Friday, February 26, 2010

Answers to Jakob Finci

Jakob Finci is the head of the small (500 people) Jewish community in Bosnia. As a neutral ethnic group he would be positioned nicely for a mediating position and indeed he used that position during the war to evacuate some 300 people from Sarajevo. However, in practice he has adopted the Bosniak position. Of course it is not unwise for a small community to attach itself to the largest and most powerful ethnic group. But that makes him less suitable as a mediator - as is visible in his initiatives:

- one of his initiatives is a truth commission. However, he fails to mention that unlike the situation in for example South Africa the political situation in Bosnia is not resolved. Without such an agreement the commission will have the same problem as the ICTY in The Hague: each party is sorry for the war crimes that have been committed by their side, but they consider them as "collateral damage" in a justified war.

- a more recent initiative by Finci was his complaint at the European Court of Human Rights about the fact that the Bosnian constitution by reserving some state positions for members of the three main ethnic groups is discriminating against Roma and Jews. I found this initiative rather phony: even if the constitution allowed the highest positions to those groups it is very unlikely that they would actually get them anytime soon.

But Finci has a point that the ethnic restrictions shouldn't be forever. During the war you couldn't be neutral and many people who did feel neutral - often because of mixed marriages - ended up as refugees in the West. Dayton reflected that situation. But this is not a desirable solution for peace time. But what Dayton wants to achieve with those ethnic rights is securing minority rights and that is very much a valid principle in peace time too. The obvious solution would be to connect the political minority rights to territorial entities. In order to achieve this the Federation would have to be split into a Bosniak and a Croat part. When that was done all the veto and representational rights of the ethnic groups could be converted in rights for the three entities.

Bosnia now has a law that it needs to repair in order to satisfy European requirements. My suggestion would be to keep the requirement for a Croat and to replace the requirements for a Muslim and a Serb by requirements that one president will be appointed by the parliament of the Federation and another by the parliament of the RS.

Monday, February 22, 2010

The Greek money problem

EUObserver has a nice blog post by Roberto Foa that punches the myths about the threat of a Greek collapse:
- countries can leave and return to a monetary union without major problems: in Africa's CFA franc zone that has repeatedly happened.
- countries can go broke without endangering their currency. No one supposes that the US guarantees all the countries that use the dollar.
- several solutions are possible. What makes the Greek situation seem difficult is that some europhiles are blocking an IMF bailout while there is not (yet) sufficient support for an European bailout.

The only real problem is for the eurocrats. Greece shows the limits of their "ever closer union". I think it will be good to give up that myth and to start instead working on what is really needed in Europe. We have seen enough dysfunctional rules whose only reason of existence seems to be to carry more power to Brussels.

Sunday, February 21, 2010

To stimulate or not to stimulate

Economists all over the Western world are divided: should we keep stimulating our economies or shouldn't we do so. The fans of the continuing of the easy money claim that when we stop our economies might yet fall into a crisis. They like to point to Roosevelt's effort to end stimulation in 1937 after which the crisis promptly came back. But their adversaries like to point out that the fate of Greece might also happen to the US or the UK. Some day there might be no more money to borrow and then they would face a really big crisis.

I believe it depends on the situation. Some general rules are:
- it is crucial to keep the country from becoming too endebted. So when a country is running trade deficits and has a negative balance of payments - like the US now - it should devalue its currency. Living above your means doesn't work.
- you cannot trust on export alone. China and Japan now are very similar to the US in the 1930s. They are dependent on export for growth. But you can only export so much before the rest of world runs out of money. If that happens your growth model runs into a wall.
- when there is unemployment government may inject extra money in the economy. This is basically a matter of distribution within a country. When the producers have too much money and the consumers too little the goal is to give the consumers more money. In the short term a stimulus is the best way to achieve that.

