Savings Glut or Investment Spree?
By Kevin
Are we doing it right?
As I previously mentioned, I'm working on a piece on global imbalances once again (fact is that I feel like I've done countless stuff on this but then it is always just some other topic that obliquely references to it somehow). I guess I'm a little behind times on reading about this issue but the more I looked into Bernanke's earlier arguments about the 'Global Savings Glut (GSG)' and his subsequent 'revisions', the more I find it difficult to swallow the notion that 'it's not just the US who is at fault'. Of course, he has softened his stand from a while back in 2005, when he actually believes that the current account deficits were hardly within the control of US and if you need someone to blame, you got to blame the rest of the world. There are many flaws in the speeches he delivered in 2005 (here and here), especially with the benefit of hindsight and additional data. Hence, I would not be launching an attack on those ideas.
In any case, as John Taylor suggested to anyone who would care to scrutinize the statistics (I actually bothered; macroeconomic data on the World Bank Database is particularly handy for looking up stuff that are two years old or earlier), there was no significant rise in world savings (in the recent years). World savings fell from 22.25% of world GDP in 2000 to 20.88% of world GDP in 2003. In that sense, there wasn't really a savings 'glut' to push down interest rates at least during that time (I refer to the beginning of 2005 when the speeches were made). In fact, during that period US investments fell from 20.58% to 18.35% of GDP - a great chance for correcting the current account deficit. But no, the chance was wasted because savings in the US declined even more, from 16.72% to 13.80% of GDP, thus increasing their current account deficit from approximately 3.8% to 4.5% of GDP. Granted, I'm looking at a selective time period and being a bully but that is just a distraction from my main point that if the 'GSG' idea continues, US will forever think they are simply a victim of circumstances when they are clearly not.
Daniel Gross characterized the idea of a 'savings glut' as a meme on Slate when it was first introduced. And I think he can't be more right. It is a matter of perspective but there is this notion of sacrificing current consumption when it comes to the idea of 'savings' but reality is that these 'saving glut' countries were pushed to purchase 'safe' investment products by none other than the deep, sophisticated financial system of the United States. In what WSJ terms as an expansion on his 'saving glut' research, Bernanke supposedly places the blame on US' mismanagement of the capital inflow but, I quote the Luca from WSJ:
The paper’s main focus, however, is on the intense foreign investor demand for what seemed at the time like safe U.S. assets in the years before the crisis.
The paper appears to be suggesting that US is merely giving investors what appears to be products they wanted - the mortgage-backed securities (MBS), safe from the rating perspective, backed by the government somewhat, and also offering the returns. In fact, it goes on further to imply that financial engineers were being efficiently responding to market demands with innovations that would generate the supply to quell this demand. I quote from various segments of the paper:
"...we verify that the “GSG countries”—that is, emerging Asia and Middle Eastern exporters—did indeed evince a strong preference for the safest U.S. assets. On the margin, this preference most likely helped push down yields on MBS relative to other assets, as most MBS were either guaranteed by the Agencies or sold as tranches carrying AAA credit ratings."
"In fact, the strong preference of the GSG countries for Treasuries and Agencies appears to have pushed Europeans and other advanced-economy investors, including U.S. investors, into apparently safe “private-label” MBS."
"Finally, the demand for safe assets by investors, both domestic and foreign, appears to have engendered a strong supply response from U.S. financial firms. In particular, even though a large share of new U.S. mortgages during this period were of lower credit quality, such as subprime loans, Agency guarantees and financial engineering in the private financial services industry resulted in the overwhelming share of mortgage-related securities being rated AAA."
I'm going to use a rather extreme analogy here and say that this is really no different from a doctor saying, "Wow, so many patients only trust me and they would only take medication I prescribe to them, so never mind if the drug is effective, I'll prescribe as long as I get paid really good commission from the drug firms. In fact, let me just prescribe these pills I just found in the cabinet here though I don't even know what they are." Granted, the financial engineers probably really believe that they have managed to tuck risks away and that the instruments were really safe, how about those pushing NINJAs to take up loans they can ill-afford? John Cassidy's How Market Fails is a collection of such stories. There appears to be a culture of absolute irresponsibility - the financial institutions couldn't care less about the fate of clients on both sides (people who took out mortgages and investors who bought MBS).
I guess the 'GSG countries' are just too eager to save they didn't practice their due diligence just like many of their counterparts in US and the finance system only mean all good and no harm. Maybe. But maybe, if the financial system was more responsible, if the culture was not all that screwed up and money was rejected on the basis that there was no more good quality investment opportunities in US and savings were allowed to 'go home' to these 'GSG countries', then things won't be so bad. For goodness sake, if investment opportunities are dried up, then curb excesses. Leave the punchbowl and you get a bust. There you had it.
Right Interventions
By Kevin
Derailing in progress...
