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.
Monday, February 08, 2010
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.
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.
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.
Postscript: the number of Serb returnees to the Federation is disputed. See this article.
Sunday, January 24, 2010
Plutonomy: why the rich get richer
I encountered some articles about the subject "plutonomy": this is the recent phenomena in the UK and the US where all the benefits of economic growth go to a small elite and as a consequence the inequality is steadily increasing. The concept comes from a "Citibank paper from 2006.
The key reasons it gives for the phenomena are:
1. They are all created by “disruptive technology-driven productivity gains, creative financial innovation, capitalist friendly cooperative governments, immigrants…the rule of law and patenting inventions. Often these wealth waves involve great complexity exploited best by the rich and educated of the time.”
2. There is no “average” consumer in Plutonomies. There is only the rich “and everyone else.” The rich account for a disproportionate chunk of the economy, while the non-rich account for “surprisingly small bites of the national pie.” Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.
3. Plutonomies are likely to grow in the future, fed by capitalist-friendly governments, more technology-driven productivity and globalization.
Inequality is something that fascinates me as it may have been a major cause of the economic crisis of the 1930s. The 1920s were a time of increasing inequality too and that inequality lasted until World War II. During the war it decreased fast and after the war it stayed at the much lower level.
The paper raised some indignation when it became public as it seemed to justify the increasing inequality. I am more interested from an academic point of view. I don't think the paper is the whole story, but it is an interesting contribution. One of the thing that I miss in the paper is attention to power: as the rich get richer they get more power to influence politics so that it favors them even more.
The key reasons it gives for the phenomena are:
1. They are all created by “disruptive technology-driven productivity gains, creative financial innovation, capitalist friendly cooperative governments, immigrants…the rule of law and patenting inventions. Often these wealth waves involve great complexity exploited best by the rich and educated of the time.”
2. There is no “average” consumer in Plutonomies. There is only the rich “and everyone else.” The rich account for a disproportionate chunk of the economy, while the non-rich account for “surprisingly small bites of the national pie.” Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.
3. Plutonomies are likely to grow in the future, fed by capitalist-friendly governments, more technology-driven productivity and globalization.
Inequality is something that fascinates me as it may have been a major cause of the economic crisis of the 1930s. The 1920s were a time of increasing inequality too and that inequality lasted until World War II. During the war it decreased fast and after the war it stayed at the much lower level.
The paper raised some indignation when it became public as it seemed to justify the increasing inequality. I am more interested from an academic point of view. I don't think the paper is the whole story, but it is an interesting contribution. One of the thing that I miss in the paper is attention to power: as the rich get richer they get more power to influence politics so that it favors them even more.
Saturday, January 23, 2010
Greece on the road to an economic meltdown
In 2002 the Argentine economy broke down. For years their coin had been pegged to the dollar, but as the inflation in Argentine was higher than in the US this let to an increasing trade deficit for Argentine. Yet the Argentine government couldn't muster the political courage for the painful reforms that were needed to correct this. And so, finally, in 2002 the country had to let its currency float. As a result the economy shrunk that year with 10%. But in the following years it regained healthy growth.
It looks like Greece is going the same road. But it is doubtful whether it will have such a speedy recovery: the problems look to serious. The budget deficit is 12%, it imports three times as much as it exports (29 vs 93 billion US$) and tourism fills only a small part of that gap.
Yet the Greek government can't be bothered with economic reform. They have promised the EU to reform their budget in 2012. But given their lacking sense of urgency they most probably will resort to new bookkeeping tricks rather than apply real reform. The inevitable conclusion has to be a serious economic meltdown.
When the credit crisis hit the Baltics demanded a speedy entry into the eurozone with the claim that that would save their economy. The example of Greece seems to indicate that it only delays the problems by a few years.
As Greece is a member of the eurozone no one knows what form such a meltdown will take. Will the Greek state go broke and stop payments? Will it exit the eurozone? The eurocrats are afraid and go out of their way to pamper the Greek government in order to delay the inevitable. However, this will only have as effect that the final crisis will be worse.
It may take a few more years before the meltdown happens. But the later it happens the worse it may be. For the Balkan countries such a meltdown will be bad news. Greece is an important investor in many countries and it employs many migrant workers from Albania.
It looks like Greece is going the same road. But it is doubtful whether it will have such a speedy recovery: the problems look to serious. The budget deficit is 12%, it imports three times as much as it exports (29 vs 93 billion US$) and tourism fills only a small part of that gap.
Yet the Greek government can't be bothered with economic reform. They have promised the EU to reform their budget in 2012. But given their lacking sense of urgency they most probably will resort to new bookkeeping tricks rather than apply real reform. The inevitable conclusion has to be a serious economic meltdown.
When the credit crisis hit the Baltics demanded a speedy entry into the eurozone with the claim that that would save their economy. The example of Greece seems to indicate that it only delays the problems by a few years.
As Greece is a member of the eurozone no one knows what form such a meltdown will take. Will the Greek state go broke and stop payments? Will it exit the eurozone? The eurocrats are afraid and go out of their way to pamper the Greek government in order to delay the inevitable. However, this will only have as effect that the final crisis will be worse.
