So, after reading up on the Cyprus deal from the Financial Times, the Economist, and Quartz, I think I have a pretty good idea of what happened. Tyler Cowen isn't happy with the deal, and I can see why, but I don't think that means the deal won't stabilize things for a spell. My four quick takes: 

1) I've been pretty insistent that the most surprising thing about the aftermath to the 2008 financial crisis is how much global policy norms haven't changed. By and large the major economies are still rhetorically and substantively committed to trade liberalization, foreign direct investment, and a constrained role for the state in the private sector. The one exception? Capital controls. The earth has moved here, and the fact that this deal will require fair amounts of financial repression and cross-border controls is just the latest sign of this fact. 

From a normative perspective, I can't say I'm too broken up about this. It's not that I'm a huge fan of capital controls or anything. In the various policy trilemmas or unholy trinities that Dani Rodrik and others talk about, however, it strikes me that unfettered capital mobility is the policy preference with the least upside. And Cyprus does seem to be the fifth iteration of the lesson that countries that live by large unregulated offshore finance will die by large unregulated offshore finance. 

2) If the FT's Peter Siegel and Joshua Chaffin are correct, then the political backlash in Cyprus from this deal won't be that great: 

In Nicosia, political leaders generally greeted the deal as painful but necessary.

The city streets were quiet and peaceful, with most businesses closed for a public holiday.

Even before the agreement was clinched, most Cypriots had come to grips with the fact that the offshore financial business sector that has powered the economy since the Turkish invasion in 1974 would be but a shell of its recent self.

And as the Economist explains, the current Cypriot reaction is based on the fact that the new deal is a damn sight better for them than the previous deal:

On March 16th Cyprus’s president, Nicos Anastasiades, desperate to protect Cyprus’s status as an offshore banking model for Russians, had decided to save the two biggest banks and thus to spread the pain thinly. He would have applied a hefty tax to all depositors: 9.9% for those too big to be covered by the EU-mandated €100,000 deposit guarantee, and 6.75% for the smaller depositors.

But after a week of brinkmanship—including protests by Cypriots, the extended closure of banks to avoid the outrush of money, a failed attempt by Cyprus to throw itself at Russia’s feet, an ultimatum by the European Central Bank and an eleventh-hour threat by Cyprus to leave the euro zone—a different decision was made: to apply the pain much more intensely, but on a smaller number of large depositors.

Which leads me to....

3) So much for Russia as a counterweight to the European Union. Cyprus tried to realign itself closer to Moscow, but it didn't take. Furthermore, the new deal really puts the screws on the large deposits of Russian investors that have parked their money in Nicosia. As Felix Salmon explains: 

In the Europe vs Russia poker game, the Europeans have played the most aggressive move they can, essentially forcing Russian depositors to contribute maximally to the bailout against their will. If this is how the game ends, it’s an unambiguous loss for Russia, and a win for the EU.

The Financial Times makes a similar point: 

One Moscow businessman blamed the harsher haircut on the Kremlin, which he accused of failing to protect Russia’s interests, “thereby allowing the Germans to bully Cyprus and thousands of Russian depositors”.

“As soon as the EU saw that Russia was not going to protect its citizens, the confiscation of Russian money in Cyprus was pushed by the EU. All that was necessary for Russia to do was to provide €2.5bn secured by Cyprus’s nationalised assets,” he said.

With Xi Jinping's visit to Moscow, there's been a lot of chatter about "rise of BRICS" and "Russia turns East" and "SCARY!! SCARY!!" Bear in mind, reading all of this, that Moscow couldn't budge the ostensibly enervated EU from its position on the EU member with the closest ties to Russia. 

[Can't Russia just mess with the Europeans on energy?--ed. Um... no. Sure, they could try to do that, but the long-run implications of that move for Russian exports ain't good. To paraphrase an old Woody Allen joke, Russia might find its economic relationship with the European Union to be totally frustrating and irrational and crazy and absurd... but Russia needs the eggs.]   

4) What I said about Cyrprus last week still seems to hold for this week. So I guess this means Cyprus now falls under the "good enough" global governance category, with the caveat that this involves eurozone officials, so "good enough" here is defined down to mean "managed not to wreck the rest of the global financial system."

Am I missing anything? 

Like other wonks, I watched last night's State of the Union address with a mixture of curiosity and whiskey. As I noted a few days ago, each State of the Union address contains some statements that history will judge rather harshly. Initially that was my focus in listening to last night's speech. That was quickly supplanted by a more interesting undercurrent to Obama's text, however. 

Foreign policy wonks like Fred Kaplan have argued that there wasn't much foreign policy content in the speech. That's true only if one has a rather narrow definition of foreign policy. What was striking to me was Obama's global justifications for a lot of his economic policy. Throughout his speech, he used the specter of foreign economic threats to prod Congress into action.  Consider the following: 

Every day, we should ask ourselves three questions as a nation: How do we attract more jobs to our shores? How do we equip our people with the skills needed to do those jobs?....

After shedding jobs for more than 10 years, our manufacturers have added about 500,000 jobs over the past three. Caterpillar is bringing jobs back from Japan. Ford is bringing jobs back from Mexico. After locating plants in other countries like China, Intel is opening its most advanced plant right here at home. And this year, Apple will start making Macs in America again.

There are things we can do, right now, to accelerate this trend....

After years of talking about it, we are finally poised to control our own energy future. We produce more oil at home than we have in 15 years....

Four years ago, other countries dominated the clean energy market and the jobs that came with it. We’ve begun to change that. Last year, wind energy added nearly half of all new power capacity in America. So let’s generate even more. Solar energy gets cheaper by the year – so let’s drive costs down even further. As long as countries like China keep going all-in on clean energy, so must we.....

