraph 2 of the US Constitution), as is the case for most other federal officials (e.g. Supreme Court Justices). This could be a requirement of a full senate vote (the standard procedure). Another approach that might make sense is the approval of both the Senate Banking and House Financial Services committees (current Chairs: Chris Dodd and Barney Frank), since many congressmen may not understand the “ins and outs” of finance. In either case, there needs to be an approval process by which the duly elected representatives of the American people have a voice.

Fifth, we should implement two targeted and small tax policies that can minimize speculation and volatility, while at the same time taxing those responsible for this mess in the first place – making them pay for most of it, and not the average taxpayer. The first tax would be a tax on financial transactions, valued at less than 1%. This tax has negligible impact on those investors who are buying and holding for a longer time period, but has a significant impact on the profit margins of speculative day-traders. One estimate suggests this tax could bring in $100 billion in extra revenue. The second tax is a parallel measure attached to currency trading (another 1% or lower tax), known as a “Tobin tax” for the economist who came up with the idea. It has the same impact, removing the profit incentive on speculative currency trading and forcing people to buy and hold for longer periods. This helps to prevent the flight of portfolio capital and precipitous currency devaluation. The proceeds of this tax could be diverted to the foreign exchange reserves, allowing for the US to manage our currency more effectively and combat Chinese currency undervaluation. This will be particularly useful as our economic clout diminishes relative to rapidly developing economies (e.g. China, India, Brazil, Russia), and the dollar ceases to be the “standard” currency of international trade.

The list I have outlined above is in no way meant to be exhaustive. I do think that the above measures could have a beneficial impact, stabilizing the global economy and focusing our energies on productive economic activities, rather than speculative finance. As usual, I welcome any comments you all may have.

Financial Meltdown: Part II - Bailing Out the Banks

As I write, Congress and the President are wrangling over what to include in a massive bailout package, intended to save Wall Street from itself. In Part I of this series, I provided what a friend termed the "antebellum" to this lovely financial conflagration. I'm going to assume you've all read that post, so you might want to read it before tackling this one. Part I details the domestic economic and regulatory causes of the current crisis, and can be found here. The current post is divided into two parts: an overview of the current situation and an assessment of what is needed to bail out the system. There is going to be a third part, discussing what to do to prevent a recurrence.

Overview: They Huffed, and Puffed, and Blew the House Down

Over the past few months, and especially in recent weeks, the entire operations of Wall Street have been turned upside down. Earlier this year, there were five major stand-alone investment firms on Wall Street. Earlier this month, the four largest still remained. Now there are none. Both major publicly guaranteed housing firms had to be nationalized by the government. Even normal mortgage institutions, protected by regulations governing loan-loss provisions, have required substantial assistance. The federal funds rate, in a time of upward pressure on inflation due to commodity prices, remains at a mere 2%. Given the speed of things, let's take stock of the principal damages. Here is a list of those companies requiring significant government intervention thus far.

Investment Banks: Smallest to Largest
Bear Stearns: Government brokered a buyout by JP Morgan Chase, valued at $10 per share. The government issued a $30 billion to JP Morgan Chase to support its purchase.
Lehman Brothers: Bankrupt, government unwilling to save, currently being scavanged by Barclay's PLC.
Merrill Lynch: Purchased by Bank of America to avoid insolvency.
Morgan Stanley: Announced it would become a "bank holding" company (like Citigroup), subject to stricter regulation.
Goldman Sachs: The giant investment firm, long the envy of Wall Street, also announced it would become a bank holding company, subject to stricter regulations. Warren Buffet has announced he will but $5 billion in preferred stock, and the company will issue another $5 billion in common stock to raise capital.

Other Institutions:
American International Group (AIG): Massive insurance company with over $1 trillion in assets. Government bailout of $85 billion for a 79.9% equity share in the company and ability to suspend dividends to common and preferred stock.
Fannie Mae/Freddie Mac: Federal takeover (79.9% equity) and bailout valued at $200 billion. Combined, the two institutions hold debt and mortgage-backed securities valued at around $5 trillion. The current agreement requires that "each GSE’s retained mortgage and mortgage backed securities portfolio shall not exceed $850 billion as of December 31, 2009, and shall decline by 10% per year until it reaches $250 billion."
IndyMac: Seventh-largest mortgage originator in the US, largest bank in Los Angeles area, with assets of around $32 billion (deposits valued at $19 billion). Taken over by FDIC, which guarentees deposits up to $100,000 (and 50% thereafter).
Washington Mutual: Largest Savings and Loan institution in the US, assets valued at over $300 billion. Worries persist about its financial health.

