Europe’s Triple Threat
PALO ALTO – Europe is suffering from simultaneous sovereign-debt, banking, and currency crises. Severe economic distress and political pressure are buffeting relationships among citizens, sovereign states, and supranational institutions such as the European Central Bank. Calls are rampant for surrendering fiscal sovereignty; for dramatic recapitalization of the financially vulnerable banking system; and/or for Greece and possibly other distressed eurozone members to quit the euro (or for establishing an interim two-tier monetary union).
In this combustible environment, policymakers are desperately using various vehicles – including the ECB, the International Monetary Fund, and the European Financial Stability Facility – in an attempt to stem the financial panic, contagion, and risk of recession. But are officials going about it in the right way?
The sovereign debt, banking, and euro crises are closely connected. Given their large, battered holdings of peripheral eurozone countries’ sovereign debt, many of Europe’s thinly capitalized banks would be insolvent if their assets were marked to market. Their deleveraging inhibits economic recovery. And the large fiscal adjustment necessary for Greece, Ireland, and Portugal, if not Italy and Spain, will be economically and socially disruptive. Default likely would be accompanied by severe economic contraction – Argentina’s GDP fell 15% after it defaulted in 2002.
Despite stress tests, bailout funds, and continual meetings, a permanent workable fix has so far eluded European policymakers. Failure will erect a huge obstacle to European economic growth for years to come, and could threaten the survival of the euro itself. Disagreement among and between heads of state and the ECB over the Bank’s purchases of distressed sovereign debt have only added to the uncertainty.
A decent pan-European economic recovery, and successful gradual fiscal consolidation, would allow the distressed sovereign bonds to rise in value over time. Until then, the jockeying will continue over who will bear the losses, when, and how. Will it be Greek citizens? German, French, and Dutch taxpayers? Bondholders? Financial institutions’ shareholders? And the fundamental problem is that how the battle is resolved will affect the amount of the losses.
Prices of bank shares and the Euribor-OIS spread (a measure of financial stress) signal a profound lack of confidence in the sovereign debt of distressed countries, with yields on ten-year Greek bonds recently hitting 25%. The crisis affects non-Europeans too; for example, concern over the exposure of American banks and money-market funds to troubled European banks is harming US financial markets.
There are three basic approaches to resolving the banking crisis (which means resolving the fiscal adjustment, sovereign debt, and euro issues simultaneously). The first approach relies on time, profitability, and eventual workout. One estimate suggests that a 50% reduction in the value of peripheral countries’ sovereign debt (reasonable for Greece, but high for the others) would cause about $3 trillion in losses, overwhelming the capital of European banks. But the banks are profitable ongoing enterprises in the current low-interest-rate environment, because they typically engage in short-term borrowing and longer-term lending at higher rates, with leverage. Playing for time thus might enable them gradually to recapitalize themselves by retaining profits or attracting outside capital.
A strong, durable economic recovery would make such an approach workable. Most European officials hope that, when combined with substantial public money to support troubled sovereign debt, it will.
The Obama administration adopted this option, following the unpopular Troubled Asset Relief Program, which injected hundreds of billions of public dollars into the banking system (most of which has been repaid). But some US banks, including Bank of America and Citi, are still vulnerable, with considerable toxic assets (mainly related to home mortgages) on their balance sheets.
The second approach is rapid resolution. But letting questionable banks gradually recapitalize themselves and resolving the bad debt later – perhaps with European Brady Bonds (zero-coupon bonds which in the 1990’s enabled US banks and Latin American countries to agree to partial write-downs) – won’t work if the losses are too large or the recovery is too fragile. More rapid resolution may be necessary to prevent zombie banks from infecting the financial system.
The US Resolution Trust Corporation rapidly shut down 1,000 insolvent banks and Savings and Loans from 1989 to 1995 so that they would not damage healthy institutions. Scaled to today’s economy, assets worth $1.25 trillion were sold off, with 80% of the value recovered. The financial system rapidly returned to health. This approach requires judgment and resolve in separating insolvent institutions from solvent ones.
Finally, there is the path of public capital. If market-driven recapitalization is too slow, and closing failing institutions is impossible, a more extreme alternative is to inject public capital directly into the banks (rather than indirectly, as now, by propping up the value of the sovereign debt that they hold). This approach prevents bank runs, because banks with more capital are safer. But how much public capital should be used, and on what terms? Private capital, of course, is preferable, but, given the risk that it will be wiped out by future public intervention, investors will be wary. In the meantime, regulators are increasing banks’ capital ratios.
Europeans, both debtors and creditors, must address the banking problem forthrightly, and simultaneously with the euro, sovereign-debt, and fiscal-adjustment issues. Pretending that banks that passed modest stress tests can be kept open indefinitely with little collateral damage is wishful – and dangerous – thinking.
Michael Boskin, currently Professor of Economics at Stanford University and a senior fellow at the Hoover Institution, was Chairman of President George H. W. Bush’s Council of Economic Advisers, 1989-1993.
America’s Free-Trade Abdication
Evidence of anxiety outside the US has been clear to everyone for almost a year. German Chancellor Angela Merkel and British Prime Minister David Cameron were concerned enough to join with Turkey’s President Abdullah Gül and Indonesia’s President Susilo Bambang Yudhoyono in appointing Peter Sutherland and me as Co-Chairs of a High-Level Trade Experts Group in November 2010. We held a prestigious Panel at Davos with these leaders in January 2011, where, on the occasion of our Interim Report, we gave full-throated support to concluding Doha. But there was no response from the US government.
In September, former British Prime Minister Gordon Brown, former Spanish Prime Minister Felipe González, and former Mexican President Ernesto Zedillo reminded G-20 leaders that in November 2009, at their first meeting in London, they had expressed “a commitment to …conclude the Round in 2010.” And, two weeks ago, the UN met again on the Millennium Development Goals (MDGs). Goal 8 is about instruments such as trade and aid, and MDG 8A commits the UN member nations to “[d]evelop further an open, rule-based, predictable, non-discriminatory trading and financial system.”
But, while practically every country today has embraced preferential Free Trade Agreements, the recent leader in this proliferation is the US. There, Congress and the president apparently have plenty of time to discuss bilateral FTAs with South Korea, Colombia, and Panama, as well as the regional Trans-Pacific Partnership (TPP), but none for negotiating the non-discriminatory Doha Round, which is languishing in its tenth year of talks.
Indeed, it is notable that, while Obama’s State of the Union address in January 2010 at least mentioned Doha, his address in January 2011 did not. Obama confined himself to promoting the pending bilateral agreements with Colombia and other emerging-market countries.
Obama’s regrettable retreat from support for the Doha Round is the result of many factors and fallacies. These were highlighted in an “Open Letter to Obama” that I organized and released, over the signatures of nearly 50 of today’s most influential trade experts worldwide, urging a presidential shift in policy towards Doha.
America’s president is captive to the country’s labor unions, who buy the false narrative that trade with poor countries is increasing the ranks of the poor in the US by driving down wages. In fact, however, there is plenty of evidence for the rival narrative that rapid and deep labor-saving technological change is what is putting pressure on wages, and that imports of cheap labor-intensive goods that US workers consume are actually offsetting that distress.
Again, Washington lobbyists have bought into the absurd claim of trade experts such as Fred Bergsten that the gain from Doha, as it stands now, is a paltry $7 billion or so annually. This ignores the far greater losses that a failed Doha Round would entail, for example, by undermining the World Trade Organization’s credibility as the principal guarantor of rules-based trade, and by leaving trade liberalization entirely to discriminatory liberalization under preferential bilateral agreements. Again, someone needs to tell Obama that imports create jobs, too, and that his emphasis on promoting US exports alone is bad economics.
Most of all, Obama is badly served on trade by his senior colleagues. Secretary of State Hillary Clinton, for example, was opposed to trade liberalization when she ran against Obama for president, and advocated a “pause” in free-trade negotiations. She also misinterpreted the great economist Paul Samuelson as a protectionist, when he said nothing of the kind. She has never recanted.