While researching for an article I'm working on about the global imbalances (yes, I'm writing on this topic again), I chanced upon John B Taylor's Getting Off Track, which is a really short read for someone who wants to know more about the government intervention aspect of the financial crisis in United States. John does pretty data-oriented research and no doubt emphasize on the importance of empirics when it comes to studying the macroeconomy.
Too often in Economics, we seem to be too quick to classify stances at debates into a 'more government' or 'less government' issue as if the government always has only one course of action. As John pointed out in his book, the US government may have worsen the financial crisis and prolonged as a result of their erroneous diagnosis of the crisis as one of liquidity rather than counter-party risks. The fact is that the government has several course of actions when they are required to 'do something' and this thing they eventually decide to do may not always be effective or good. The question (at that time at least) was whether the contracting liquidity experienced at that time is a symptom or in itself the source of the problem. Of course, with the benefit of hindsight, John confidently concludes that he has been right pretty early on that counter-party risk was the root of the problem.
Now, we turn back to the general question of government intervention. While we always ask ourselves if we should always trust the government to do the right thing, I think the more important point is that we all should be helping to the government arrive at the right course of action. It calls for a greater academic participation in governance and social policies. This, I believe, is something particularly important that Singapore should learn. I pointed out earlier that we need to make better use of data, and academic tools at our disposal. If you peer into the work of John through his book, you'd realise that is exactly the sort of thing our academia should be doing for the government. And this, will also require that the government be more open-minded to external ideas and tap on expertise beyond their numbers. That's what I mean by pluralism in ideas for governance of a country.
Bananas to go BANANA
By Wei Seng
Build Absolutely No wind farm Anywhere Near Anyone?
What's all this banana talk today? BANANA is acronym for Build Absolutely Nothing Anywhere Near Anyone, according to Jim DiPeso of The Daily Green, and he claims that it is "there is no such place as 'Somewhere Else'" when it comes to where to build "unsightly offshore wind turbines, that scary nuclear waste disposal site, those gigantic solar mirrors, those ugly power lines". This kind of thinking, referred to as BANANA thinking, is certainly bananas in today's world where there is a looming environmental crisis and something needs to be done to tackle this head-on.
Certainly, we want cheap power supply, we want reliable power supply, we might even want green power supply. But some people want all that without anything ugly associated with creating these conditions in their backyard. Wind turbines might provide reliable energy, but people just dont want them in their backyards as it blights the scenery. There certainly are other issues of genuine concern to citing wind turbines or nuclear waste depositories in their backyard, but really, if not here, then where?
How then, do we encourage people to drop that BANANA thinking? According to DiPeso, "a key is to ask citizens for their input early and often, and make a real effort to listen, even if the politicians and technical experts mutter to each other that those uneducated citizens are going on about non-issues". This will "build trust" and ensure that such initiatives are not seen as isolated from ground perceptions or just a top-down approach. Certainly no one wants a nuclear waste dumping site in their backyard, but are there advantages or is there some greater good out of it all? Locals need to be convinced, by the local and national government, that such sacrifices are worth it and meaningful.
Difficult questions to answer, difficult mindsets to change, but totally worth it if people can abandon the BANANA thinking and do their part for the environment.
Gridlocked
By Kevin
Trapped in Fragments
A couple of months back I stumbled upon this book by Michael Heller (a lawyer), Gridlock Economy. It raised a very interesting question in the introduction and convinced me to borrow the book. The book went on to look into different parts of the modern economy where hurdles to economic activities are created because of structures built within the modern economy used to spur economic activities in the first place. It's an irony we can't ignore. The author framed them as a 'Tragedy of the anticommons'; this idea is from Michael Heller himself so the book is more or less a vehicle to get greater audience exposed to it.
Anyways, it started this way;
A few years ago, a drug company executive presented me with an unsettling puzzle. His scientists had found a treatment for Alzheimer's disease, but they couldn't bring it to the market unless the company bought access to a dozen patents. Any single patent owner could demand a huge payoff; some blocked the whole deal. This story does not have a happy ending. The drug sits on the shelf though it might have saved millions of lives and earned billions of dollars.
I thought this is exactly the sort of problem that is going to plague the field of microeconomics in the modern world. The world's complexity naturally mean that the mesh of technological advancement, legislative hurdles and logistical difficulties in the market would introduce new problems for us to solve. I didn't quite manage to read much of the book but I'll try to spend some time researching stuff in this area soon. Meanwhile, USA still probably going to continue being the hot bed for patent disputes.
The Bigger Brother
By Kevin
Not so cute...
A search query on Wikipedia for 'Big Brother' offers a disambiguation page that offers a link to their 'Authoritarian personality' article. Today, we sometimes allude to the concept of 'Big Brother' when we talk about our governments but we hardly picture the government being authoritarian, perhaps just more of nannying. Today's problem for the world, however, is that our Big Brothers are getting too big, as Leader of The Economist this week pointed out.