America’s energy sector is just one part of an aging infrastructure badly in need of repair. Ask any CEO where they’d rather locate and hire: a country with deteriorating roads and bridges, or one with high-speed rail and internet; high-tech schools and self-healing power grids. The CEO of Siemens America – a company that brought hundreds of new jobs to North Carolina – has said that if we upgrade our infrastructure, they’ll bring even more jobs....

Let’s also make sure that a high school diploma puts our kids on a path to a good job. Right now, countries like Germany focus on graduating their high school students with the equivalent of a technical degree from one of our community colleges, so that they’re ready for a job....

In each of these passages, Obama was using comparative language to contrast the United States with other countries -- or, as he would put it, other magnets for jobs. The explicit thesis is that unless the United States makes the necessary investments, scarce jobs will leave American shores. 

Obama has used this kind of rhetoric on the campaign trail and in previous SOTUs. It reveals a somewhat mercantiilist worldview, one in which jobs and economic growth have a zero-sum, relative gains quality to it. 

[So, what, Dan? Most Americans see the world through a mercantilist lens as well. Will this kind of rhetoric matter?--ed.] I'm honestly not sure. Here's the foreign economic policy component of the SOTU:

Even as we protect our people, we should remember that today’s world presents not only dangers, but opportunities. To boost American exports, support American jobs, and level the playing field in the growing markets of Asia, we intend to complete negotiations on a Trans-Pacific Partnership. And tonight, I am announcing that we will launch talks on a comprehensive Transatlantic Trade and Investment Partnership with the European Union – because trade that is free and fair across the Atlantic supports millions of good-paying American jobs.

Now on the one hand, announcing the formal start of negotiations with the EU on a trade deal augurs well for my prediction last year about foreign economic policy playing a big role in Obama's second term. On the other hand, viewing trade through a mercantilist lens will make tough negotiations even tougher ... which means I might owe Phil Levy an expensive DC dinner.

In a speech in which traditional security threats seemed very much on the wane in terms of actual threat as well as political salience, it would be a cruel twist of fate to ratchet up ill-conceived foreign economic threats as a substitute. 

Developing...

The Washington Post's Howard Schneider and Danielle Douglas have a story detailing the ways in which post-crisis global financial reform has allegedly ground to a halt:

Five years after the collapse of Lehman Brothers, a global push to tighten financial regulation around the world has slowed in the face of a tepid recovery and a tough industry lobbying effort....

the post-Lehman goal — of a global scheme that would immunize the financial system from another large-scale shock — remains incomplete. Big banks, insurers and other financial giants remain intact and arguably “too big too fail.” Tools to guard against dangerous bubbles in the value of property or other assets are not yet in place. There is no agreement on how countries should coordinate the failure of a globally important financial company. Implementation of basic banking rules in major nations has fallen behind schedule.

Finishing the job “is going to take many years,” International Monetary Fund chief economist Olivier Blanchard said last week. “It is conceptually very difficult, politically very difficult.”

In their effort to overhaul the global system, regulators have been confronted by a number of head winds. The world’s economy has been unexpectedly slow to recover, making governments leery of doing anything that might make banks cautious to loan and invest. The financial industry has pushed back hard, warning that aggressive regulation might undermine growth. And regulators are simply limited in their understanding of how modern finance can be made safe while still supporting economic activity.

The result: Some of the proposals once considered core to a safe, post-Lehman system have been delayed and weakened, and others have been played down, at least for now, as too politically complex.

Well, this sounds like a blow against my theory of "pretty good" or "good enough" global governance that I've been yammering about on the blog.... that is, until one starts reading the rest of the Post's story.

First of all, with the exception of one Jamie Dimon quote, there's not any real evidence in the story that industry lobbying is to blame. I'm not saying that this means that there was no industry lobbying, or that it was inconsequential -- merely that there's no evidence in the story to support the lede.

What there is evidence of, however, are two things that seem pretty consistent with "good enough" global governance. The first is that even in areas where there's been minimal global agreement, there have beern "patchwork" arrangements that look like they will work. For example:

There also is no comprehensive global approach for addressing bank failures. Individual members of the Basel committee, including the United States, have established resolution plans in case their own lenders become insolvent. And the United States and Britain in December released a set of guidelines to handle a major insolvency — a potentially important agreement between two world financial centers.

But determining how to coordinate the collapse of a major multinational bank is an area where the IMF and others have had limited success in pushing for a broader global agreement. The issue is important because a method to share the fallout of a bank failure across national borders would probably make countries more willing to let institutions go out of business, rather than propping them up with taxpayers’ money.

Again, in a perfect world one would like to see a comprehensive agreement. Given the center of gravity for the financial sector, however, an Anglo-American arrangement is actually pretty powerful and covers the biggest concerns.

Then we get to the implementation of the Basel III accords, designed to insure that banks have sufficient reserves of safe and liquid assets on hand to prevent a panic. As Schneider and Douglas note, the Financial Stability Board reports that only 8 of 27 nations are on track to implement these reforms on schedule.

Why is that the case? Here we find that interest group lobbying seems to matter less than... a recognition by regulators that life is not so simple:

[O]ther Basel proposals have been revised as regulators, bankers and officials have better understood how some of their major assumptions about finance and risk had been upended by events.

In Basel this month, regulators scaled back one key set of provisions that would force banks to keep the equivalent of larger levels of cash on hand to guard against a run on deposits or another fast-moving crisis.

Such highly liquid assets had been defined to include government bonds — which traditionally can be sold quickly and at close to their face value — and to exclude securities backed by residential mortgages, the bundled, complex assets that had triggered the financial crisis in 2007 when they proved difficult to sell other than at a steep loss.

The financial crisis in the euro zone showed a flaw in the approach when Greek, Portuguese and other government bonds plummeted in value. Smaller U.S. banks, meanwhile, argued that to completely exclude mortgages from the new “liquidity coverage ratio” would reduce their ability to make home loans.