Likewise, now that Warren Buffett is considered to be Obama’s most trusted economic adviser, it is worth recalling that back in 2003 he produced the astonishing prescription that the best way to reduce the US trade deficit was to allow no more imports than it could finance from its export earnings. An amused and alarmed Samuelson drew my attention to this nutty idea. While Buffett’s prescription of higher taxes for America’s wealthy is entirely desirable, will Obama realize that a genius in one area may be a dunce in another?
What we need today is for the world’s leading statesmen to stop pussyfooting and to unite in nudging Obama towards a successful conclusion of the Doha Round. That alone would provide the counterweight to the forces that pull him in the wrong direction. It is still not too late.
Protectionism in Argentina
Keep out
South America’s two biggest economies are imposing heavy-handed trade restrictions. Our first article looks at Argentina, our second at Brazil
BUENOS AIRES
IN RECENT years BlackBerrys have become an essential component in the young professional’s toolkit in Buenos Aires. But if you failed to buy one before the southern-hemisphere winter, you may be out of luck. “We have trouble getting them,” says an assistant at a Claro mobile-phone store in posh Recoleta. “We haven’t had them for months,” is the answer at a Personal shop in leafy Palermo. Movistar advertises the 8520 model on its home page, but the phone is in fact sold out.
At South America’s southern tip, the missing BlackBerrys are almost ready to roll off the line. On October 3rd Brightstar, a multinational manufacturer, will begin importing kits of the phones’ parts to its factory in Tierra del Fuego, the normal base for cruise ships going to Antarctica. Some 300 workers will brave the frigid austral fog to assemble the pieces and put them in locally sourced packaging.
Making BlackBerrys south of the Magellan strait will cost $23m upfront, plus $4,500-5,000 a month per worker, some 15 times more than in Asia. But the government touts the project as a triumph of its trade policy. It will help cut foreigners’ share of Argentina’s mobile-phone market from 96% in 2009 to a forecast 20% by the end of 2011. “We have a domestic market with growing demand. The goal is to supply it with local labour and production,” said Débora Giorgi, the industry minister, when the deal was announced.
Argentine manufacturers have been booming ever since the 2001 crash. Over most of that period, a cheap peso has ensured their competitiveness. But since 2005 inflation has been in double digits. As the trade surplus has dwindled, Cristina Fernández, the president, has beefed up her industrial policy. According to Global Trade Alert, a database of restrictions on international commerce, Argentina now imposes more trade limitations deemed “harmful” than any country save Russia.
Even before Ms Fernández’s late husband, Néstor Kirchner, became president in 2003, Argentina was taxing farm exports. The policy was meant to raise revenue. But the Kirchners later justified it as a way of discouraging commodity exports in favour of manufacturing. In 2008 Ms Fernández sparked protests by trying to raise taxes on soyabeans, Argentina’s chief export, and lost a congressional vote. Since then the country has restricted maize and wheat exports, leaving farmers with an estimated 4m tonnes of maize they can neither sell at home nor ship abroad. Beef exports have also been limited, which caused ranchers to stop raising cattle and led to lower leather output and beef consumption. Many foreign leather firms, such as Italy’s Italcuer, have left.
On the import side, Argentina cannot raise tariffs on its own because it belongs to the Mercosur customs union. So it is resorting to informal tools. Its main method is “non-automatic licensing”, a tactic recognised by the World Trade Organisation that lets countries delay imports for 60 days.
Argentina has made no pretence of honouring that time period. In January it expanded the list of products requiring licences from 400 to 600. It was a limit on phone imports that led Research in Motion to hire Brightstar to make BlackBerrys in Argentina (tax incentives then led the firm to Tierra del Fuego). Other affected goods include toys, pharmaceutical ingredients, tyres, fabrics, leather and farm machinery. On September 15th Argentina blocked imports of books, and over 1m piled up at the borders. Imports of Harley-Davidson motorcycles are frozen until 2012.
For firms that refuse to (or cannot) move production to Argentina, the government offers another option: deals to export goods worth at least as much as a company’s imports. In January customs officials stopped letting Nordenwagen import Porsches. Its cars languished in port for three months before the firm succumbed to a deal. Since its owners also possess Pulenta Estate, a vineyard, they agreed to launch a new line of mass-market wines for export, erasing the family’s trade deficit. They are also considering canning fruits. “It’s not the same margins as fine wines, but it takes time and investment. We’re trying to make it profitable,” says Eduardo Pulenta, the company’s export manager. “We’ll keep working to import cars. That’s what we know how to do.”
Copying from Brazil, the next target of Argentina’s new protectionism will probably be land. In April the government put forward a bill to cap total foreign landholdings at 20% of the country’s territory, and to stop any individual from acquiring over 1,000 hectares (2,471 acres). It makes no exemption for technology transfers. And it counts any firm with over 25% foreign ownership as an outside buyer, forcing the government to track every trade in the shares of public companies near the limit. Investors in mining, which many Argentines tout as the “new soyabeans”, are nervous. The bill has not been approved. But in next month’s election Ms Fernández is expected both to win again and to increase her party’s share of seats in Congress.
The net effect of these policies is hard to measure. Since 2005 imports have grown faster than exports. But that gap might have been bigger without the trade limits. The industry ministry says Argentina has substituted $5 billion of imports a year since 2009 (1.4% of GDP). Local consumers bear most of the cost, although some will fall on taxpayers now that the government is offering loans to exporters at negative real interest rates. Marcelo Elizondo, head of the UCES business school in Buenos Aires, says the interventions have affected the trade balance only slightly. “But it’s a deterrent,” he says. “It’s a general message for everyone who wants to import that it will be expensive and complicated, and you’re better off producing here.”
Climbing greenback mountain
Reserve currencies
Climbing greenback mountain
The yuan is still a long way from being a reserve currency, but its rise is overdue
AT THE FLAGSHIP store of Yue Hwa Chinese Products in Hong Kong customers can find exotic and everyday items from mainland China without having to cross the border. The offerings include silk brocades, sandalwood carvings, Sichuan peppers and traditional Chinese remedies such as ribbed antelope horns. Horn shavings, boiled in water, are said to quieten the liver and quell fevers.
Feverish visitors from the mainland can even pay for their shavings in their own currency, the yuan. The store charges 2,660 yuan ($416) for a whole horn, at an exchange rate of 1.1 Hong Kong dollar per yuan. Nearby money-changers offer a better rate, but some Chinese visitors prefer the convenience of using their own money. That way they can still get a late-night snack at the 7-Eleven after the money-changers have closed.
That is how, not long ago, the yuan set out on its career as an international currency. It crept into Hong Kong in the wallets of mainland visitors. The trickle across China’s borders quickened last year when the government allowed a broader range of Chinese firms to settle imports and exports in yuan. In the same year it set these offshore yuan free. Outside the mainland, the yuan could be transferred between banks, borrowed, lent and invested, just like any other currency.
This offshore experiment is, for many forecasters, a first tentative step towards making the yuan a fully fledged reserve currency to rival the dollar and the euro. But China’s policymakers are in two minds, as they tend to be when it comes to freeing finance. Restricting the flow of money into and out of China protects the country’s immature banking system. When Japan sanctioned the international use of the yen in the 1980s it set the stage for a damaging property bubble.
On the other hand China hates having to rely on the dollar. Officials are troubled by the Federal Reserve’s notably loose monetary policy and by America’s rapidly rising public debt. They fear that stimulus measures put in place to revive America’s flagging economy will sooner or later generate a burst of high inflation and weaken the dollar. That would hurt holders of US government bonds, including China. Around $2 trillion of its currency reserves of $3.2 trillion are in dollars, mostly in bonds. On August 5th America lost its triple-A credit rating from Standard & Poor’s because it had failed to come up with a credible plan to cap its public debt. China’s official news agency, Xinhua, immediately called for a new reserve currency.
Such calls have been made before, during bouts of dollar weakness in the late 1970s and mid-1990s, but the dollar still holds the privileged position in the world’s monetary system it has occupied since the second world war. It faces no immediate challenge to its status, notwithstanding the debt downgrade, because there are few good alternatives. Despite a long and steady decline in its value against other currencies, it still accounts for 60.7% of the world’s $9.7 trillion of currency reserves. That is around three times America’s weight in the world economy as measured by GDP. The dollar’s closest rival, the euro, accounts for 26.6% of the world’s reserves.