The cover of The Economist features a big fat monstrous lump attempting to devour a corporate executive reflecting their perception of how appallingly huge and scary governments have become. As a matter of fact, developed world governments might have taken up to much of economic breathing space because of the recent events and will need to scale down their footprint more. It's always easy to get involved in many activities in the economy but difficult to pull out. The Briefing talks about state spending ballooning and makes a fierce assault on the weaknesses of government.
One of the case mentioned was their failure to make good use of management consultants, who ends up being portrayed as conman treating "the public sector as dumping grounds for airy-fairy ideas". Oh well, in a crisis everyone suffers, even the management consultants themselves are not doing well.
Public Education
By Kevin
Cash for Brains
Traditionally education has been mostly funded by the governments, at least mass education. Things didn't start out this way of course; education started out as some sort of pastime for the rich kids and subsequently became a tool to distinguish the aristocrats and peasants, serving the function of supporting what was eventually called 'high culture'.
In fact, education wasn't so focused on writing, reading and arithmetic in the beginning - it consists mostly of life-skills like archery, horse-riding, a little hand combat, a couple of classics. But then people realised that civilized behaviours helped cultivate deeper relationships between people and improved interactions between strangers whose education has resulted in some sort of informally synchronized norms. Crude traders therefore decided to become 'educated'.
As technological advancement made education an economic necessity, government started to intervene in the market for education. Theoretically speaking it is because the rising external marginal benefit resulting from education so the good becomes more of a market failure as the potential positive spillover effects increase. Mass education became important as the educated bunch tend towards a critical bulk. When everyone around you are educated then the cost of not being educated rises. When all your trading partners consist of educated people who demand certain standard of conduct when doing business, then there's more pressure to be educated. Government spending on education thus climbed, but in a good way.
It's then a pity that budget deficits caused by the economy education have been helping to support all the while is causing funding for education to be slashed. Yet like what is mentioned The Economist article, this is an important opportunity for private sector education providers. For-profit education might sound like a bad idea since they have all the incentives to dish out qualifications to those with 'financial quality' and shun the poor smart ones; this is the moment for them to correct their image and raise their standards of education to those of public education; this selectivity will benefit them long after a boom in private-section education industry.
Shock Doctrine
By Kevin
Got shot by shock
I've previously read Shock Doctrine and written a review on my personal blog; it was a time before ERPZ started and became active. Here's a reproduction of the original review:
After 2 months of reading I finally finished Naomi Klein's powerful book, Shock Doctrine. It was a long ride deep into the dark old mines of history on the different 'economic revolutions' all around the world: Argentina, Chile, China, Russia, Bolivia and Poland. It was a book that was written with intentions to put down Milton Friedman, clearly anti-corporatist and in some sense, anti-globalization. From this book I understand finally how the term 'anti-globalization' have been mis-interpreted by so many people, even myself. I once thought that it means being against the integration of cultures, economies and companies but then I realised it gets way deeper than that.
The idea of anti-globalization is usually used to mean being against the way the phenomena is taking place in our world, that inequality is rising and corporates are like taking over the world while people in poor countries work in sweatshops, suffer in silence and endure the hardship only to realise generations later that nothing changes. It is the discovery of a certain helplessness in the bottom layer of the world. Shock Doctrine is clearly about that, and more.
In a clear but otherwise way too long writing, Naomi presented a very complete picture of how pure ideology-driven economist are used by corporates and government to advance their self-interest. And of course, in a capitalistic perspective, self-interest is just profit and money. She didn't over turn free market theories on how a perfectly free market is able to dilute power and increase freedom but she did show that the approach that allows for extreme free market is not exactly compatible with democracy and worst of all, economist have been naive about how a free market can be brought to exist. Case after case cited in the book, firms are privatize just be selling it out to the private sector without proper valuation of the assets and this hasty act would not only delay the attainment of a market equilibrium that would be at least more socially optimal but also create new forces that increases the inertia of the market. In other words, it makes the market less free.
In the area of corporate America and politics, Naomi is suggesting that the corporate people have penetrated politics too deeply with CEOs becoming civil servants in top positions of the government and politicians being lobbied by powerful companies with CEOs receiving incomes more than 400 times the average person on the street. And because of that, government becomes ran like corporations, public sector jobs being slashed and direct public spending is reduced while outsourcing (locally, giving contracts to companies) all the functions that can be done by the private sector. Worst, it is infected by a touch of cronyism; and this probably explains why contracts are rarely distributed by bidding and that the contracts concentrate in the hands of the few big firms that are always 'aiding the government' with 'planning'.
It has been a good read anyways and while Naomi Klein has a rather extreme stance, my reading of Joseph Stiglitz (Globlization & its Discontents as well as Making Globalization Work) have helped me appreciate the gravity of the matters she was talking about and I could understand her thinking. As always, the writer do give us a gleamer of hope about what the future may turn out to be when the 'Shock Wears Off' and how we can prevent similar stuff from happening again. I would recommend this book for people who have no fear of heavy non-fiction reading, a thorough interest in learning how and why corporate America is seen in bad light.
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