When the final Basel rules on the issue were released this month, the required liquidity levels were reduced, mortgages were included in the tally and banks were given extra time to comply.

“Nobody set out to make it stronger or weaker as a standard but to make it more realistic... to make sure there was no impediment to financing recovery,” said Bank of England Governor Mervyn King, who chairs a Basel committee of central bankers and regulatory chiefs.

So, to sum up: after an initial burst of regulatory arrangements, progress has slowed down in some areas, and in other areas relies on a more patchwork arrangement. That said, there appear to be intrisically good reasons for the slowdown, and the patchwork covers the major financial centers.

Yeah, this is "good enough" global governance.

One of this blog's annoying tics persistent themes has been its insistence that the 2008 financial crisis did not, in fact, doom the United States to a future of inevitable decline.  Indeed, there are many reasons to be optimistic about America's future, and there are many reasons to be skeptical about claims that China will be able to exercise leverage over the United States. 

Now, one of the counterarguments to this thesis over the past five years has been the explosion of U.S. debt and Washington's need for Beijing to continue to buy that debt to finance America's current expenditures.  This was a running theme of financial writers in 2009.  Four years ago, there was a particular concern that "China is also trading long-term Treasuries for short-term notes."  If the United States could only borrow overseas by issuing more short-term debt, that ostensibly gave China some kind ov leverage as Washington needed to continually roll over those debt obligations. 

I bring this up because Daniel Altman highlights a fascinating data point in his Foreign Policy essay about the shifting composition of the federal government's debt: 

In the past several years, the national debt of the United States has undergone a tremendous change. Long-term securities -- those with maturities of seven years or more -- have gone from about 30 percent of the debt in 2009 to about 40 percent today. By 2018, according to the Treasury's own estimates, they'll make up 50 percent of the debt, a proportion the Treasury expects to maintain from then onward. The United States is doing what any smart borrower would do: locking in low rates for the long term. As a result, its probability of default for any given level of debt has dropped.

Huh.  So it turns out that desite a surge in borrowing by the U.S. government and China's desire to keep the arrangement on a short-term basis, Washington has managed to borrow in a relatively efficient manner at historically low interest rates. 

Oh, and by the way, how has China altered its purchases of U.S. debt?  Well, besides a general slackening of such purchases (which partially explains the appreciation of the yuan) and a general lack of complaint in response to QE3, it has also changed the composition of those U.S. debt purchases: 

China has actually decreased its short term U.S. bond holdings by 5.1%. China holds $US 3.7 billion short term U.S. paper. On June 2011 China held $US 4.9 billion of short term U.S. paper. So basically all the debt that China holds are long term treasuries now. Interesting to know, China had $US 200 billion in short term U.S. debt in May 2009. So they divested all short term paper to long term paper.

In other words, contrary to the fears of debt hawks in 2009 -- including, it should be noted, Hillary Clinton -- China has not exercised an iota of influence over the United States via its debt holdings.  Indeed, the shifting pattern of their debt purchases strongly suggests that the Chinese have recognized the futility of such an approach. 

While Beijing has recognized this truth, certain Very Serious People who write Very Serious Columns persist in being afraid of China's mythical debt leverage.  So, on occasion, as a public service, this blog will continue to remind its readers that U.S. remains clothed in immense financial power. 

Unless, of course, our politicians were stupid enough to self-sabotage that power.  Note to self:  start revising and updating this note to post-apocalyptic historians.

Walter Russell Mead shares my enthusiasm for the prospect of a transatlantic trade deal, though I fear he goes a bit overboard in his post: 

The mobilization towards an agreement reflects the changing landscape of global trade. If a deal emerges, it will allow the U.S. and EU more leeway to set the rules of the road for the industries that matter most to them....

This potential trade deal is also a further sign of the collapse of the movement toward global free trade. The new round of WTO negotiations is effectively dead, and a major deal between two of the world’s largest economies would be a further signal that bilateral negotiations are once again becoming the norm.

Finally, this deal shows us that the BRICs are not quite as influential as many think. A U.S.-EU trade deal is essentially a way to ignore countries like Brazil and India while crafting rules that will govern some of the high-tech industries and information-based services that play a growing role in US-EU trade.

Mead is correct to point out the advantages of the US and EU trying to craft an FTA template, particularly for the sectors they care about a lot.  Still, a few quibbles and disagreements. 

First, a transatlantic deal doesn't signal a "collapse of the movement toward global free trade" -- it signals a different pathway towards that goal.  The collapse of Doha suggests that the traditional multilateral round negotiaions are dead, but it's worth remembering that the global economy got very close to zero barriers in the late 19th century and there was nary a multilateral institution to be found.  True, the trade agreements of the 19th century had most-favored nations clauses and their 21st century counterparts do not.  Nevertheless, the political economy of trade diversion still generates competitive incentives for a growth in FTAs, thereby leading to a similar end outcome -- a world blanketed in free-trade agreements. 

Second, contra Mead, I'd suggest that a transatlantic trade deal is not a sign of US-EU strength, but rather its weakness.  There have been rumblings and trial balloons to do something like this for the past fifteen yewars, but it never really got off the ground.  The reason it never got off the ground was simple -- both Americans and Europeans were worried that any trade deal this massive would scupper the WTO system.  It would seem like a developed country effort to completely rewrite the rules of the global trading game.  Since everyone had a lot of skin in the WTO game, it didn't seem like it would be worth it. 

Two things have changed.  First, the traditional method of multilateral trade liberalization has died.  Second, while both the US and EU are major trading states, they're not quite as pivotal as they used to be.  Ironically, it's their declining (though still appreciable) importance in global trade that makes a US-EU agreement feasible now.  The BRIC economies are now sufficiently large that a transatlantic trade deal doesn't seem like an existential threat. 

Developing....