As far as I know, that covers all of the major problems in the past few months. Although, at the rate things are going, I might have missed one. In general, it might be an exaggeration to say that the financial sector is reverting to a pre-1929 conditions, but not by that much. The economy, despite media hyperbole, is not going to crash to Great Depression levels. The country should remain fairly well protected from that level of crash. Social security, Medicare, Medicaid, unemployment insurance, and the FDIC did not exist until the New Deal. Accounting standards and financial regulation through the SEC are also significantly stronger than before the Depression. Each of these measures affords some containment and security, a buffer against hard times.

However, if you will recall my previous post, one of the crucial post-1929 pieces of financial legislation was Glass-Steagall, which separated investment banks from mortgage banks. The repeal of that particular provision of Glass-Steagall in 1999 was a monumental mistake and opened the economy to systemic financial risk. The collapse, acquisition, or change of the investment banks into bank holding companies serves to exacerbate this problem, by and large. The increased concentration of capital into mega-banks concentrates management, distorts market incentives, and removes a layer of insulation from the financial markets. It connects personal deposits even more directly to risky investments taken on by the investment bankers. It also concentrates wealth in the hands of fewer institutions, meaning if one institution collapses, it in itself creates systemic risk. Imagine is Citigroup, with assets of over $2 trillion, were to go bankrupt! Perhaps the only ray of sunlight is that the bank holding companies are all subject to tighter regulation than normal investment banks, and access to deposits and the required loan-loss provisions can make the collapse of an institution more difficult.

Suffice it to say that the contagion has spread throughout the system, and no one has gone untouched. What is needed is a constructive solution with significant long-term components, based in an understanding of where the economy stands. What this means is that any bailout program needs to address long-term regulations as urgently as it needs to ensure short-term financial solvency. This trend could be disastrous if it continues.

I recently posted a link to an in-depth analysis by CEPR. What follows is my take on how we should modify financial governance in the wake of the current crisis. My take on long-term regulation is somewhat similar to Dean Baker at CEPR, but I do disagree with him on how to handle the current bailout. Also, his article is a bit technical and geared towards those with a significant background in economics and finance; I will try to make mine more accessible.

Bailing Out the Banks, but Not the Bankers

Given the sheer magnitude of the current situation, the primary focus of a bailout should be on efficiently flushing the toxic assets from the financial system. It is tempting to quail at the size of the Bush Administration’s proposal, but a full-fledged purge is exactly what the current situation requires. Japan in the 1990s attempted a succession of small stimulus plans and rescue packages, yet the economy remained in the doldrums for a decade, and the banks have only recently become profitable again. On the other hand, following the advice of the IMF, South Korea allowed the banking sector to collapse following the burst of the East Asian real estate bubble in 1997-8, and the economy underwent a severe contraction. In fact, the one country that survived the crisis with the least pain was Malaysia, which made sudden and decisive use of capital controls to prevent the flight of foreign portfolio investment (currently a problem for the US, as well).

In practice, this means that we need to put concerns about the national debt on hold until the financial system recovers. It is tempting to assume that debt, as debt, is a bad thing for the economy. However, government debt is not the same thing as your personal credit card debt. What matters is the cost of meeting debt-service obligations, and whether the debt-creating expenditures create more growth than debt-service. In the case of rescuing the US financial system, it is almost certainly money well spent. Additionally, talk of US debt problems are somewhat overblown. Government debt, by itself, has virtually zero correlation with the health of the economy. Consider that Japan has the 2^nd-highest debt-to-GDP ratio and remains at the center of innovation. A number of countries that have low debt-to-GDP ratios remain underdeveloped (see the CIA World Factbook). Keeping this in mind, a $700 billion bailout is only 5% of the USA’s $14 trillion GDP. Even if all that money is not repaid, this takes out debt-to-GDP ratio from 61% to 66% - hardly a dire increase. The United States is not likely to run out of creditors, as we are the main anchor of the global financial system, and 5% of GDP is certainly a reasonable price tag for the targeted removal of toxic assets from the financial system.

If we look around, we can also see a lot of recrimination and blame. This is tempting, but somewhat counterproductive. Certainly, we need to strictly limit “golden parachute” payoffs to the executives that ran their companies into the ground. Just as certainly, these limits will likely not be as strict as the CEOs deserve (if you make a company bankrupt, I don’t personally think you deserve anything). However, we should not attempt to blame the shareholders and wait until companies absolutely need rescuing to do anything. Dean Baker suggested that shareholders need to be punished – but most shareholders are not board members, most are people who invested their retirement savings in a 401(k) mutual fund that then invested in these companies. Even if they did invest on their own, given the faulty risk ratings on many of these assets, and a lack of insider info, they could not be expected to know that profits would not continue – particularly since this bubble has been 5-10 years in the making, and most financial analysis only goes back to ten year averages (at most). Perhaps board members deserve to take a loss, but we should not punish innocent investors for making a decision based on the information that was available to them before the bubble burst.

It might be thought that I’m coddling Wall Street, despite my claims that executive compensation needs to be limited. What I have in mind is a two-step process; the limitations on Wall Street come in the form of regulations intended to prevent a recurrence of this disaster.