How does one currency maintain such dominance? Textbook economics says domestic money has three uses: as a unit of account against which the value of goods is measured; as a medium of exchange; and as a store of value used to conserve spending power for a rainy day.
The won fulfils these roles in South Korea; the yuan does the job in China; and the dollar provides these services in international markets as well as in America. It is the unit of account for commodities such as crude oil that are traded globally. Most trade that is invoiced in a currency other than those of the trading partners is quoted in dollars. And because the dollar is the benchmark for world prices and is used to settle cross-border trades, it makes sense for countries to keep stores of dollar reserves, both as a float and to bolster confidence in their own currencies.
The demand for reserve currencies is a boon to their issuers. Around $500 billion of America’s currency is used outside the country’s borders. Some of this cash is used to lubricate dollar-based international trade. But much of it greases the wheels of cross-border crime such as drug trafficking: crooks need a unit of account, a medium of exchange and a store of value just like legitimate businesspeople.
Indeed, a reserve currency might almost be defined by its appeal to criminals. Of the €900 billion-worth of euro notes in circulation, a third by value comes in the form of the pink and purple €500 note. Cynics say it was issued to capture a share of the international black market from the dollar, for which the largest denomination is $100. An illegal stash of €500 bills would be lighter, easier to conceal and easier to count. The €500 note was withdrawn by banks in Britain after police said its main use was in organised crime. That is a compliment of sorts to the euro. When Somali pirates or Russian gangsters demand payment in yuan, it will be the surest sign that economic power has shifted to China.
The cost of printing $500 billion-worth of notes is negligible compared with the value of the goods and services they can command. In order for those notes to circulate outside America, they must first have been exchanged for $500 billion-worth of goods and services. They represent a cost in real resources. The gap between the printing cost of banknotes and their face value is called seigniorage. Governments that print reserve currencies benefit from extending seigniorage beyond their own borders.
Issuers of international currencies also enjoy protection from currency volatility. A Vietnamese exporter selling to China is exposed to exchange-rate risk: he pays his workforce in dong, the local currency, but receives payment in dollars. If the dollar falls, so do his earnings, but his labour costs are unchanged. American exporters do not have to worry about currency mismatch because both their domestic costs and their export earnings are in dollars.
Nor has America had much need to acquire costly reserves of its own. Under the Bretton Woods system of fixed exchange rates that governed rich-country trade until 1971, members were constantly at risk of running short of dollars if their exports became uncompetitive, whereas America could always print more dollars. This was an “exorbitant privilege”, grumbled France’s finance minister at the time, Valéry Giscard d’Estaing.
Exorbitant privilege v original sin
The privileges of reserve-currency status were not confined to the dollar, though it enjoyed the lion’s share. They include being able to borrow cheaply. The dollars and euros (and, to a lesser extent, the pounds, Swiss francs and yen) that other central banks keep in reserve are mostly in the form of government bonds. The extra demand weighs on bond yields and sets a lower threshold for the cost of credit for businesses and consumers.
This part of the exorbitant privilege contrasts with the emerging world’s “original sin”, a term coined by Barry Eichengreen of the University of California, Berkeley, and Ricardo Hausmann of Harvard University for some countries’ inability to borrow in their own currencies. Borrowing in foreign currencies (as Brazil and other Latin American countries had done before the 1980s debt crisis) leaves original sinners at risk of default if their currency loses value. Trouble-prone countries have often had to keep interest rates high, even in a recession, to support their currencies and stave off default on foreign-currency debts. Hungary is a recent example of a country in this sort of trap. The Federal Reserve has never had to worry about such things.
The divide between the exorbitantly privileged and the original sinners was especially deep after the East Asian crisis of 1997-98. The lesson from that crisis was never to be short of reserves. The investment rate in emerging Asia fell, the saving rate stayed high and the excess saving was sent abroad. It marked the start of an unprecedented build-up of foreign exchange to insure against future balance-of-payments problems. The world’s currency reserves increased from $1.9 trillion in 2000 to $9.3 trillion in 2010. Much of the increase was in China.
The surge in demand for safe and liquid assets in dollars, euros and pounds pushed down long-term borrowing costs. The savings of the emerging world allowed the rich world to spend too freely, one of the deeper causes of the wave of crises that has afflicted the rich world since 2007. America’s financial markets met the global demand for “safe” dollar assets by repackaging the mortgages of marginal borrowers as bonds, which turned sour. But the resulting financial crisis hit mainly the rich world rather than the emerging markets.
Rich-world banks and investors seeking higher returns when interest rates were low had bought a lot of the ropy mortgage securities. That made room for reserve managers in emerging markets to buy more bonds backed by governments or issued directly by them. Investors were so anxious for yield that they barely distinguished between good and bad credits. Countries with large public debts, such as Greece and Italy, could borrow as cheaply as countries with sound public finances such as Germany. Windfall tax revenue from housing booms fuelled by cheap foreign credit made the public finances of Ireland and Spain look sound until recession (and, in Ireland’s case, the terrifying cost of bank bail-outs) caused public debt to explode.
Some believe the exorbitant privilege is really a curse that lures the reserve-currency country into too much borrowing or printing too much money. Over time this saps the economic and political strength that was the source of the privilege. This paradox was first noted in 1947 in a Federal Reserve paper written by Robert Triffin, a Belgian-born economist.
Under the Bretton Woods arrangement currencies were pegged to the dollar at fixed exchange rates. The dollar in turn was tied to gold at a fixed price. Triffin spotted a dilemma. A rising stock of dollars was needed to finance world trade. The more dollars were supplied, the more the currency’s link to gold would be questioned since America’s gold stocks would support an ever-larger pile of banknotes. This came to a head in August 1971 when heavy selling forced President Nixon to suspend the conversion of dollars into gold.
The Triffin dilemma is echoed in contemporary worries about the rich world’s public debts and its currencies. Easy access to credit lured the euro zone’s periphery into overborrowing. Greece is insolvent, Ireland and Portugal are not far off. For reserve currencies, what is safe is in conflict with what is convenient, argues Stephen Jen of SLJ Macro Partners, a hedge fund, adding that “the euro is efficient but it’s not safe.” Reliable and liquid repositories for rainy-day saving are scarce, which is why reserve managers and bond investors continue to push money into the Treasury market. But this tempts America to overextend itself, amassing debts it may one day struggle to service.
As America’s weight in the global economy drops, supplying the world with most of its reserve currency needs may become too big a job for the country. In his recent book, “Exorbitant Privilege”, Mr Eichengreen argues that a reserve-currency system will emerge in which the dollar, the euro and the yuan share the privileges and the responsibilities. That would make the world a safer place, he reckons, because each issuer would nudge the others towards financial and fiscal discipline.
It is not obvious that one currency needs to play a pre-eminent part. In its heyday, sterling was rarely as dominant as the dollar has been since it took over. On the eve of the first world war the pound accounted for only around half of all reserves: most of the rest was in French francs and German marks. By 1924 more reserves were held in dollars than in sterling.
The dollar is flawed, but so are the candidates to displace it. The euro has no single fiscal authority standing behind it. Nor is there a single issuer of sovereign debt to match the size and liquidity of the market for US Treasuries—although the bonds issued by the European Financial Stability Facility (EFSF), the euro area’s emergency bail-out fund, may foreshadow a single euro bond backed by all its members. For all its shortcomings, the euro still accounts for a quarter of the world’s reserves. Even as the region’s sovereign-debt crisis has deepened over the past year, its currency has gained ground against the greenback.
The speed at which the dollar rose to prominence suggests that the yuan might be an international currency as soon as 2020, says Mr Eichengreen. The greenback overtook sterling in reserves barely a decade after the founding of the Federal Reserve in 1913 as the backstop of dollar liquidity. The Fed pushed the dollar by fostering a liquid market for trade acceptances, the credit notes used to fund shipments. By the mid-1920s more trade was carried out in dollars than pounds and more international bonds were issued in New York than in London.
However, the obstacles to the yuan becoming a reserve currency are bigger than those faced by the dollar in 1913. At that time America was already a trusted storehouse for capital, a democracy where the rule of law was firmly established. China’s recent history is less reassuring, so it will take a while before foreigners feel secure keeping their savings in yuan. The currency would have to be fully convertible so that investors could park their yuan reserves in assets of their choosing and redeem them when needed.