I was trying to cogitate a post on the attacks in Cairo and Benghhazi yesterday inspired by this 13-minute piece of tripe that was consistent with what I've said before about stupid speech acts and the necessity of government tolerance of them. 

Fortunately, Marc Ambinder has already written something that is better than anything I can craft on the fly, so I'll just outsource the argument to him.  In particular: 

We live in a world where American provocateurs can easily arouse the militancy of Muslim extremists who are more ubiquitous than even I would like to admit, or, at the very least, allow bad people to use extant anti-American sentiment to whip crowds into frenzies. In either case, innocent people, including Americans, die.

On Twitter, the first instinct of a lot of Americans was retributive justice. But the U.S. government's sensitivity about the mood of the violent protesters is maddening but necessary. Being aggressive would cause more unnecessary dying. 

Those who use the gift of institutionally and legally-protected free speech to exploit and prey upon the vulnerability of certain people to violence ought to be shamed.  

At the same time, the people who killed people; protesters, thugs, militants, whomever, are ultimately responsible for their actions. If the U.S. government is going to discourage our own idiots from provoking people, then the governments of Egypt and Libya should act to corral those within their own nations who would storm an embassy on the pretext that a film offends. Well, barely, a film. A piece of anti-Muslim bigotry that was made to make the filmmakers feel good and others feel bad. If, as an American, I feel embarrassed that so many of my fellow Americans are bigots, I would, as an Egypt or a Libyan, be even more horrified that the majority in my country seemed unable to stop (and barely condemn) the even more deplorable violent religious extremism of a minority.  

The Arab Spring is incredibly messy and it is hard to see how American values and sensibilities about religious speech will ever take hold in some countries there. That’s incredibly depressing, but I do know this: The barrels of our own guns won't help anything either.

Read the whole thing. 

I should be really pleased with Thomas Friedman's column today.  Entitled "In MItt's World," Friedman pens a substantive column criticizing Romney's foreign policy rhetoric to date and wishing that Romney displayed the same analytic acumen about foreign policy that he displayed as CEO of Bain Capital. 

So I should be happy, except that I passed out from banging my head against my desk after reading the first two paragraphs: 

Mitt Romney has been criticized for not discussing foreign policy. Give him a break. He probably figures he’s already said all that he needs to say during the primaries: He has a big stick, and he is going to use it on Day 1. Or as he put it: “If I’m president of the United States ... on Day 1, I will declare China a currency manipulator, allowing me to put tariffs on products where they are stealing American jobs unfairly.”

That is really cool. Smack China on Day 1. I just wonder what happens on Day 2 when China, the biggest foreign buyer of U.S. debt securities, announces that it will not participate in the next Treasury auction, sending our interest rates soaring. That will make Day 3 really, really cool. 

No.  No, no, no, no, no, and no. 

To elaborate a bit further:  

First, it wouldn't be enough for China to stop buying Treasuries -- as Joe Weisenthal showed with some fun charts a few weeks ago, China has pared back its Treasury purchases intermittently over the past few years -- with zero appreciable effect on U.S. interest rates. (see non-panda-hugger Paul Krugman on this point as well).  No, for China to have the effect that Friedman envisions, they would also have to actively dump most of their holdings of U.S. debt as well.

So what if they do?  Well, second, while Romney's stated China policies border on the destructive, the "labeling" move is bone-headed rather than truly calamitous. China wouldn't dump its debt unless things got really bad between the two countries.  Not even Stephen Roach thinks this would be the initial Chinese response -- and I think Roach is being way too gloomy about Sino-American relations under Romney. 

The reason China won't respond with the nuclear option of dumping all its U.S. debt holdings is that -- to repeat a theme -- this move would hurt China way more than it would hurt the United States.  The far more likely response by China would be to retaliate with trade measures.  This would not be good, as China is now the third largest export market for the United States.  Beijing can hurt a Romney administration by reducing its American imports far more adroitly than trying to trigger another financial crisis. 

Now, for the record, I don't think Romney should label China as a currency manipulator on day one, and I think Friedman makes some trenchant observations on Romney's consequences-free foreign policy statements later in his column.  But this Niall Ferguson-lite version of Sino-American relations is bad international relations theory and really bad economics -- and yet Very Serious People keep trotting it out.  

I really, really wish this would disappear from public discourse.  But it won't.  So, most likely, my desk is gonna get dented a few more times before Election Day. 

I've been reading a raft of books recently arguing that authoritarian capitalism is a more sustainable model than us in the West appreciate.  According to this meme, entities like sovereign wealth funds, state-owned enterprises, and national oil companies will be carving up ever-greater slices of the global economy. 

Whenever I read these arguments, the question that gnaws at me is how these authoritarian capitalist institutions will operate in other authoritarian capitalist countries.  See, this kind of argument presumes a harmony of interests that doesn't necessarily exist between authoritarian states.  It also presumes a standard of competency and efficiency - or, at least, efficient corruption -- that makes these firms and institutions able to compete with private sector firms. 

For see what I'm talking about, see this Washington Times story by Kelly Hearn on China's growing frustration with Venezuela:

China has poured billions of dollars into Venezuela’s oil sector to expand its claim over the country’s massive oil reserves.

But Beijing is getting relatively little for its investments, and Chinese officials are increasingly frustrated with Venezuelan President Hugo Chavez, according to energy analysts and former managers of the state oil company, Petroleum of Venezuela, or PDVSA as it’s known by its Spanish acronym....

In 2010, CNPC signed a deal to help Venezuela develop a major Orinoco oil field known as Junin 4, which includes the construction of a facility to convert heavy oil to a lighter crude that could be shipped to a refinery in Guangdong, China.

“Although the contract was signed in December 2010, not one barrel of oil has yet been produced, much less upgraded,” said Gustavo Coronel, a former PDVSA board member.

“So far, nothing much seems to be happening, except for the arrival of a large group of Chinese staff to the CNPC’s Caracas office,” he added, referring to the Venezuelan capital, Caracas.