There are two things that need to be addressed in making this bailout effective and efficient, without unduly burdening the government or rewarding institutions and executives who ran themselves into the ground. Here I take two cues from Dean Baker. First, given the corruption and incestuous nature of the private risk appraisal industry, preventing gaming of the proposed auction process is a real problem. One way to avoid this is to make executives personally liable for the misreporting of auctioned assets - allowing them to be sued for assets that underperform (e.g. default more often than) their risk rating (outside a statistical margin of error, say +/- 5%). Faced with potential lawsuits, executives would think twice about misrepresenting risk to the US Treasury. Second, the government should not be responsible for repaying loans to companies that it bails out, if those loans were made within the financial quarter preceding the bailout. The creditors who made those loans, for instance to Bear Stearns or Lehman Brothers, had access to their books and knew their financial situation when they agreed to make the loans – they should be forced to suffer the consequences. This should prevent creditors from making last-minute high-return loans risk-free in expectation of government bailouts should default occur.

Sorry for the length – it’s been a complicated couple of months on Wall Street. Part III of this series will address long-term regulations to prevent a reoccurrence of this mess.

Bailout Terms?

Well, I haven't had time to do my own diagnosis of the current situation, to make long-term suggestions. In the meantime, here is an excellent and detailed piece by Dean Baker at CEPR on what the terms of the bailout should be. His take leans a little further towards heavy regulation then I would, but many of his suggestions have a great deal of merit.

Shameless Promotion II

So, my wonderful girlfriend had a print of one of her paintings selected as "Today's Best" on Zazzle! Check it out here: http://www.zazzle.com/fate_untangling_our_mistakes_print-228309324394495039

Financial Meltdown: Part I

Well, I think it’s about time I weighed in on the current financial crisis. Sorry this took me so long, but I needed time to do some real research to sort through all the opinions. What follows is an analysis of the root causes and history behind this crisis, as well as who to blame (because blaming people is so much fun!). This is part I of II, because the next post will assess the government’s response and what should be done.

First off, let’s get one thing clear. This is not the fault of the Bush Administration. Frankly, the only real things the Bush Administration did to contribute were (a) allow deregulation to stay around and (b) spend too much money on ill-founded wars. Their fault lies in overextending the government’s resources so they don’t have the resources to properly handle what they’ve been given. This crisis has been building since before Bush was elected.

If we can’t blame “everyone’s favorite target,” then who can we blame? No one person is 100% responsible, but a significant portion of the blame is shared by Alan Greenspan and the Republican Congress of 1999-2000. Each of these entities shares some responsibility the twin causes of the current crisis: the housing bubble and deregulation.

Let’s start with the easy case, and the immediate cause of this crisis: the housing bubble. The fault for the housing bubble lies squarely on the shoulders of the Federal Reserve. That means Alan Greenspan. Housing prices have declined 20% since this crisis began, but that’s only half of the 70% increase in real terms they saw from 1973-2007 (170%*-20% = -34%). In comparison, housing prices remained steady in real terms from 1948-1973 (source: CEPR). This has a direct correlation with average fixed-rate mortgage rates and the federal funds rate over that period. Mortgage rates peaked in 1981 at around 16-18%, and have steadily declined since. It’s understandable that Paul Voelcker would want to begin lowering these rates; the initial spike was a monetary policy move to stem the inflation of the late 1970s, and rates needed to come back down eventually. However, Greenspan continued the trend through 1992, with the federal funds rate bottoming at 3%. Since 1992, the funds rate has not peaked above 6.5%, and has remained below 6% for the majority of that time. In essence, Greenspan allowed the economy to overheat, precipitating the tech bubble burst, and now the housing bubble, by keeping the cost of credit at artificially low rates, allowing companies and homeowners to live beyond their means for an extended period of time. Eventually, that time runs out.

The second case, deregulation, is a little more complicated. However, if we want to play the blame game, the majority of the blame falls on three Republican Congressmen: Representatives James Leach (R-IA) and Tom Biley (R-VA) and Senator Phil Gramm (R-TX). These three gentlemen were behind one monumentally foolish piece of regulation: the “Gramm-Leach-Biley Financial Services Modernization Act of 1999” (official Senate site). Gramm-Leach-Biley repealed part of the “Glass-Steagall Act of 1933.” To begin with, let me provide a little history.

The Glass-Steagall Act was an extremely important piece of New Deal legislation intended to combat the collapse of the financial sector that precipitated the Great Depression. It had two crucial provisions: (1) establishing the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to a value of $100,000, and (2) prohibiting bank holding companies from owning investment banks, insurance corporations, securities firms, hedge funds, etc. The first key provision, the FDIC, is still in place. But Gramm-Leach-Biley repealed the second key provision, allowing the merger of mortgage banks with insurance, investment, and commercial banking services. For example, shortly after Gramm-Leach-Biley was passed, Citibank became Citigroup following its acquisition of Travelers Group (an insurance company). It is worth noting that Gramm-Leach-Biley was passed with well over a 2/3 majority and was veto-proof.