This in turn would require China to allow capital to move freely across its borders, which it has been reluctant to do. In recent years it has eased restrictions on residents taking capital out of the country; for example, more foreign takeovers by big Chinese firms have been allowed to go ahead. But foreigners face formidable barriers to bringing money into China because the government is reluctant to cede control of the yuan’s value or of domestic bond yields to the ebb and flow of foreign capital.
China has taken some baby steps toward setting the yuan free. It has allowed trade in goods to be invoiced and paid in yuan. The proceeds can be put to work in a fledgling offshore yuan market in Hong Kong with restricted links to the mainland. Trade settlement in yuan has grown rapidly, reaching 600 billion in the second quarter of 2011 (around 10% of total trade), according to the People’s Bank of China.
So far such trade settlement has been a rather one-sided affair: most has been for imports (ie, Chinese firms paying foreigners in yuan for supplies). Few of China’s exporters are willing or able to demand yuan from foreign customers, though those customers should not find it hard to get hold of the currency. China’s central bank has set up swap agreements with the central banks of many of its emerging-market trading partners, ranging from Singapore to Kazakhstan, allowing foreign banks to supply yuan to their customers.
By the end of July yuan deposits in Hong Kong had swollen to 572 billion. The IMF said in July that 155 billion of yuan-denominated bonds (so-called “dim sum” bonds) had been issued in Hong Kong since the market was set up, many by branches of mainland banks. Issues by non-financial foreign companies are less common, in part because firms still need permission to bring the cash raised into China. There have been some high-profile deals, though the bonds have short duration. McDonald’s sold a three-year bond last year. Caterpillar, an American maker of earthmoving equipment, has issued a couple of two-year bonds so far. A recent sale in Hong Kong of 20 billion yuan of government debt was heavily oversubscribed.
The offshore yuan market has quickly come up from nowhere and China’s central bank has continued to strike bilateral swap deals to keep it growing. But it is a big leap from being a currency in which a chunk of your own trade is settled to being a fully fledged international currency, and a further jump to reserve-currency status. Only a small fraction of the world’s $4 trillion in foreign-exchange deals each day are for trade settlement. The bulk of currency dealing is for hedging or related to trading in stocks, bonds and other assets. The dollar is one side of 85% of all currency trades, according to the Bank for International Settlements (see chart 2). The yuan accounts for just 0.3% of turnover.
Yet the exorbitant curse will catch up with the dollar one day and the yuan is its most likely replacement. China’s economy is second only to America’s in size and is likely to overtake it soon. It is already the world’s largest exporter. And it has net foreign assets of $1.8 trillion, whereas America owes a net $2.5 trillion to foreigners. Only Japan is in a stronger position.
A global yuan?
Reserve-currency status depends on these three gauges of economic dominance—size of economy, exports and net foreign assets—says the Peterson Institute’s Arvind Subramanian. By 1918 America had the world’s biggest economy and would soon be its largest creditor and exporter; within a few years the dollar also had the lion’s share of the world’s foreign-exchange reserves. If that precedent is anything to go by, the yuan should soon become the main global reserve currency, and not merely a junior alternative to the dollar or the euro.
The rewards to China of opening up fully to foreign capital trump the risks, reckons Mr Subramanian. Turning the yuan into a reserve currency offers China a way out of its mercantilist growth model, which has run its course. Demand for yuan reserves would push up the exchange rate, discourage exports and give China’s consumers greater purchasing power. A push for reserve status for the yuan would go hand in hand with the development of China’s financial system—a necessary step to support the small- and medium-size businesses it needs to serve its domestic market, and for many other reasons. For China to escape the middle-income trap, it will have to let go of the yuan.
The rich world’s monopoly on reserve-currency privileges has given it first call on the world’s precautionary savings. For now, it is clinging on to its privileges. But rivalry from developing countries in the markets for oil and commodities is already exacting a price from the West.
Tobin taxes and audit reform
The blizzard from Brussels
The Economist | LONDON
THE Europeans can rouse themselves occasionally. Two initiatives emerged from the European Commission this week, one to improve the audit profession, the other to tax financial transactions. The first raises serious questions about how best to protect investors; the second serious questions about policymakers’ priorities.
Auditing first. A leaked proposal from the directorate-general for the European Union’s single market suggests that Michel Barnier, the commissioner in charge, thinks the industry needs reform from top to bottom. The proposal envisages forcing clients to change auditors every so often, so beancounters and bosses do not get too cosy (although the evidence on whether this helps is weak). It also wants two auditors to work together on the accounts of especially important companies.
But by far the most radical proposal in the leaked draft would be to forbid audit firms from providing non-audit services. In America providing most non-audit services to audit clients is already forbidden, under the Sarbanes-Oxley financial reform passed in the wake of the meltdown of Enron, an energy-trading company. In some European jurisdictions, selling both audit and (say) consulting to a client is still permissible. Mr Barnier’s leaked proposal would not simply go down the route of Sarbanes-Oxley and forbid this. It would force the creation of pure audit firms.
This would be a huge change to the business model of the “big four” audit firms: PwC, Deloitte Touche Tohmatsu, Ernst & Young and KPMG. These are technically networks of firms, rather than single global entities. All of them have seen robust growth in their consulting businesses in recent years, to around a third of total revenues for most of them. In the year ending in May 2011, for example, Deloitte’s consulting business grew by 14.9%, against 4.7% for the audit business. Forcing the breakout of pure audit firms would separate an exciting and growing business from a plodding but vital one, in Europe at least.
Mr Barnier’s proposals are still in draft form, and may change before their formal unveiling in November. After that, the EU’s Council of Ministers as well as the European Parliament will take a crack at modifying them. But in taking on concerns that auditors are not performing their crucial function in public markets as well as they might, the commission deserves credit.
Kind words are far harder to find for the commission’s other big idea. On September 28th it formally proposed a financial-transactions tax (FTT), otherwise known as a Tobin tax—after James Tobin, a Nobel economics laureate who put forward a similar scheme for currency markets in 1972—or a Robin Hood tax by those who want to use the proceeds for aid purposes.
If adopted, the levy would be applied from January 2014: all securities transactions involving an EU-based financial institution would be taxed at 0.1% and all over-the-counter derivatives deals at 0.01% of the notional principal amount. There are several exemptions, including primary equity and bond issues, spot foreign-exchange deals and deals involving central clearing-houses. Retail products such as mortgages will also be exempt. But the commission thinks that the proposal would still capture around 85% of all inter-dealer transactions in Europe, raising an estimated €55 billion ($75 billion) for EU and national coffers.
The big flaw in the plan is that taxable transactions are likely to migrate outside the EU. Although the commission bills its proposals as the first step towards a global agreement, it is hard to discern sweeping international enthusiasm for the idea. The commission’s own numbers, partly based on an unhappy Swedish experiment with an FTT from 1984-91, suggest that derivatives traders could relocate as much as 90% of their business outside any tax zone.
That gives Britain in particular, as the home of Europe’s dominant financial centre, little incentive to adopt the plan (which requires unanimous support). Indeed, euro-zone ministers have said they may just press ahead with their own FTT if they cannot win EU-wide agreement—which could mean extra business for London from the likes of Frankfurt and Paris if Britain vetoes the idea.
Die-hards may not care. They argue that an FTT is a fair way of recouping some of the costs of bailing out financial institutions during the past three years. They also believe that it would be no great loss if the tax drives away “high-frequency traders”, ultra-fast automated traders whose margins are razor-thin. But that assumes the FTT will not simply be passed on to end-customers, either directly by affected institutions or as reduced liquidity leads to wider bid-ask spreads. The commission’s own assessment suggests that the FTT could reduce long-run GDP in Europe by anywhere from 0.5% to 1.8%. At a time of economic frailty, that seems perverse.