“Apart from money, there seems to be little that China can offer Venezuela in the oil industry,” he said, adding that a “culture gap will make working with China very difficult for Venezuelan oil people, who were mostly trained in the U.S.”....

The Chinese also seem to be increasingly wary.

Internal PDVSA documents released by a Venezuelan congressman show that the Chinese balked at a $110 billion loan request by Mr. Chavez in 2010, after PDVSA officials failed to account fully for where the money would go.

Venezuela is not the only place that Chinese foreign direct investment in energy is running into bottlenecks and roadblocks.   There was Myanmar last year:

fter five years of cozy cooperation with Burma’s ruling generals, China Power Investment Corp. got a shock in September when it sent a senior executive to Naypyidaw, this destitute Southeast Asian nation’s showcase capital, a Pharaonic sprawl of empty eight-lane highways and cavernous government buildings.

Armed with a slick PowerPoint presentation and promises of $20 billion in investment, Li Guanghua pitched “an excellent opportunity,” a mammoth, Chinese-funded hydropower project in Burma’s far north.

Then came the questions: What about the risk of earthquakes, ecological damage and all the people whose homes would be flooded? Is it true that most of the electricity would go to China?

Two weeks later, Burma, also known as Myanmar, scrapped the cornerstone of the project. President Thein Sein, a former general who took office in March, announced that he had to “respect the people’s will” and halt the $3.6 billion dam project at Myitsone, the biggest of seven planned by China Power Investment, or CPI.

As the world’s biggest consumer of energy, China has hunted far and wide in recent years for sources of power — and of profit — for state-owned corporate behemoths such as CPI. The result is a web of deals with often-repressive regimes, from oil-rich African autocracies such as Sudan and Angola to river-rich Burma.

But coziness with despots can also backfire.

Amid a dramatic, though still fitful, opening in Burma after decades of harsh repression, public anger has swamped China’s hydropower plan. The deluge threatens not only hundreds of millions of dollars already spent but also China’s intimate ties to what had been a reliably authoritarian partner, its only East Asian ally other than North Korea.

Beijing still has big interests in Burma, including a multibillion-dollar oil and natural gas pipeline that is under construction. But a partnership forged with scant heed to public opinion has been badly jolted by a barrage of no-longer-taboo questions.

These are just isolated cases -- I have no doubt that China has a boatload of successful FDI projects in energy.  What's telling, however, is that regardless of whether the host regime is democratizing or reverting to autocracy, the political economy of these investments is far from problem-free. 

One must sympathize with the Chinese firms here.  China's domestic politicsal economy of investment aren't this messy.  Oh, wait...

After a year of nearly-nonstop travel, I've flown airlines ranging from American to SATA, to airports as large as Shanghai's Pudong International Airport and as small as Ithaca's Tompkins Regional Airport.  Which ones can I recommend?  Which ones should be avoided?  My long-awaited picks:

Best Airline: It's Virgin Atlantic, and whichever airline finished second ain't close.  Admittedly, I was flying in their "Upper Class" cabin. Still, their airport lounges are far and away the most pleasant places to be in an airport, and their planes are quite comfortable as well.  The food on the plane was tasty, the food in the airline loundes was exceptional, and the service was impeccable.  These were the only flights I can honestly say I enjoyed this year.  Besides, their commercials are just so darn kicky.   

Worst Airline:  I'm tempted to just say "all the rest," but I will put Lufthansa in its own inner concentric circle of hell.  Old planes, grumbly service, and really, really bad food.  The low point was when they showed a Golden Girls episode on hour 5 of The Longest Transatlantic Flight I've Ever Taken. 

Worst Airport:  My criteria here is very simple:  How easy is it for me to get from the curb to my airplane seat with a minimum of time and a maximum of choices to feed myself?  Using these criteria, I will be trying to avoid Dubai International Airport fot a spell.  The security checks there are the more onerous I've seen in any airport anywhere -- and I'm including trying to fly in and out of Ben-Gurion Airport in this assessment.  The Dubai security personnel were all nice, and I understand that they have a job to do, but this was a wretched experience.

Best Airport:  I'm surprised to come to this conclusion, but I have to award this to Reagan National Airport.  I fly in and out of this airport a lot, and I realized that I have never once had a bad TSA experience there.  This is surprising, given the kind of travelers they encounter.  Plus, they have a Five Guys.   

Hey, remember my last bloggingheads, when I went to the 1930s analogy to describe the current problems in the global political economy?  Well, that was a few days ago, and my, how things have changed -- to make that 1930's analogy even more powerful.  The eurogoggles metahor may be coming to an end -- because the situation is so dire that even the cheeriest summit won't alter perceptions in financial markets. 

After a week of gyrating europolitics on the Greek bailout and meaningless G-20 summitry, markets and media will be focused on Italy this week.  This matters -- for both Europe and the world, Greece is a diverting sideshow compared to a major financial collaspse in Italy.  The pressure on Italian PM Sylvio Berlusconi to resign have gotten so loud that he had to take to his Facebook page to say, "The rumors of my resignation are groundless."   New rule of thumb:  any time a politician follows Sarah Palin's lead, there's going to be a problem. 

The Daily Telegraph's Ambrose Evans-Pritchard explains the eurofarce that is currently playing out: 

As of late Friday, the yield spread on Italian 10-year bonds over German Bunds was a post-EMU record of 458 basis points. This is dangerously close to the point where cascade-selling begins and matters spiral out of control.

The European Central Bank has so far bought time by holding a series of retreating lines but either it has reached its intervention limits after accumulating nearly €80bn of Italian debt, or it is holding fire to force Silvio Berlusconi to resign – if so, a foolish game.

The ECB’s hands are tied. A German veto and EU treaty constraints stop it intervening with overwhelming force as a genuine lender of last resort. The bank is itself at risk of massive over-extension without an EU treasury and single sovereign entity to back it up.