Now, why is all of this so bad? Doesn’t this simply make the financial sector more dynamic and flexible? Shouldn’t that be a good thing? Well, another word for “dynamic and flexible” is “volatile”.

Sometimes, a piece of legislation is put in for a legitimate reason. The reason for the Glass-Steagall provisions was to prevent another run on the banks, like the one that happened in 1929-1930. The FDIC ensures that people get their money, even if a bank collapses, and the separation of savings banks from commercial and investment banks prevented banks from taking huge losses on speculative investments and using people’s savings to back them up. Gramm-Leach-Biley changed all that, allowing the merger of the different classes of institutions. (Sidenote: European and Japanese systems allow the merged types too, but have a significant government dialogue and oversight over the types of investments made, which helps to minimize volatility and ensure longer-term investment goals.)

So what happened in the crisis? In order to raise capital, the savings/mortgage bank subsidiaries of financial corporations (e.g. the Citibank portion of Citigroup) issue mortgages. The investment portions of different corporations (e.g. Bear Stearns, Lehman Brothers) then packaged a number of mortgages into securities – including blending subprime and prime mortgages together under one risk rating – and purchased portions of those securities to provide extra operating capital to the banks, allowing the mortgage banks to make more loans (including mortgages). After all, the excess money had to go somewhere! The insurance portions of the new conglomerates (e.g. AIG, Travelers Group) then insure the risk of taking on these new mortgage-backed securities in case of default. The conglomerates are then faced with risk from the same mortgages in three different sections of their books. Originally, this was hailed as “risk-diversifying,” and in cases of normal operation, it might be – after all, in a period of stable housing, it provides a measure of security as mortgages are felt to be safe. Unfortunately, it happened during a housing bubble, and further exacerbated the number of mortgages being offered. Eventually, you run out of reliable clients. Some people don’t own houses because their credit isn’t good enough and they don’t have the income (I should know, I’m a graduate student!)

So, the subprime housing bubble bursts. Now, rather than losses being confined to one sector, they are magnified throughout the entire financial system. Bear Stearns was the first to fall, then Lehman Brothers, then AIG, and Merrill Lynch. Only two of the original five investment firms have escaped relatively unscathed – the largest two, Morgan Stanley and Goldman Sachs. Even the quasi-public mortgage backers – Fannie Mae and Freddie Mac – have needed a bailout. Quite simply, deregulation was a mistake, premised on a foolish assumption that growth can happen indefinitely. Well, it can’t. The market needs to undergo periodic corrections, and regulation exists to make sure that those corrections don’t cause the whole system to collapse. More on this and the government response in the next post.

Hypocrisy in High Heels

So, after my last post about Sarah Palin, people suggested I was being too harsh - that she's a woman and was mayor and then governor of a republican state is impressive, that no one would ask questions about "who will care for my five kids - one pregnant and 17, the other five and Down syndrome?" if she was a man, that I was somehow wrong for calling into question the experience and moral fiber of a woman who wishes to be, arguably, the second-most powerful politician in the United States.

Malarky. Enough with the hypocrisy, people.

I got a bad vibe from Sarah Palin. I got a bad vibe from her life choices because she reminded me of the cheerleader captain who was dating the quarterback, who's parents' had money and was used to getting everything handed to her on a silver platter, but would cut your throat if you so much as disagreed with her. I got a bad vibe because she professed "family values" while deciding that being vice president was more important than making sure her children - one of whom needs emotional support, another who has special needs - have BOTH parents around. (Oh, by the way, I would call any man who did the same a misogynist jerk, too - not that it matters.)

Well, folks, it looks like my bad vibe has been confirmed. Ask yourself this: what would happen if you elected the high school cheerleader captain mayor of your town? Are you cringing yet? If not, maybe you should be. You would sit by and watch as she rewarded all of her high school friends, and then punished anyone who so much as disagreed with her. You would see experts fired from their jobs and replaced with incompetents, and watch as real government fell apart.

Maybe I'm exaggerating. Maybe not all high school cheerleader-beauty queens are like that. But one thing is for sure, Sarah Palin is like that. You want evidence? Here's a five page NY Times article, full of incriminating evidence and examples of why Palin isn't fit for the PTA, let alone VP: Once Elected, Palin Hired Friends and Lashed Foes.

Just for good measure, here's a nice op-ed in The Nation, as well: Lipstick on a Wing Nut

Shameless promotion

The book I was doing research on for Dr. Robin Broad and her husband, John Cavanagh (director of the Institute for Policy Studies) has finally been published. It's a short volume (ca. 100pp) tracking the rise and fall of the "Washington Consensus" and the rise of alternative development movements. It coud serve as a decent introduction to the field, or an interesting alternate perspective for those who have read Jeff Sachs or Tom Friedman.