The Haqqani network
Snake country
The Pakistani army’s complex relationship with jihadists
ISLAMABAD |
CLUTCHING a glass of distinctly un-Islamic whisky, a retired senior Pakistani official explains at a drinks party in Islamabad, the capital, that his country has no choice but to support the jihadist opposition in Afghanistan. The Indians are throwing money at their own favourites in Afghanistan, he says, and the Russians and Iranians are doing the same. So Pakistan must play the game too. “Except we have no money. All we have are the crazies. So the crazies it is.”
Chief among the crazies is the Haqqani network, an Islamist militia with a 30-year history of fighting foreign occupations of Afghanistan. In mid-September the network struck in the heart of Kabul, launching a 20-hour assault on the American embassy and other targets. A week later, the leader of President Hamid Karzai’s efforts to make peace with the insurgents, Burhanuddin Rabbani, was assassinated in Kabul. The suicide bomber is suspected by some to have been linked to the Haqqanis.
Just after this Mike Mullen, chairman of America’s Joint Chiefs of Staff, declared that the Haqqani network was a “veritable arm” of Pakistan’s Inter-Services Intelligence (ISI) spy agency, part of the country’s all-powerful army. A raft of other American officials, incensed by recent attacks on Western targets in Afghanistan, joined the verbal assault on Pakistan.
Perhaps because he is retiring this week, Admiral Mullen seems to have overstated things. It is not clear that the Americans have, as he claimed, a smoking gun linking the ISI to the ordering of strikes in Afghanistan. More to the point, America’s abilities to influence Pakistan’s army are limited. Admiral Mullen’s comments are likely only to worsen relations with Pakistan, and to fuel anti-American sentiment among ordinary Pakistanis.
The Haqqani network is based in Pakistan’s North Waziristan region, part of the Federally Administered Tribal Areas (FATA), which border on Afghanistan. The border is porous. American officials say that the district capital, Miranshah, houses compounds used by the Haqqanis under the noses of Pakistani intelligence. Pakistan angrily denies that it supports the Haqqanis, whom it po-facedly insists are based in Afghanistan, not Pakistan at all.
In an Afghan or Pakistani tribal context, Jalaluddin Haqqani (pictured), founder of the group, is a supremely successful guerrilla commander, once lauded by America for his services as a CIA-backed mujahid repelling the Soviet invasion of Afghanistan. Mr Haqqani, now said to be bedridden, was a minister for border and tribal affairs when the Taliban ruled Afghanistan. To their supporters in Afghanistan today, the Haqqanis are fighting an occupying force, just as they did the Soviets before, says Saifullah Mahsud, of the FATA Research Centre, an independent think-tank in Islamabad.
The chief help that Pakistan gives the Haqqanis takes the form of sanctuary, and perhaps guidance. Little suggests any direct Pakistani role in Haqqani operations. Pakistan’s generals believe that, with an unfriendly government in place in Afghanistan, they need proxies to represent their interests there. Pakistan prefers to make common cause with ethnic Pushtuns, who straddle the border, to guard against Tajiks, Uzbeks and Hazaras, whom the generals regard as close to India, their arch-enemy. The Pakistani army’s paranoia is fed by scenario planning in which a hostile Afghan government, with a growing army now trained and equipped by the Americans, joins India to mount a two-front war against Pakistan, sandwiched between the two countries.
To the ISI, which has had a relationship with him since the 1970s, Jalaluddin Haqqani is a more reliable proxy than the Taliban ever were. Since Pakistan formally abandoned its support for the Taliban under great American pressure following the September 11th attacks, distrust has reigned on both sides. The Haqqani network has demonstrated its willingness to hit targets in Afghanistan that please Pakistan’s military men most—especially Indian ones, including its embassy, in 2008, and Indian construction companies.
The Haqqani and the Taliban are operationally separate, with the first handling eastern Afghanistan and the second focusing on the south. But the Haqqani network appears to recognise the Taliban leadership, based in the Pakistani city of Quetta, as the authority guiding the insurgency. If the Taliban reconciled with the government in Kabul, says Mr Haqqani’s son, Sirajuddin, not entirely convincingly, his group would too.
Amazingly, America has until now not designated the Haqqani network as a terrorist organisation. Meanwhile, it will probably hope to increase missile strikes in North Waziristan by its drone aircraft. The drone campaign has been less successful against the Haqqani than against other groups, especially al-Qaeda. Perhaps Pakistan does not share much intelligence on the Haqqanis. However, America will be pulling its front-line troops out of Afghanistan by the end of 2014. Pakistan will have to live with the jihadists it promotes.
Will Hillary Clinton Challenge Obama Next Year? By Bob Weir
Then, the country witnessed his wife on national television saying that people were telling lies about her husband. "I'm not some woman standing by my man like Tammy Wynette," she said, trying to save the philanderer whom she viewed as her key to political prominence.
If she had told the voters what she already knew about Bill's lascivious liaisons, his ambitions would have ended in Little Rock. But Hillary is not the type of woman who cares about such mundane matters as marital fidelity; she, like Bill, is a child of the "free love" era that dominated the 1960s. The pursuit of power is the aphrodisiac of choice for this pair of ruthless hucksters. After Bill's two terms in the White House, they moved to New York, pulling a Bobby Kennedy type of carpetbagger caper, so Hillary could run for the U.S. Senate.
The rest seemed easy. Hillary would be a shoo-in for president in 2008. However, as happens in some of the best-laid plans, suddenly, the devious duo got hit with Hurricane Obama. The fact that this upstart community organizer from Illinois, with a mere two years in the Senate, could wrench the nomination away from a woman who felt she was the heir-apparent to the throne seemed to indicate that the country had had enough of the Clintons. Begrudgingly, Hillary accepted the secretary of state position, while plotting the demise of the man who had robbed her of her place in history as the first female chief executive, while securing his own place as the first African-American to achieve that lofty goal.
Like something out of a Shakespearean tragedy, the Brutus and Cassius conspiracy began to chip away at the Caesar whom the Clintons felt an overwhelming compulsion to eliminate. They hid their vitriolic resentment well for almost three years, rejecting any notion that Obama should be challenged for the nomination in 2012.
But now it seems the time is right to strike a blow for Hillary. While she appears to remain above it all, Bill is making noises like a supporter of a new candidate. Recently, he took a shot at Obama's jobs plan, calling it "confusing" and saying that the president and Congress shouldn't be raising taxes or cutting spending. The Clintons know that Obama's hope for reelection is tied to the economy, so, they put those malevolent minds together and not so subtly undermined his desperation tactic. With a suspicious public watching the scenario unfold, Bill was asked if he would like his wife to be president. His response was that he has always believed she is one of the brightest people of her generation. Couple that with the recent poll that said Hillary is the most admired woman in America, and it's easy to imagine the scenario being planned.
There's no doubt that the Clintons have a lot of ears on the ground in the Democratic Party, which is facing a scary election in 2012. If the president's poll numbers are this low (or lower) by January, there will be many senators and congressmen worried about holding onto their seats. If they believe that Obama will hurt their chances, the pressure will be on him to bow out for the good of the party. In 1968, during the height of the Viet Nam War, LBJ, whose poll numbers were in the basement, told the nation that he would not be running for reelection. Could history repeat itself in 2012?
One indication could be the recent comments by two of the Clintons' most prominent strategists. James Carville and Mark Penn said Obama should learn from the centrist policies Clinton embraced in 1996. In addition, during the BP oil spill, Carville was stridently critical of the president's actions regarding the cleanup: "Man, you got to get down here and take control of this! Put somebody in charge of this thing and get this moving! We're about to die down here!"
Keep in mind that Hillary, as secretary of state, serves at the pleasure of Obama. Her husband would not be attacking the central theme of Obama's reelection strategy without her approval. Carville and Penn wouldn't be criticizing Obama unless they got the nod from the former First Lady. While she keeps her slacks clean, exuding an air of nobility, Hillary has others laying the groundwork for her ascension. These are crafty politicians who keep their eyes on the goal. Patience is not their strong suit, so waiting for 2016 was never part of the plan.
Romney the Electable?. By Aaron Reber
This is a bad joke.
Now, I'm no beltway "expert." However, I've had the opportunity to work on campaigns ranging from U.S. Senate down to City Council, and I can see the problems with Mitt Romney. Let us for a moment consider the attributes a candidate must have to be truly successful, and you will quickly see why Mitt is one of the least electable candidates we have for the general election.