This lack of a back-stop guarantor is an unforgivable failing in the institutional structure of monetary union....

The spreads on EFSF 5-year bonds have already tripled to 151 above German debt, leaving Japan and other early buyers nursing a big loss. The fund suffered a failed auction last week, cutting the issue from €5bn to €3bn on lack of demand.

Gary Jenkins from Evolution Securities said the “frightening” development is that the EFSF is itself being shut out of the capital markets. “If it continues to perform like that then the bailout fund might need a bail out,” he said.

Europe’s attempt to widen the creditor net by drawing in the world’s reserve states evoked near universal scorn in Cannes and a damning put-down by Brazil’s Dilma Rousseff. “I have not the slightest intention of contributing directly to the EFSF; if they are not willing to do it, why should I?”

Europe is resorting to such antics because its richer states – above all Germany -- still refuse to face up to the shattering implications of a currency that they themselves created, and ran destructively by flooding the vulnerable half of monetary union with cheap capital.

Simon Johnson is, er.... less than optimistic about these developments: 

MIT Sloan School of Management professor Simon Johnson didn’t equivocate on the perils of the current global economic environment. “We have built a dangerous financial system in the United States and Europe,” said the former chief economist at the International Monetary Fund. “We must step back and reform the system.”

Professor Johnson cited alarming parallels with October 1931, when “people thought the worst was behind them, but the smart people were wrong and instead the crisis just broadened.”  (emphasis added) 

I've said it before and I'll say it again:  any time the global economy is counting on Sylvio Berlusconi to do the right thing is not a good time. 

Developing.... 

You humble blogger has been skeptical but not dismissive of the Occupy Wall Street phenomenon.  My general assessment was that it did reflect ongoing frustrations about trendlines in the American and global economy, but that in all likelihood the decisions of a few banking bureaucrats would have more of an effect than these protests. 

As I've noted before, the big problem with networked movements of this kind is what happens over time: 

What happens when the coalition of like-minded individuals stop being of like mind? These sorts of protests can be very powerful on single-issue questions where a single policy change is desired. Maintaining this level of activism to affect the ongoing quotidian grubbiness of politics, however, is a far more difficult undertaking. Even if people can be mobilized behind the concept of "Policy X is Stupid!" getting the same consensus on "Policy Y is the Answer!" is harder. Over time, these kind of mass movements have an excellent chance of withering away or fracturing from within. See, for example, the Tahrir Square movement in Egypt.

Another thing, and this is important: unless the people in these movements actually vote in elections, then their agenda will be thwarted in the long run. Even if these kinds of networked movements are new, the political imperative to get elected and re-elected is not. If they don't vote, then officials have a pretty powerful incentive to curry favor with the people who do vote, don't take to the streets and don't like these young whippersnappers with their interwebs have different policy preferences.

I bring this up because n+1 relays some of the internal deliberations among the Occupy Wall Streeters.*  Let's take a peek, shall we? 

Friends, mediation with the drummers has been called off. It has gone on for more than 2 weeks and it has reached a dead end. The drummers formed a working group called Pulse and agreed to 2 hrs/day at times during the mediation, and more recently that changed to 4 hrs/day. It’s my feeling that we may have a fighting chance with the community board if we could indeed limit drumming and loud instrumentation to 12-2 PM and 4-6 PM, however that isn’t what’s happening.

Last night the drumming was near continuous until 10:30 PM at night. Today it began again at 11 AM. The drummers are fighting among themselves, there is no cohesive group. There is one assemblage called Pulse that organized most of the drummers into a group and went to GA for formal recognition and with a proposal.

Unfortunately there is one individual who is NOT a drummer but who claims to speak for the drummers who has been a deeply disruptive force, attacking the drumming rep during the GA and derailing his proposal, and disrupting the community board meeting, as well as the OWS community relations meeting. She has also created strife and divisions within the POC caucus, calling many members who are not ‘on her side’ “Uncle Tom”, “the 1%”, “Barbie” “not Palestinian enough” “Wall Street politicians” “not black enough” “sell-outs”, etc. People have been documenting her disruptions, and her campaign of misinformation, and instigations. She also has a documented history online of defamatory, divisive and disruptive behavior within the LGBT (esp. transgender) communities. Her disruptions have made it hard to have constructive conversations and productive resolutions to conflicts in a variety of forums in the past several days.

At this point we have lost the support of allies in the Community Board and the state senator and city electeds who have been fighting the city to stave off our eviction, get us toilets, etc. On Tuesday there is a Community Board vote, which will be packed with media cameras and community members with real grievances. We have sadly demonstrated to them that we are unable to collectively 1) keep our space and surrounding areas clean and sanitary, 2) keep the park safe, 3) deal with internal conflict and enforce the Good Neighbor Policy that was passed by the General Assembly.

This description sounded faintly familiar, and then I remembered -- it was a replay of every dorm meeting I attended when I was a first-year in college. 

Don't worry, OWS sympathizers -- a few hours after this was posted, there was the following update: 

Crisis averted: tonight at the General Assembly, the working group of drummers, Pulse, in a spirit of conciliation and generosity, brought forward a proposal to limit their drumming from 12 to 2 and 4 to 6 PM only. The proposal had been worked out through weeks of mediation with the direct action working group. It was considered a first step toward showing the community board that the community in Zuccotti Park can regulate itself. The proposal was approved by consensus by the General Assembly, with applause and rejoicing on all sides.

Good on OWS for resolving some conflict, but this little window into their internal deliberations suggest the hard limits on their movement.  If the transaction costs of  regulating drumming are this massive, I'm extremely dubious about their ability to agree on concrete policy proposals and articulate them effectively to anyone outside their band of sympathizers -- especially since I'm not sure that all of their views will resonate within the mainstream of American public opinion. 