It may take a few more years before the meltdown happens. But the later it happens the worse it may be. For the Balkan countries such a meltdown will be bad news. Greece is an important investor in many countries and it employs many migrant workers from Albania.
Russian Youtube cop arrested
Russia has a serious problem with corruption, specially in the police. Some time ago a cop from Novorossiisk published a video complaining about the local coruption. Now he has been arrested for "fraud and abuse of power".
It looks like Putin prefers to let his comrades of law and order pilfer the country rather than to restore order and make the country a safe place to do business.
Postscript: Here is an update: the cop, mr. Dymovsky, was released after a few weeks, probably because he is too famous. Russia's parliament is now adopting a law that would make what he did punishable.
Postscript 2: on 3 august the NY Times published a video report with the title "Russia's YouTube Whistle-Blower" about Dymovsky and others who after him also published video complaints.
It looks like Putin prefers to let his comrades of law and order pilfer the country rather than to restore order and make the country a safe place to do business.
Postscript: Here is an update: the cop, mr. Dymovsky, was released after a few weeks, probably because he is too famous. Russia's parliament is now adopting a law that would make what he did punishable.
Postscript 2: on 3 august the NY Times published a video report with the title "Russia's YouTube Whistle-Blower" about Dymovsky and others who after him also published video complaints.
Friday, January 15, 2010
The big US mortgage heist
One part of the US crisis concerns the mortgages. Until now the US government has spent $111 billion for the mortgage guarantee that it provided through Fannie Mae and Freddie Mac. But as it recently
raised the cap of $400 billion there is the fear that the final bill may be much higher.
This sounds like the US is just paying for past sins, but I don't believe so. I suspect that much or even most of the money is landing in the pockets of the banks and other mediairies that are between the Fannie Mae and Freddie Mac (the big guarantee holders) and the mortgage holders. These inbetweens tend to give their customesr big fines when they are late with payments. This often results in swamp of fines where customers get another fine for not paying the previous one on time, etc. As a consequence the money that those customers can pay ends up in the pockets of the inbetweens who charge it as a (very generous) reward for their extra work to reclaim the money. The creditors end up getting nothing.
The Obama administration has tried to improve the situation by trying to stimulate the rescheduling of those loans. But this has effectively been sabotated by the inbetweens who formally consider rescheduled loans as new ones and ask the same proves of creditworthyness that they demand for new loans. Given that these customers are in financial trouble it is no surprise that very few loans have been rescheduled. I think the Obama administration has made a mistake by seeing this only as a consumer problem. It encounters the same problem as a guarantor of those mortgages.
The "securization" of mortgages is a recent innovation. In the past banks sometimes outsourced the contact with the customer, but they always kept the final control so that they could push out the intermediary when they found that necessary. In the present situation the economic owners of the mortgages no longer have that possibility. It looks like that has become a serious problem now.
In my opinion there is only one solution: removal of the inbetweens. The US should nationalize Fannie Mae and Freddie Mac and they should take over the handling of any mortgage that is guaranteed by them where the customer is late with payments. Local offices of those organizations should then take care of rescheduling those mortgages when necessary.
Such a solution would be quite similar to the Resolution Trust Corporation that handled the aftermath of the savings & loans crisis.
raised the cap of $400 billion there is the fear that the final bill may be much higher.
This sounds like the US is just paying for past sins, but I don't believe so. I suspect that much or even most of the money is landing in the pockets of the banks and other mediairies that are between the Fannie Mae and Freddie Mac (the big guarantee holders) and the mortgage holders. These inbetweens tend to give their customesr big fines when they are late with payments. This often results in swamp of fines where customers get another fine for not paying the previous one on time, etc. As a consequence the money that those customers can pay ends up in the pockets of the inbetweens who charge it as a (very generous) reward for their extra work to reclaim the money. The creditors end up getting nothing.
The Obama administration has tried to improve the situation by trying to stimulate the rescheduling of those loans. But this has effectively been sabotated by the inbetweens who formally consider rescheduled loans as new ones and ask the same proves of creditworthyness that they demand for new loans. Given that these customers are in financial trouble it is no surprise that very few loans have been rescheduled. I think the Obama administration has made a mistake by seeing this only as a consumer problem. It encounters the same problem as a guarantor of those mortgages.
The "securization" of mortgages is a recent innovation. In the past banks sometimes outsourced the contact with the customer, but they always kept the final control so that they could push out the intermediary when they found that necessary. In the present situation the economic owners of the mortgages no longer have that possibility. It looks like that has become a serious problem now.
In my opinion there is only one solution: removal of the inbetweens. The US should nationalize Fannie Mae and Freddie Mac and they should take over the handling of any mortgage that is guaranteed by them where the customer is late with payments. Local offices of those organizations should then take care of rescheduling those mortgages when necessary.
Such a solution would be quite similar to the Resolution Trust Corporation that handled the aftermath of the savings & loans crisis.
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