If anyone is curious, you can get it from Amazon, or Barnes and Noble, or Borders, or Paradigm Press. If you're a Barnes and Noble member, it appears chepest, at $13.72. Otherwise, Paradigm press (the publisher) is cheapest at $14.41. The other two sites charge the full list price of $16.95.

Book opening is at Busboys and Poets (for those of you in DC), October 10th from 6-8pm.

Clean, Green, Driving Machines!

Well, given the incredible amount of press "green technology" is receiving, I decided it's about time I started bookmarking some sites to see what's actually out there. After all, news articles, even from respected publications, can only tell you so much. I firmly believe that the news is no substitute for think tank policy briefings, academic journals, and scholarly books. Of these sources, the first are typically free and readily available. They also tend to be more recent and provide plenty of statistics - though academics tend to be better about in-depth analysis and careful, narrow interpretation of statistics.

In any case - I found a decent site on new car technology, called the Green Car Journal - main website is here: http://www.greencar.com/. The website doesn't have the best layout, but it does have a fair amount of information on different types of automobile technology and op-eds. It's not just PR for the auto companies, either - some of the experts are from places like Sierra Club, Oceans Futures, and Natural Resource Defense Council, among others.

Some interesting sub-pages include: (1) expert opinions, (2) Reviews of specific cars, (3) Historical perspectives on clean energy advancement, and (4) Directory of environmental auto manufacturers and organizations.

I haven't had a chance to check it all out, but so far it looks promising. Anyone interested in the topic would do well to take a look.

Later posts in this "miniseries" may include different think tanks approaches to environmental economics and foreign policy initiatives.

Sarah Palin: McCain Blunders Yet Again

Well, I've been saying over, and over, and over again that McCain is the wrong choice, and just does not understand how to get elected. Part of it is his age, part of it is his lack of tech-savvy (or even proficiency) in the information age, but part of it is just plain disconnect and foolish mistakes. The most recent blunder falls into this last category - McCain clearly doesn't have a clue what he needs for his Vice President, just as he doesn't know what to say to become President. In many ways, its the same issue: McCain isn't sure where to stand to get the best advantage, so instead he is waffling and flip-flopping - both on issues, and in terms of political calculus.

Let's think about this for a minute. What was it that McCain needed in a VP pick? He's running on a platform of independent-minded conservatism and experience to lead. Obama has responded, rather effectively, by picking one of the most independent and experienced Democrats in the Senate: Joe Biden - a pick in many ways reminiscent of JFK-LBJ, except that Biden is also likable, in addition to being well-connected. McCain needs to pick amongst four goals, then: (a) consolidate his leadership experience to bring out the distinction, (b) reach across the aisle to disillusioned democrats/independents who consider Biden too left-leaning (he is a textbook democrat), (c) consolidate the conservative base-vote, especially in vulnerable "pink" states (e.g. GA, NC, perhaps VA), and/or (d) find a way to appeal to younger voters or women.

So who did McCain choose? He picks Sarah Palin, The forty-four year old, first term governor of Alaska (only in her 2nd year), who's only other political experience include being mayor and city councilmember of Wasilla, Alaska (population 5,500). Oh, she was also a TV sports reporter, and owns a commercial fishing business. She is opposed to McCain on the one major national in Alaska - ANWR drilling. She supports it, he opposes it.

Oh, did I mention, she also has a pregnant 17-year old daughter; and her youngest daughter (4 months) has Down's Syndrome. (Edit: A quick explanation about where this is going. I have a Down's syndrome uncle whom I love - but I also know that they require a lot of time and energy to raise, time and energy a high-powered politician doesn't have, especially the VP of the United States. The family troubles and emotions caused by adjusting to having a young, pregnant daughter and shotgun wedding pose a similar "life challenge" and take time, at least in the short term. As my comments below suggest, it seems a poor choice on Palin's part to become a VP candidate at this time.)

So, time for a quick analysis:

(a) The choice of Palin - an underqualified, inexperienced politician - would already have tanked McCain's chances at buttressing his experience advantage. That's before considering that Ms. Palin doesn't really have the time or energy (at this juncture) to play catch-up. Quite frankly, and at the risk of sounding insensitive, she has too many family distractions. Her daughter is 5 months pregnant, and will be having the baby the moment she gets to the White Hourse (if she does). The youngest, Trig, is 4 months old and has Down's Syndrome, which means she will have to devote a significant amount of time to raising the child - a luxury she cannot afford as VP. She is probably a very nice person, and Trig is probably a wonderful baby, but the fact of the matter is that mental handicaps take time and energy. To devote proper time to her family, she cannot be a high-powered politician. Even worse, what happens if McCain has a heart attack or some other illness? He isn't young, and now an overexerted and inexperienced VP is forced to take command. It makes me more than a bit worried.