Charisma and the Ability to Create Personal Connections
Creating personal connections with the voters is what wins you an election. Period. The average voters do not think like we issue-oriented types do. People first vote based upon who they perceive shares their values and creates the best personal connection with them. Ideology is a distant second. Mitt Romney couldn't create a personal connection with a Labrador puppy. The man is robotic. He is so slick that one gets the feeling you could feel the grease if you shook his hand. John Stewart said it best when he stated that Romney "looks like he stepped out of a Viagra commercial." Counting on this man to connect with voters is a non-starter.
A Politician's Record and Credibility
A politician's record is crucial to his or her candidacy. It can be used to create or crush one's ability to connect with voters. A fine case in point is Kerry and the swift boat veterans. In 2004, Kerry's inability to connect with voters was bad enough. However, because his record didn't seem unpalatable to the general public, he was still being held afloat by dissatisfaction with Bush's policies -- that is, until the swift boat veterans came onto the scene. Overnight, Kerry's record in Vietnam, initially seen as a strength, was used to obliterate his credibility.
What exactly do you think will happen with Romney and RomneyCare? How does a man attack ObamaCare when his own plan was the basis for ObamaCare? Tying the already deeply unpopular ObamaCare to job-destruction is our best line of attack. Yet with Romney as the nominee, Obama will be able to dodge it in the first debate. Just think of Obama's response to Romney's charge against ObamaCare. "Well Mitt, your plan was the basis for my health care bill." Winning!, as Charlie Sheen would say, and just like that, Romney would lose his ability to comment on the issue. Tie that to the fact that Mitt has flip-flopped on just about every other issue the country cares about, and you have yourself the Republican John Kerry.
Fund-Raising, Wealth, and Campaign Structure
I have to hand it to him: Mitt can raise a lot of money. He has his own personal wealth to put into the campaign, and he has a fine campaign team. However, the fact is that no matter who the nominee is, he or she will have the money necessary to get the message out. Furthermore, even if Romney's campaign team is the best there is, it can be put to work for the eventual nominee if he loses. Also, do we really want a nominee who can flaunt that much of his own cash during an age where politicians seem so out of touch with reality? Won't bulldozing his beachfront mansion to build another, bigger mansion rub the electorate the wrong way? Just a thought.
Ideology and Exciting the Base
There is no such thing as being too conservative or too liberal to win a general presidential election. This was proved by both Ronald Reagan and Barack Obama, respectively. Voter turnout is what truly decides an election. If a candidate is trailing in the polls 99% to 1%, but only that 1% who approves of him turns out to vote, he will win with 100% of the vote tally. This of course is an absurd example, but I chose it to make a point. You must turn out your base if you plan on winning an election. You do not ever choose a candidate based upon what the fickle independents may or may not want. You choose only the wording for your messaging based on how independents will receive it. Again, take Reagan and Obama. Both men come from the far poles of the American political spectrum. Both revved up their base, and both chose their wording in the general election to make their positions palatable to the politically ignorant.
The election in 2008 was a classic example of what happens when you have one candidate, Barack Obama, who excites his base, and another candidate, John McCain, who deflates his base. John McCain was supposed to be this bipartisan problem-solver that the middle would swoon over. What happened? McCain depressed his own base so much that he lost my home state of Indiana. Indiana had not voted for a democrat since LBJ! What's more is that McCain lost the independent vote in an avalanche. Why? Independents follow strength and conviction. They will see right through some pandering politician, just as they will see right through Mitt Romney. It is too obvious that he is saying only what he thinks will get him elected. Just watch him speak to the Tea Party. It's such obvious pandering that it is wince-inducing. Romney's flip-flopping and the pictures of him with Ted Kennedy signing RomneyCare into law will only suppress voter enthusiasm among the base, and it will do nothing to win independents.
What is that, you say? Anger against Obama will be more than enough to turn out the base? I'm sorry, but I again must refer you to John Kerry. The liberal base hated George W. Bush. Kerry still lost. Positive emotion trumps negative emotion. Why do you think Obama is so blatantly attempting to appease his base now? He knows that it is his only hope. You win elections by starting with your base and then adding to your coalition until you hit that 50+1% to win.
The only people we have telling us Mitt Romney is the most electable candidate are the inbred RNC types who got us into this mess four years ago. Somehow I just don't trust Tim Pawlenty, the first man into the presidential race and the first man out, to understand what it takes to be electable. Of course, it is possible that the economy will be in an official recession next year, and it won't matter whom we nominate...but do we really want to take that chance? Do we really want the guy who planted the seed of ObamaCare entrusted with the job of removing it? Let us all do ourselves a favor and not nominate the Republican John Kerry. Find the man who can beat Romney and rally behind that man, or, absent another economic meltdown, we'll have four more years of Obama.
Euro Debt Crisis: Can't tell the players without a scorecard. Rick Moran
This article in the Economist seeks to name the players and institutions that have the responsibility over the next few months of avoiding economic catastrophe:
Germany's slow response also has something to do with the personality of the chancellor, Angela Merkel. She is a physicist by training, methodical to a fault and ultra-cautious; faced with conflicting advice, her instinct is always to put off a decision. She may be fully committed to the project, but for her Europe is a cost-benefit calculation rather than historical destiny.
Not so her finance minister and one-time rival, Wolfgang Schäuble, a disciple of the ex-chancellor, Helmut Kohl. Mr Schäuble, who is wheelchair-bound since an assassination attempt in 1990, does not demur when interviewers describe him as the cabinet's "last European". His relations with Mrs Merkel have not always been easy. She became chairman of her Christian Democratic Union in 2000 after Mr Schäuble was forced out of the job over his involvement in a party-financing scandal. These days the Merkel-Schäuble dynamic is watched as closely as bond spreads. At least once, the chancellor has countermanded a deal struck by her finance minister. Mr Schäuble is hawkish on the need for fiscal discipline and may be readier than Mrs Merkel to push Greece into a default, yet he is also more prepared for greater integration in the future, including joint Eurobonds, which the chancellor opposes.
Mrs Merkel may be lacking high-quality advice. Her newish economic adviser is Lars-Hendrik Röller, known for his writings on competition rather than high finance. He replaced Jens Weidmann, a long-serving adviser with an economics PhD who took over at the Bundesbank in May. Mr Schäuble, for his part, has Jörg Asmussen as his Europe man, a Social Democrat kept on for his experience of financial fire-fighting. But Mr Asmussen is heading for the ECB, where he and Mr Weidmann-it is hoped-may be more flexible than their predecessors, Juergen Stark and Axel Weber. His replacement, Thomas Steffen, was the chief insurance regulator.
There are 17 countries that have to approve any changes to the central bank or other institutions dealing with the Euro. The question: Is this set up functional enough, efficient enough, and nimble enough to respond to the crisis?
We'll find out in the next few months.
Romney and Rubio in 2012 By Mercer Tyson
In the September 22 Republican presidential debate, Michele Bachmannn declared it inevitable that Obama would lose to any Republican, and therefore it was time to get a true conservative instead of a moderate. Bachmann is wrong.
Don't get me wrong: I share Bachmann's frustration with the political process in the U.S. that has led us down the long, slow, painful path of socialism. I also agree that we could use a good, strong constitutional conservative in the White House. As appealing as her call is to take the big, bold step, the 2012 election is about one thing and one thing, only -- making sure there is a Republican in the White House come January 2013. Even if we believe we can beat Obama with almost anyone, it's not worth taking the gamble of putting up someone with anything less than the best possible chance. At this point in time, the best chance is Mitt Romney.
The problem with Bachmann's statement is this: it ain't over 'til the fat lady sings, and she ain't singin' for another fourteen months. Anything can happen. As unlikely as it seems, unemployment might even start dropping. If that happens, Obama may have a fighting chance. Most analysts seem to think that undecided voters tend to make up their minds by October of election year -- one year from now. But we have to choose our candidate well before that. If we don't go with the most electable, a shift in the political winds of Washington between the GOP convention and election day could spell disaster.