Am I missing anything? 

*I confess that part of me is still wondering if this is satire. 

Centrist pollster Douglas Schoen has an op-ed in today's Wall Street Journal that reports on some polling his firm did of the Occupy Wall Street protestors: 

The protesters have a distinct ideology and are bound by a deep commitment to radical left-wing policies. On Oct. 10 and 11, Arielle Alter Confino, a senior researcher at my polling firm, interviewed nearly 200 protesters in New York's Zuccotti Park. Our findings probably represent the first systematic random sample of Occupy Wall Street opinion.

Our research shows clearly that the movement doesn't represent unemployed America and is not ideologically diverse. Rather, it comprises an unrepresentative segment of the electorate that believes in radical redistribution of wealth, civil disobedience and, in some instances, violence. Half (52%) have participated in a political movement before, virtually all (98%) say they would support civil disobedience to achieve their goals, and nearly one-third (31%) would support violence to advance their agenda....

What binds a large majority of the protesters together—regardless of age, socioeconomic status or education—is a deep commitment to left-wing policies: opposition to free-market capitalism and support for radical redistribution of wealth, intense regulation of the private sector, and protectionist policies to keep American jobs from going overseas.

Sixty-five percent say that government has a moral responsibility to guarantee all citizens access to affordable health care, a college education, and a secure retirement—no matter the cost. By a large margin (77%-22%), they support raising taxes on the wealthiest Americans, but 58% oppose raising taxes for everybody, with only 36% in favor. And by a close margin, protesters are divided on whether the bank bailouts were necessary (49%) or unnecessary (51%).

Thus Occupy Wall Street is a group of engaged progressives who are disillusioned with the capitalist system and have a distinct activist orientation.

Now there are two ways to look at this data.  The first, as many sympathizers with the movement have done, is to impugn the pollster's politics, his methods, and the ways in which he's inferring broad political generalizatiions from the data. 

These points are worth considering, though looking at the precise questions asked compared to his inferences, I'm not seeing all that much conceptual stretching.  Plus, Schoen's results seem to jibe pretty strongly with a smaller New York poll of 100 protestors conducted earlier this month. 

Furthermore, consider Nate Silver's analysis of the protests that took place over the weekend across the globe.  In looking at turnout, Silver arrives at a similar -- thouugh not identical -- conclusion: 

The nascent movement known as Occupy Wall Street had its largest single day of protests on Saturday. And a funny thing happened: most of the action was far from Wall Street itself....

Over all, about 38,000 protesters — more than half of the documented total — turned out in the Western Census Bureau Region, which accounts for about 23 percent of the country’s population. On a per-capita basis, the West drew about two-and-a-half times more protesters than the Northeast, four times more than the Midwest, and five times more than the South. And it wasn’t necessarily in large cities — although places like Los Angeles and Seattle had large crowds, so did the wine-and-cheese town of Santa Rosa, Calif., and the college town of Eugene, Ore. among others.....

 

This could be due to a number of factors. Perhaps it has something to do with race, for instance. Cities where African-Americans make up a majority of the population, like Detroit, New Orleans and Cleveland, have tended to have underwhelming numbers of protesters and poorly organized Occupy groups. (There are plenty of those cities in the South, the Northeast and even the Midwest — but not really in the western United States).

Or maybe it has something to do with technology: Much of the organizational activity for the Occupy movement has taken place online, and the West Coast is particularly tech-savvy.

I suspect that more than anything, however, it reflects the politics of the protesters. Specifically, they tend to be more liberal than they are Democratic partisans. Take liberalism, subtract the Democratic Party, and the remainder might look something like Occupy Wall Street (emphasis added).

There needs to be more data, but Schoen's results don't seem out of line with the other data points. 

While Occupy Wall Street has been garnering many headlines with outrage about the financial sector, the Bank of International Settlements just released a paper that's likely to have more actual impact on said financial sector.  The paper is an effort to estimate the costs and benefits from requiring global systemically important banks (G-SIB's) to increase their capital buffers.  From the executive summary: 

[R]aising capital requirements on the top 30 potential G-SIBs by 1 percentage point over eight years leads to only a modest slowdown in growth. GDP falls to a level 0.06% below its baseline forecast, followed by a recovery. This represents an additional drag on growth of less than 0.01 percentage points per year during the phase-in period. The primary driver of this macroeconomic impact is an increase of lending spreads of 5-6 basis points. Soon after implementation is complete, growth is forecast to be somewhat faster than trend until GDP returns to its baseline. The aggregate figures conceal significant differences across countries, which reflect differences in the role of G-SIBs in the domestic financial system and in current levels of bank capital buffers. International spillovers are also important, and in some countries are likely to be the dominant source of macroeconomic effects.

The overall results are robust to variations in key assumptions. Using a longer list of banks, scaling by assets rather than lending, shortening the implementation period, or limiting the ability of authorities to offset slower growth with monetary or macroprudential policy were all found to increase the growth impact, but not markedly.

What will be the effect of the full package of the Basel Committee's proposals for stronger capital requirements - the set of buffers that will be required of all banks under Basel III, combined with the additional buffers to be carried by G-SIBs? The impact of the Basel III proposals, using the end-2009 global capital levels as a starting point, was calculated by the MAG [Macroeconomic Assessment Group] in 2010. On top of this, we assume for illustrative purposes that the top 30 G-SIBs will need to raise their capital ratios by an additional 2 percentage points, and that both parts of the reform are implemented over eight years. Adding together these two components, we find that the impact is again quite small, with GDP at the point of peak impact forecast to have fallen 0.34% relative to its baseline level. Roughly 0.04 percentage points are subtracted from annual growth during this period, while lending spreads rise by around 31 basis points. As before, different assumptions lead to different effects, with faster implementation or a weaker monetary policy response increasing the impact on GDP.