(b) Palin is unlikely to reach accross the aisle, she runs on a textbook "family values"/social conservative platform and supports ANWR drilling - neither appeal to Democrats. She's also from Alaska, which is conceived of as out of touch with or different from the lower 48, for better or worse.

(c) If she's running on a conservative platfrom, isn't she likely to consolidate the base vote? Maybe, but I doubt it. Again, here we have the "skeletons in the closet" issue. She's young, for one, which doesn't appeal to a lot of skeptical conservatives, who prefer age and experience in national security matters. For another, just as damaging, her 17-year old daughter just had an out-of-wedlock child. They are marrying, but that is quite obviously a "shotgun" wedding - don't we often expect better of our leaders than ourselves? Perhaps she garners some pity, but pity doesn't win a presidential election.

(d) Finally, wouldn't the struggles of a younger, attractive (she's had pictures taken by Vogue), mother-figure appeal to younger and women voters, and help to contrast with McCain? Maybe, but again I doubt it. First of all, her obvious youth will serve to contrast McCain's equally obvious age. If that was the goal, a better option would have been to pick a mid-50s VP candidate who still remains "in touch" with the changing landscape - but doesn't create huge "contrast" worries. As far as women are concerned, maybe that will help a bit, but I think this is a superficial attempt that underestimates the intelligence (or at least cynicism) of the voting public. Do we really think John McCain has women's interests in mind, in the same sense Hillary did, just because he picks a female governor as his running mate? I doubt it, I think people are too skeptical for that. He might get some votes, but not enough to offset the weaknesses involved.

Instead, I think McCain would have been better playing to his strengths, and using them to draw out Obama's weaknesses - particularly given the Republican attack machine behind him. Someone like Joe Lieberman or Michael Bloomberg would have scared me as a VP candidate, because they would seriously buttress McCain's "experience" advantage, and both are "across-the-aisle" candidates with serious pull. Lieberman strengthens campaigning in Connecticut and probably guarantees Florida, though he weakens the conservative base vote (never McCain's strength). Bloomberg is somewhat liberal on social issues, but he spearheaded the post-9/11 economic turnaround in NYC - though recent wall street troubles would hurt him - he still would have a buttressing effect and might guarantee Florida. Perhaps another candidate with experience and judgment could be found - Romney, for example - who has economic and health care knowledge, ran a conservative social platform, and has some pull in NE.

Whoever he picked, another choice would almost certainly have been better than Sarah Palin. She undermines his strengths and does minimal work to buttress his weaknesses.

The Republican Media Machine...

Here is an excellent article from The Guardian that lays out one major reason US politics is so out of whack with the rest of the western world. In a nutshell - we have an army of pundits with no respect for the truth or facts, who are paid to warp, spin, and twist anything they can into one-line misinformation. And they let them masquerade as journalists (or quasi-journalist talk-show hosts) while they do it.

One of my Scottish friends brought this to my attention - and expressed his incredulity as follows: "They let a JOURNALIST (not a politician or something) on CNN (which is the main, mainstream source of TV news in the US yeah) call a boring centrist politician like Obama a MARXIST? Do people get away with this kind of total nonesense regularly?"

In any case, here's the article: http://www.guardian.co.uk/world/2008/aug/31/uselections2008.barackobama

Biden the Ideal Choice for VP

This morning I received a 3am phone call from the Obama campaign - well, actually it was a text message - informing me that Senator Joe Biden, of Delaware, is now Obama's VP candidate. I could not be happier. Heck, I've wanted this ticket since the first Democratic Primary debate 16 months ago. So, keeping in mind my bias here, lets explore why Senator Biden is a brilliant choice.

(1) Experience: This is the most obvious advantage from picking Biden. Biden is the senior senator from Delaware, in the senate since 1973. He is every bit the "elder statesman" and has served as chairman (and ranking minority member in Republican years) of arguably the two most important Senate committees - the Judiciary Committee from 1981-1995 and the Foreign Relations Committee from 1997-2007. His record on both committees is prestigious, though not spotless. On the judiciary committee, he presided over the defeat of Robert Bork, and narrowly bungled the nomination of Clarence Thomas. Biden was a long-standing advocate of intervention in the Balkans, which became a hallmark success of the Clinton administration.