I think there are three possible situations:
- producers and consumers are rather in balance. In that case a stimulus will get the economy running again. The cost of the stimulus will soon be made up by additional tax receipts and less unemployment benefits.
- there is too much money with the consumers and too little with the producers. This is the 1970s scenario. A stimulus only leads to stagflation. The solution is to direct more money to the producers - as Thatcher and Reagan did with tax cuts.
- there is much too much money with the producers and too little with the consumers. This is the case with export dependent countries like China and Japan and the US in the 1930s. In this case a stimulus has only a temporarily and weak effect. Economists like to say that the government should just stimulate more, but there are both practical and political limits to how much a government can spend. Japan has now spent so much that its government debt is now above 200% of GDP. That is a major distortion. What is needed are more structural reforms that bring more money to the consumers. In the US it was the war economy of the 1940s that finally brought that restructuring. To accomplish a more consumption oriented economy in peace time one might consider the following measures: policies that favor the poor over the rich (the rich tend to save more), policies that aim for full employment (that leads to upwards pressure on the wages of the poor and so to less inequality) and discouraging saving for the old day (it is much better when people build a house that will serve as their old age reserve; a property bubble however will destroy this way out).

My conclusion is that we in the West need to undo what Reagan and Thatcher did. Not because what they did was wrong, but because what they did has gone too far and we need to bring the balance back towards the consumers.

I am rather pessimistic about China despite its foreign currence reserves. Its policies for fighting the crisis have resulted in bubbles. It looks like China is going the way of Japan after the Plaza Accord. The Plaza Acord forced Japan to revalue its currency. China is not yet facing such pressure but it is clear to everyone that China no longer can keep growing by increasing its exports. Its reaction to that is a very similar real estate bubble like Japan created. The one thing ibn favor of China is that its government seems prepared to make unpopular steps to puncture bubbles.

The quest for a new Thatcher

I am not a fan of Thatcher. In many ways I found her too extremist. But I admire her for how she took on the Miners Union. That union more or less had Britain captive to its demands. It took Thatcher a hard fight to defeat it: for months there was not enough coal and the country was seriously hurt. But Thatcher didn't give up and in the end she won. It didn't make her popular either: before the Falkland War her popularity was low. Yet now many see her as a visionary.

Reagan did something similar when he broke the air traffic controller's strike by firing the strikers. In his case there was less upheaval. But when the air traffic had become paralized or the strikers had somehow managed to keep their jobs Reagan would have been seriously humiliated and would have had to struggle not to become a lame duck. A good example what can go wrong is Hillary Clinton. After her failed attempt to introduce universal health insurance she didn't play a political role for quite some time.

I would like to see more such visionaries. Take California. In California the teachers union CTA is what the Miners Union was to the UK. Going far beyong simply defending the basic interests of the teachers it paralizes the education system, blocks reforms, has achieved very poshy working conditions for teachers and tries to influence subjects that have nothing to do with eduction. Schwarzenegger has had some struggles with the union but he never really has tried to break their power. Such would be a hard fight and schools might be closed for months. But it would be the beginning of the end of the political gridlock that paralizes California's politics.

Obama is in the same position. His country is just as much the hostage of special interest group as California. But in his case these are the most difficult ones: financial. Yet it can be done - as Roosevelt demonstrated some 75 years ago. Obama has the right ideas how to attack the crisis and to reform the financial sector. But until now he hasn't picked his fight.

There is one thing that a courageous leader should keep in mind: voters won't appreciate it - at least not immediately. Voters look at results and the immediate results of a struggle are strikes and breakdown of services. It is only later that the economic benefits become visible. After she broke the power of the miner's union Thatcher was highly impopular - until the Falklands War saved her.

Monday, February 08, 2010

The EU environment hoax

I am dedicated to the environment. But nowadays "environment friendly" seems to be an excuse to destroy our world. And the EU is specially bad in that respect:
- they are promoting "biofuel" for which huge tracks or forest are destroyed. To add insult to injury to EU is now planning to declare palm plantations to be "forests", hiding their detrimental aspects.
- the carbon tax is another disaster. Last week hackers exposed the vulnerability of the system to fraud. I believe in simplicity. Having a carbon tax is asking for fraud. I see it as one of the excesses of "free market" thinking where regulation is needed. In my opinion it is a much better policy when countries optimize their reliance on renewable energy sources like wind and sun. They have as an addition benefit that they strengthen the trade balance and make a country less vulnerable for the swings in oil prices. The use of oil and gas can be discouraged by the well-tested means of taxes.
- "cash for clunkers" was yet another disaster. In the past the old cars in Western Europe and the US were exported to poorer countries - including Africa. Now they are destroyed. And then our politicians have the guts to say that this benefits the environment because it takes old polluting cars away...
- Yet another one is pumping CO2 gas into the ground. Such pumping only costs more energy. I don't think that will save us in the long run.