But there is more. We don't want a candidate who is likely to fire Dems up. Republicans are fired up enough as it is. We will go to the polls. GOP turnout will be high. That's not a problem. The worst thing we can do is nominate a candidate to mobilize the opposition. I submit that, of the frontrunners to date, Romney is the least likely to get the left mobilized.
One reason that's important is because the outcomes of the Senate and House elections (as well as state houses and local elections across the country) may rest on partisan coat-tailing in the presidential election. Even if we win the presidency, getting the Dems revved up or alienating independents could result in losing seats in Congress (especially the Senate) that we might have won. There may be a few Dems who would vote with the GOP, but it would be nice to have a 60-seat majority so we don't have to count on it. The other critical issues such as Cap and Trade, Dodd-Frank, and the myriad of appointments to the many (too many) various federal agencies such as the EPA require that the GOP wins the presidency and has substantial majorities in congress. And let's not forget the possibility of a retiring Supreme Court justice.
Sure, there will be criticism of Romney's Mormon faith, which isn't to be taken lightly. Of course, the Democratically partisan MSM won't come out and say, "His religion is a problem," but the insinuation will be there. My view, however, is the non-secular independent and moderate voters who do not want religion as part of politics will react more favorably to a mild-mannered Mormon than to an outspoken evangelical.
I also believe that the public largely doesn't want to be duped again into voting for an inexperienced candidate. Sure, policies are the main issue, but leadership ability is valuable as well. And Romney presents himself as a leader. He looks presidential. Granted, there is general displeasure with Washington insiders, but look what happened by electing a non-Washington guy. Romney is not a Washington guy, but he is definitely "establishment" in appearance.
And then there is the vetting process. You can absolutely bet your Christmas turkey that the Republican candidate will be investigated, slandered, and turned completely inside-out -- both by the media and the DNC. Romney has been through considerable scrutiny, and virtually nothing has turned up. It's unlikely that anything will be found that will sway the independents negatively. The truth about the other candidates is that we just don't know.
Not the least important is debating ability. Romney, while reasonably forceful and clear, does not come across as radical. He is attractive and presidential, and he carries himself well. And all he has to do is not lose a debate. Bachmann and others may be able to hit a home run, but they are also more likely to strike out. Look at the huge drop in Perry's numbers after he stumbled in the Fox/Google debate. Home run is good, but not necessary. Strikeout is bad. So far, Romney has presented himself well in the debates and has indicated he can stand up to whatever comes his way, à la Bill Clinton. A little Teflon is a good thing to have.
Rounding this out, Romney also has experience winning an election in Massachusetts -- not an easy task for a Republican in a staunchly blue state -- considerable business experience, and success turning around the 2002 Winter Olympics. (Here is a link to Wikipedia on this subject. The section on Romney's involvement is a short but good read, and gives some insight into Romney's character.)
As a friend of mine has stated to me many times, "R&R in 2012." Romney and Rubio is a winning ticket. In addition to the abundant positives of Romney as a presidential candidate, Marco Rubio (of Cuban descent) is the ideal man for the second slot.
It has long been my feeling that Hispanics should be mostly Republican for many reasons we don't have time to discuss here. Unfortunately, the bulk of outspoken Hispanic leaders are pro-Democrat. Rubio, in addition to being a stellar politician with the right ideas, is well-spoken, reasoned, and convincing. He might be the man to bring the Hispanic people into the GOP. He also might be the man to get the GOP to understand the Hispanic community better and move us toward them a little while bringing them towards us.
One last thing -- Herman Cain. Mr. Cain is an enigma to me. Of all the candidates, he is my favorite in many ways. His executive abilities have proven exemplary, and he brings the most creativity to problem solving of any candidate in the hunt. He is likeable and always positive. Because he is not as well-funded as some of the other candidates, however, he does not have the resources to support his theories on taxation and his other proposals, which sound good at first blush but are hard to get your arms around. For that reason, I think Mr. Cain should not be on the ticket this time around. However, he would be my first cabinet choice. Cain is creative and capable of looking outside the box for ideas and possible solutions. He is a quick study, so once inside Washington, he would be a valuable asset, and spending some time inside the halls of the administration might give him what he needs to add "POTUS" beside his name in the future.
Romney is the one to beat Obama and bring in the best overall GOP results. However, on June 6, 2012 (California primary), whoever the polls say has the best chance to beat Obama gets my vote. Period.
Friday, September 30, 2011
Obama as Demoralizer-in-Chief
So just when everyone had concluded the Chris Christie matter - saying "Great speech at the Reagan Library, but he's not gonna run for president" - the New York Post comes along with a story that says the New Jersey governor is seriously considering a 2012 run. Apparently the Reagan Library experience had a big impact on Christie, and others. He's now being urged to go for it by Nancy Reagan, Henry Kissinger, former president George W. Bush, and former first lady Barbara Bush.
According to the Post story, even Christie's wife Mary Pat is warming to the idea.
I don't have anything to add to this in the way of a forecast. But it does give me a hook to weigh in on Christie's speech. It was uplifting and inspiring. As many have commented, it was a Reagan leadership speech on exceptionalism, or "earned American exceptionalism," as the Wall Street Journal editors put it. I agree.
There are a couple a points that I want to emphasize, though.
First, Christie gets the linkage between domestic economic growth, national security, and foreign-policy influence. This was an absolute key Reagan principle.
Reagan's firing of the PATCO workers was heard around the world by the old Soviet Union. But it was Reagan's tax cuts, limited government, deregulation, disinflation (with Paul Volcker), and free-trade policies that grew the economy by nearly 5 percent annually during the recovery period of the 1980s, with nearly 20 million new jobs added. That ultimately knocked out the Soviet Union. (Throw in deregulated oil prices, too. They decimated Soviet coffers.)
Second, at the Reagan Library, Christie talked about the New Jersey model, where in a tough war against government unions and teachers, divided government worked to reform the state's pension and health benefits, cap property taxes, and hold down arbitration awards for union salaries. (Christie didn't mention this, but he also stopped the millionaire's tax in New Jersey.)
And while the governor said there was compromise on a bipartisan basis, and while he emphasized leadership in compromise several times in his speech, he noted that he balanced two budgets with over $13 billion in deficits without raising taxes.
So there's compromise, and there's compromise.
In New Jersey, Christie has set an example for the U.S. Congress. What he seems to be saying is that compromises should occur in the spending areas, with particular emphasis on entitlements and a general curbing of the public sector. That's a strong, positive message.
Third, Christie is a growth guy. He gets that. Numerous times in the speech the governor spoke about pro-growth tax reform along with entitlement reform and free trade. He came down on the side of the entrepreneur, not the government planner. And he said he'd opt for free-market reform in education. These are important policy markers if he decides to run.
Additionally, in what may have been the speech's toughest passage, Christie blasted President Obama for dividing the nation along class-warfare lines: "Telling those who are scared and struggling that the only way their lives can get better is to diminish the success of others . . . trying to cynically convince those who are suffering that the American economic pie is no longer a growing one . . . insisting that we must tax and take and demonize those who have already achieved the American dream . . . is a demoralizing message for America." (Italics mine.)
That helped make the Christie speech truly superb.
American economic psychology today is depressed and dispirited. It is, in fact, demoralized. And President Obama's contribution as a divider is a key part of this demoralization. Not the only part. There are other culprits. But a key part.
In effect, Christie has labeled Obama the demoralizer-in-chief. He is the first to do so. It was an exceptional addition to an exceptional speech.
I am not choosing sides here in the GOP primary. I am not endorsing. I am merely trying to report what I think is a very important political statement, one that should be incorporated into the various GOP campaigns and the national debate.
Governor Christie is holding President Obama responsible. No excuses. And that, by itself, is a big contribution.
Tim Geithner: The Forrest Gump Of World Finance
One almost feels sorry for Treasury Secretary Tim Geithner.
He’s a punchline in his own country because he oversees the IRS even though he conveniently forgot to declare $80,000 of income (and managed to get away with punishment that wouldn’t even qualify as a slap on the wrist).
Now he’s becoming a a bit of a joke in Europe. Earlier this month, a wide range of European policy makers basically told the Treasury Secretary to take a long walk off a short pier when he tried to offer advice on Europe’s fiscal crisis.