(2) Derailing the "straight-talk express": This is another obvious benefit to picking Biden. McCain has built a reputation over the past decade as a Washington reformer, as someone above partisan politics, who speaks to the people. The irony of this is that McCain's current campaign shows serious signs of flip-flopping on his past record in an effort to win over moderate voters, and a frightewning lack of knowledge about vital issues - notably the economy and environment. However, if there is any senator with a reputation for "speaking truth to power" that can match John McCain's pre-election reputation, it is Biden. Biden is well-known for his straight-shooting, sometimes blunt assessments of a situation, and for a wise-cracking sense of humor very akin to McCain's in many ways. True, this has gotten Biden into trouble in the past, but it does ensure that his statements are taken seriously by the media - and Obama's ability to draw subtle distinctions in a reasonable tone should help to defuse any tension it generates. At the same time, it means that Biden will not hesitate to attack McCain's flip-flopping in this campaign, or point out, in no uncertain terms, how and why the two candidates differ - and why Obama is the better choice.

(3) Connecting with Middle America: Here is another aspect of Biden's persona that helps shore up Obama's perceived weaknesses (though I, for one, think this perception is short-sighted spin). Biden, the son of a car salesman (born in Scranton, PA), is the least wealthy member of the Senate, commutes to work daily on Amtrak (a 90-min train ride each way, I checked), did not go to an Ivy-league school (alma maters: U of Delaware and Syracuse University), is Irish Catholic, and exudes down-to-earth common sense. Biden is someone who, for all his time in Washington, understands how most of the country lives. Oh, and did I mention that his son (Delaware's Attorney General and a Captain in the National Guard) is deploying to Iraq in October?

(4) Ideological Blend - Reinforcing the Message of Change: This is a less obvious parallel, one somewhat obscured by the media and McCain's spin. After all, Biden has been in the Senate for thirty-five years. But the question is not "how long" Biden has been in politics, but "what has he done?" The goal of the campaign is to change divisive politics, but that cannot be done without working with those who are already in politics. Joe Biden knows the people in Washington and has worked with them, but he has always done so in the spirit of meaningful change. This is a man who grew up in the 1960s Civil Rights movement. This is a man who sponsored and pushed through the Violence Against Women Act. Biden fought to bring Slobodam Milosovic to justice, to support independence and democracy in the Balkans - not as a false pretense, but as a fundamental goal. Biden represents a man who has fought, within Washington, for the change platform that Obama is campaigning on.

(5) Personality Blend - Working together in Office: In some ways, this may be the most important aspect here. How well will these two individuals work together, if they are elected? I think the answer has to be, very well. On the one hand there are the obvious agreements - Biden is a progressive Democrat who wants to bring opportunity to the middle class, who opposes the neoconservative "black and white" foreign policy of the past eight years. On the other hand, there is Biden's combative personality and sharp sense of humor. These are two men who can banter back-and-forth and establish a sincere working rapport, and will agree on our general goals. But, even given this rapport, Biden will insist that his views be heard and is not afraid to tell Obama: "Mr. President, you're wrong."

In short, the selection of Joe Biden is nothing short of brilliant. There is a deep synergy between these two candidates, they represent a team that complements each others strengths while shoring up each other's weaknesses. Biden is the pragmatic veteran warrior of change the Obama campaign needs. Finally, this is a ticket that can bring hope to America.

Bolivia: Morales's Victory

Here is an excellent article and analysis of Morales's decisive (62% of the vote), yet not overwhelming victory in the Bolivian referendum. He now has a clear mandate, but still has his work cut out for him in terms of land reform and nationalization, particularly in Santa Cruz (though he won over 40% of the vote there, surprisingly). The wealthy, predominantly white minority will continue to block moves by Morales to grant some measure of social progress and equity to the overwhelming, impoverished indigenous majority.

I'm not an expert on Bolivian politics, but suffice it to say claims that Morales is a "leftist" are overblown melodrama - yes, he favors state control over some aspects of the economy, especially natural resources and some financial services/heavy industry - but these are policies that have worked to generate government revenue and provided the impetus for industrialization in South Korea, Taiwan, Thailand, Indonesia, Malaysia, China, and India. For that matter, land reform was a key aspect of generating an agricultural surplus in South Korea, Taiwan, and China as well.

Private enterprise is all well and good, but there needs to be sufficient government capital to provide social programs (e.g. education and basic health care) and public infrastructure. There also needs to be some sense of equal property distribution, at least to the point where there is enough demand to generate local consumption and ensure a market for locally-produced goods. Latin American Gini coefficients typically range from 0.6-0.7, compared with Asian and European Gini's in the 0.3-0.45 range (lower = more equal). Capitalism doesn't work without the prerequisites for a market, even neoliberals recognize that, and public control of commodities and finance can be an effective way of jump-starting industrial development - as the East Asian Miracle has demonstrated. Privatization, whether or not we like it, frequently needs to come later on in the process. Sometimes, what seems a "lefist" policy in an American context is simply pragmatic policy in another context (especially a development context).

Food Aid, Security, and Production

Here is an interesting article on food production patterns, development, and humanitarian food aid, courtesy of BBC: http://news.bbc.co.uk/2/hi/science/nature/7553958.stm. Just a brief commentary, below.