My objection to Europe has always been that interest groups are more influential as its citizens. This seems a clear example. As the US has the same problem I suppose it has something to do with the size.

Postscript (june 2010): the EU has upgraded its rules for biofuels. They should now be from a "clean" source. No more cutting woods to grow the fuel. But this doesn't solve the problem: it just means that the plants grown on freshly cleared land will be labeled for food while those on existing fields will qualify as biofuel.
But at the same time lobbying is going on for a carbon tax. Big promotor is the nuclear industry. Maybe they should combine it with a radioactivity tax: the radioactivity of nuclear waste will be around long after the carbon has been reabsorbed by the earth.

The directive will also lead to higher taxes on imported biofuel.

Postscript 2: Due to the economic crisis many emission permits in the Emission Trading System are unused. As they can be carried over to following years this means that the scheme simply doesn't work at the moment. It also shows the weakness of a system that is dependent on the rate of economic growth. I think it would be better to have a performance driven system. For example that cars should achieve a certain number of voyager-km per liter of fuel and that a country should have a policy that punishes the inefficient.

Thursday, February 04, 2010

New financial regulation needed

Letting a bank or another financial institution going broke is difficult. If a normal company goes broke there will be a lot of assets. Maybe they can go on producing for years under the protection of Chapter 11. With financial institutions that is not the case. As soon as it is clear that it may not survive every customer will try to withdraw his money. Soon it will run out of cash and it will go broke for that reason.

For that reason there are special regulations that allow governments to take over banks that are in trouble. However, in the recent crisis these regulations proved to be inadequate, specially when it comes to other financial institutions than banks.

Take Lehman Brothers, whose bankruptcy started the crisis. In a recent article in the Economist the authors argue that Lehman had a deficit of about 25 billion dollar. However, the bankruptcy is resulted in additional damage so that the total cost came to 150 billion dollar. This could have been prevented if there had been a financial authority with the power of a bankruptcy judge. He could have imposed a solution where the shareholders lost all there money while the bondholders lost some of their money and became shareholders. This is the same kind of solution that would have been imposed by a judge in a bankruptcy case. However, such a financial authority should be able to impose it within one or two days. In the months that it takes for a normal bankruptcy judge the company would have become worthless.

A similar case applies to AIG. The US Secretary of the Treasury Geithner is often criticized that the US government took over all the debts of this insurer. It would have been more normal to pay only a certain percentage of the debt (in the financial lingo this is called "giving the debtors a haircut"). Geithner argued that it would have taken a long time to get all debtors to agree to a haircut and that for that reason he had no choice. Here to it would be logical to give some financial authority the power to impose such solutions.

The Obama administration is aiming to establish such a resolution authority.

Tallking with the Taliban

The main consensus from the London conference on Afghanistan seems to be to go talking to the Taliban.

I find these developments quite amazing. On the one hand Afghanistan is full of people who once served the Taliban and who now support its government. So I can't see why we should do as if it is something special when we can turn a few more Taliban supporters around. The conflict in Afghanistan is to a large extent an ethnic conflict and support for the Taliban is not only determined by support for radical Islam but also by tribal affiliations. This is a kind of conflict where people easily switch sides and we should be prepared to play the game. To continue with the idea that the Taliban is Al Qaeda and as such is bad and must be destroyed is just lunacy.

On the other hand I hate to see how much stress is given to talking with the Taliban. This smells like desparation and reminds me of Vietnam. I think it is extremely unlikely that there will be any grand agreement with the Taliban and if there is such an agreement it is likely that the Taliban will break it just like the Vietnamese communists did.

Tuesday, February 02, 2010

Khamenei thinks he is god

Iran has executed two opponents for trying to overthrow the Islamic regime during street protests. What makes it interesting is that they were convicted of "moharebeh" – literally meaning waging war against God. It looks like Khamenei - Iran's real leader - thinks that he is god himself. Is there something more blasphemous?

One argument for an independent RS in Bosnia

One element that held Bosnia together was the mixed population. But with the low number of Serbs in the Federation and the sense of discrimination among Serbs there an important element that held Bosnia together is falling away. If the international community wants to preserve Bosnia as a whole it should pay top attention to this situation. When the Serbs of the RS stop feeling connected with the territory of the Federation I see no future for Bosnia as a whole.

Postscript: the number of Serb returnees to the Federation is disputed. See this article.