And the latest development is that the German Finance Minister basically said Geithner was “stupid” for a new bailout scheme. Here’s an excerpt from the UK-based Daily Telegraph.
Germany and America were on a collision course on Tuesday night over the handling of Europe’s debt crisis after Berlin savaged plans to boost the EU rescue fund as a “stupid idea” and told the White House to sort out its own mess before giving gratuitous advice to others.German finance minister Wolfgang Schauble said it would be a folly to boost the EU’s bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank.”I don’t understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense,” he said.
All that’s missing in the story is Geithner channeling his inner Forrest Gump and responding that “Stupid is as stupid does.”
...at birth?
Separated...
This little spat reminds me of the old saying that there is no honor among thieves. Geithner wants to do the wrong thing. The German government wants to do the wrong thing. And every other European government wants to do the wrong thing. They’re merely squabbling over the best way of picking German pockets to subsidize the collapsing welfare states of Southern Europe.
But that’s actually not accurate. German politicians don’t really want to give money to the Greeks and Portuguese.
The real story of the bailouts is that politicians from rich nations are trying to indirectly protect their banks, which – as shown in this chart – are in financial trouble because they foolishly thought lending money to reckless welfare states was a risk-free exercise.
Europe’s political class claims that bailouts are necessary to prevent a repeat of the 2008 financial crisis, but this is nonsense – much as American politicians were lying (or bamboozled) when they supported TARP.
It is a relatively simple matter for a government to put a bank in receivership, hold all depositors harmless, and then sell off the assets. Or to subsidize the takeover of an insolvent institution. This is what America did during the savings and loan bailouts 20 years ago. Heck, it’s also what happened with IndyMac and WaMu during the recent financial crisis. And it’s what the Swedish government basically did in the early 1990s when that nation had a financial crisis.
But politicians don’t like this “FDIC-resolution” approach because it means wiping out shareholders, bondholders, and senior management of institutions that made bad economic choices. And that would mean reducing moral hazard rather than increasing it. And it would mean stiff-arming campaign contributors and protecting the interests of taxpayers.
Heaven forbid those things happen. After all, as Bastiat told us, “Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.”
Why the GOP should embrace Mitt Romney
Rick Perry isn't up to the job. Chris Christie isn't coming to the rescue. Republicans must accept that the candidate they want is right in front of them
Attention, Chris Christie fans. If you are looking for a Republican nominee who could actually do the job of president, who does not repel independent voters, who can survive a 90-minute debate without saying anything foolish, why the hell not Mitt Romney?
For three years, Republican activists, strategists, and donors have tried to find a plausible alternative to Romney, and again and again they have failed. For about 15 minutes, that alternative seemed at last to have materialized in the form of Texas Gov. Rick Perry.
Perry still leads the national polls and is still raising money. Yet it's hard to miss the loud hiss of air escaping this particular balloon.
So maybe it's time to reconsider the long-standing frontrunner — the candidate who was more than conservative enough for party conservatives back in 2008 — and to rediscover his good points.
1) Given the dreadful economic conditions, the Democrats will have no choice in 2012 but to run a negative campaign against the Republican alternative. Message: "We may have disappointed you on jobs, but they will take away your Medicare, Social Security, and unemployment insurance."
The best choice for Republicans and the country is the one that has been waiting there all along.
Of all the Republicans in the field, Romney is least vulnerable to this line of attack. He did not associate himself with the Ryan plan to withdraw the Medicare guarantee from people under age 55. He did not denounce Social Security as a "monstrous lie." He has not condemned the unemployed as layabouts.
Yes, Romney has vulnerabilities of his own in a general election, plenty of them. But at least he is not adding more. Perry, on the other hand, generates new raw material for Democratic attack ads almost every time he opens his mouth.
2) After the campaign comes the presidency. Who can believe that Rick Perry has the wherewithal to do that job? The global financial crisis still rages about us. Just ahead: Debt defaults in Europe. After that? Perhaps the popping of China's real-estate bubble. What else? Who knows?
The person you want in that job in such a time is someone with a deep understanding of finance and economics. The U.S. is paying dearly now for electing in 2008 a president who lacked such understanding, despite many other fine qualities. As a result (as Ron Suskind now reports), economic decision-making in the Obama White House degenerated into a struggle between advisers to sway a more or less passive president.
Romney spent much of his career in financial markets. One benefit of that experience: He is less likely to be overawed by possibly self-interested actors than a less familiar president. The U.S. has had quite enough of that.
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For Barney Frank, no Fed dissent will do
“If two people always agree,” says Ben Bernanke, “one of them is redundant.” So imagine what the Federal Reserve chairman thinks of Rep. Barney Frank’s legislation designed to dampen dissent within the Fed.
Fond of diversity in everything but thought, a certain kind of liberal favors mandatory harmony (e.g., campus speech codes). Such liberals, being realists at least about the strength of their arguments, discourage “too much” debate about them (e.g., restrictions on campaign spending to disseminate political advocacy). Now Frank wants to strip the presidents of the Fed’s 12 regional banks of their right to vote as members of the policymaking Federal Open Market Committee.
Five presidents are permitted to vote at any one time, and Frank’s bill is partly a response to three of them voting incorrectly, in his opinion. In August, the FOMC voted 7 to 3 in favor of an indefinite extension of the very low interest rates of the past three years.
Frank says he has “long been troubled” from a “theoretical democratic standpoint” by the “anomaly” of important decisions affecting national economic policy being made by persons “selected with absolutely no public scrutiny or confirmation.” It was not, however, until August that this affront to Frank’s democratic sensibilities became so intolerable that he proposed a legislative remedy.
When three regional presidents voted their skepticism about cheap money, Frank decided to act against the problem, as he sees it, which is that allowing five regional bank presidents to vote “has the effect of skewing policy to one side of the Fed’s dual mandate.” That is the side of preserving the currency as a store of value — controlling inflation. This comes, Frank thinks, at the expense of the other side, which he calls “promoting employment.” The actual language of the mandate speaks of promoting “maximum employment,” which is problematic: “Maximum” means “the highest attainable,” and this might depend on ignoring the other half of the mandate.
The results are skewed, Frank says, because the regional bank presidents come from “a self-perpetuating group of private citizens who select each other and who are treated as equals in setting federal monetary policy with officials appointed by the president and confirmed by the Senate.” That is, members of the boards of directors of the regional banks select those banks’ presidents, and those members are — here we come to the crux of Frank’s complaint — “overwhelmingly representative of business,” and particularly the financial sector, therefore “they are not in any way representative of the American economy.” Not “in any way”?
Heavy representation of the economy’s financial sector in the governance of the central bank does not seem bizarre. But Frank is indignant that in the past decade 80 percent of dissents in the FOMC were from members concerned about excessively cheap money, and that 97 percent of those dissents came from presidents of regional banks. Frank’s prescription for institutionalizing a policy of cheap money comes as Europe’s economy seems about to follow America’s into convulsions caused by monetary gorging.
Nowadays it is obligatory to present any proposal as a cure for the decline of comity in Washington. So Frank says that “until recently, the tenor of Federal Reserve deliberations was one that promoted consensus,” but now “the Federal Reserve has been affected by the disdain for consensus and the contentiousness that has affected our politics in general.”
Note Frank’s insinuation: Any dissent from the policy he favors — he is not satisfied with 70 percent support in the August FOMC vote — constitutes “disdain for consensus” and unhealthy “contentiousness.” He says such dissent “has now become a significant constraint on national economic policymaking,” but is unpersuasive about how the constraining works: He says a 7-to-3 decision “is clearly less effective” influencing economic behavior than unanimity would be. Therefore, dissent must be discouraged as inimical to the national interest.
When Frank complains that the regional bank presidents are “neither elected nor appointed by officials who are themselves elected,” he is almost asserting what he is clearly implying — that the Fed itself should be tamer and more compliant to the political culture, at least when liberalism sets its tone. The 2010 elections cost Democrats their House majority and Frank his chairmanship of the Financial Services Committee. So his legislation is not an immediate threat to the Fed’s independence. Nevertheless, it is notable that the left now has its Ron Paul. Notable and, in a sense, appropriate because one of liberalism’s steady aims is to break more and more institutions to the saddle of centralized power.
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