It's an interesting article, though it could be organized a little better (his metaphor with the second law is a bit forced). I think it should be pretty obvious that we should be using cash to purchase food locally to the greatest extent possible, so as to build local supply links - the problem is identifying the "greatest extent possible". At a certain point, either approach can radically distort supply/demand. Shipping in too much food gluts supply and creates informal markets for food aid, harming producers. By the same token, purchasing too much food decreases supply, and while it helps local producers with the surplus to sell (typically better-off anyway), it can spike the cost of purchasing food for consumers - even as some of that food is distributed to the "worst off". In a country where most of the population is fairly destitute, that can be a problem in itself.

My personal take is that these problems are really only solved by diversifying the labor base and moving up the value chain - which includes industrialization, though it would be nice if it was in a more eco-friendly and not debt-financed manner. That type of diversification is needed to generate the type of demand necessary for farmers to be financially sustainable - at least in the current environment. The rest is just an attempted band-aid on a structural problem: it can alleviate suffering, but doesn't address the root causes. Another thing that would be interesting to see is what would happen to global food chains if most/all countries were industrialized and diversified - would production diversify or become increasingly concentrated (probably depends on legal/political factors as much as economic, but still interesting).

Halifax Initiative

Just a short post here - I recently discovered an extremely helpful source for progressive/alternative development information, through my work at the Bank Information Center. It's a Canadian coalition of civil-society organizations called the Halifax Initiative: http://www.halifaxinitiative.org/

McCain's Ignorance and Incompetance, revisited...

About a week ago I posted about how, though I'm relatively happy with the two candidates this time around, I'm still somewhat frightened by McCain - his inability to understand basic economics, complete lack of familiarity with modern technology, and (perhaps worst) incompetence in choosing worthwhile advisers. This op-ed by Frank Rich at the New York Times makes much the same point, and is extremely thorough. Republicans, read at your own risk!

http://www.nytimes.com/2008/07/20/opinion/20rich.html

Defense Secretary Sounding Smart...

Here is a surprising message from a US Defense Secretary - particularly one nominated by Bush. Its a shame that it wasn't the prevailing mindset for most of the past seven years...

http://www.cipcol.org/?p=638

Clean, Green, Gore...

As many of you have heard, no doubt, Al Gore gave a speech on Wednesday calling for the US to set a goal of powering itself 100% on clean or renewable sources within ten years. I don't normally embed videos, but here is the speech, it's worth watching:



As far as my take on the speech, let me say that I'm extremely happy about Gore's analysis and presentation (although some of his language is still a bit erudite). If he gave a speech with this much passion eight years ago, he may have been elected president. At the same time, the cynical part of me wonders if bold rhetoric translates into change, or not being taken seriously. Given that this is Al Gore, I imagine he is difficult to dismiss, so the bold rhetoric is useful - so long as we understand that 100% of our energy will not be generated using non-carbon sources within ten years, especially if one includes coal in the mix.

However - this caveat does not mean that similar bold goals aren't attainable - for instance, reducing the vast majority of our dependence on oil as a resource, and triggering significant cuts in emissions and heavy metals over the next ten years. Here is a useful document from the Edison institute. The most telling section is page five - where there are pie charts giving our energy production breakdown.

Using this data, a few things become clear. First, reforming coal power is perhaps the single most important short-term reform in terms of emissions: 50% of our electricity comes from coal. Policies on the adoption of clean coal technologies need to be prioritized. Second, renewable energy sources are currently a paltry 9% of our energy portfolio (not including hydro power, which is severely handicapped by the location of potential sources, only 2.4% of our power is renewable). However, nuclear power currently accounts for almost 20% of our electricity generation - and thus represents a useful technology to be expanded (the french, for instance, rely primarily on nuclear power). Contrary to popular myth and fears, modern nuclear power plants are some of the safest, most cost-effective, and most reliable sources of electricity we have access to. They are not "three mile island, take two" waiting to happen. Investment in nuclear plants likewise represents an excellent, less infrastructure-intensive option to revamping our electrical grid. So - in terms of how we generate our electricity, a number of relatively simple approaches exist - approaches that don't displace whole industries (e.g. the coal industry - referenced in Gore's admission of the need for new jobs for coal miners).

Given the still-present efficiency hurdles in solar, geothermal, and wind power, we should think about some more readily achievable steps in reforming how we generate electricity - though this is not to suggest that fully renewable sources shouldn't be explored in greater detail. This seems to be particularly true since the same is not the case in terms of our oil dependency and transportation habits. Consider, for example, our vast foreign oil dependency - yet only 3% of our energy is produced with oil. What this means is that the oil dependency is a matter of our transportation habits far more than our energy generation habits (assuming we switch to clean coal and expand effectively). That is a far thornier problem requiring substantial investments in new technology, public transit infrastructure (inter-city and intra-city), urban planning, and transportation regulations.