The benefits of the G-SIB framework relate primarily to the reduction in the exposure of the financial system to systemic crises that can have long-lasting effects on the economy. The LEI estimated the benefits of Basel III by multiplying the degree to which it reduces the annual probability of a systemic crisis, by an estimate of the overall cost of a typical crisis in terms of lost output. Drawing on the [Basel Committee Long-term Economic Impact Study's] results, the MAG estimated that raising capital ratios on G-SIBs could produce an annual benefit in the order of 0.5% of GDP, while the Basel III and G-SIB proposals combined contribute an annual benefit of up to 2.5% of GDP - many times the costs of the reforms in terms of temporarily slower annual growth.

Let me just translate how the BIS would put this to a lay audience:

Hey, you know how Jaime Dimon and all the other bankers who contribute to the Institute for International Finance, American Bankers Association, and Financial Services Forum keep saying that raising their capital requirement is "anti-American" and will lead to catastrophic economic consequences?  Yeah, well, they don't know what the f**k they're talking about.  Raising their capital requirements causes a extremely small dip in expected growth -- and by small we mean less than one tenth of one percent of GDP.  This is massively outweighed by preventing the expected lost output that would result from recessions triggered by another financial crisis. 

Now, it's not terribly surprising that global regulators will say that they're right and the banks are wrong.  One would expect that the interest group power of Wall Street, however, would have the upper hand.  What is surprising, as the Wall Street Journal's Sara Schaefer Munoz notes, is that the banks seem to be losing their battle with regulators:

The tug-of-war between banks and regulators over post-crisis financial rules has so far moved in the watchdogs' favor with banks largely failing to upend the tougher proposals in the U.S. and Europe....

Even before Monday's report, regulators didn't seem responsive to the industry's arguments. In the U.S., lawmakers have already determined that the country's big banks must hold more capital, but haven't yet specified how much.

The Dodd-Frank financial overhaul law, enacted more than a year ago, mandated many new restrictions on banks but left it to regulatory agencies to write the rules. Wall Street and the financial industry have spent millions of dollars lobbying to shape the rules, with little success so far.

They lost in their efforts to block new limits on the fees they can charge merchants when consumers use debit cards. Regulators are expected to vote Tuesday to issue a proposed "Volcker Rule," a part of the Dodd-Frank law designed to curtail trading activities at bank. Now they appear likely to fail in their efforts to block or water down a rule requiring them to hold extra capital.

In 2010, securities and investment firms spent a record $101.6 million on lobbying, up from $92.3 million in 2009, according to the Center for Responsive Politics. Through early October 2011, the firms had shelled out $49.5 million.

There are plenty of ways in which large banks can continue to fight the suggested rules, particularly on the implementation side.  Still, this is not how open economy politics traditionally works.  Traditionally, bank preferences are communicated to national governments, which then get expressed in BIS/Basle Committee meetings.  This certainly happened in the actual Basel III negotiations.   This kind of back and forth, in which regulators appear to trump the arguments of the financial sector, is highly unusual. 

I confidently predict that this post will not generate the kind of comments that, say, an Occupy Wall Street post has in the past week.  That's kind of a tragedy, because this ongoing tug of war between the BIS and IIF will likely have more far-reaching consequences than anything those protestors achieve. 

Developing....

I was fortunate enough to give a talk at my alma mater over the weekend and chat informally with some of the political science undergraduates over some food from an Indian restaurant that didn't exist when I was in school and I can't believe how much greater their range of ethnic food choices are than when I was in school and their life is great and college life was much tougher back in my day while we broke bread. Inevitably, the question of Occupy Wall Street came up and whether it would go anywhere.

Now, in many ways, this phenomenon has many of the features of networked movements that have been at the center of The Slaughter-Drezner Debates (although in this case Slaughter seems a bit more disdainful of the movement's potential). If you read here or here or here, you'll see all the advantages of a networked structure outlined in painstaking detail. This ragtag group of rebels has managed to get coverage on The Daily Show, generate associated online movements like the "We Are the 99%" Tumblr, generate headlines through mass arrests over the weekend, and inspire similar movements in other cities.

So … what did I say to these impressionable young adults?

I said two things. First, I said the moment was ripe for this kind of movement. You have an ample supply of network technologies to start a movement, and rising economic inequality to create the necessary social purpose for such a movement. Indeed, the surprising thing about Occupy Wall Street isn't that it's happening -- it's that it took three years for it to happen.

The other thing I said was that for this group to generate more than a thousand people or so out in the streets, however, their message has to resonate culturally with people who would otherwise not want to go out onto the streets. And here's where I start to be a bit more skeptical. I'm not sure the latest manifesto is really cogent enough -- beyond a rejection of corporations as we know them -- to generate much sympathy with broad swaths of the American people. And, as I've said before, unless you attract people who vote, this kind of thing will generate news coverage and not much else.

Could they attract a larger crowd? After reading Time's Nate Rawlings, I'm skeptical:

While "Occupy Wall Street" has become more organized, its demands haven't coalesced into a coherent message. The only thing its various constituent groups appear to have in common is a deep-seated anger at inequality in this country. For them Wall Street symbolizes that unfairness, but the groups have other concerns as well. Many want to redistribute wealth; others want to enlarge government social programs. Some are protesting against the wars in Iraq and Afghanistan. Daniel Levine, a journalism student from upstate New York, said he was taking a stand against the controversial method of natural gas extraction known as hydrofracking in his hometown – but also noted that the practice can bring jobs to economically disadvantaged regions.

Just as it lacks a single message, the "Occupy Wall Street" movement has been defined by the absence of a clear leader. Participants say that is by design, and point to the committees that have sprung up to tend to the daily needs of those camped in Zuccotti Park. It isn't clear that they want a single leader, and many think the movement is better of[f] without one. “It's kind of cool how it's growing organically,” one said. “People just need to give it time and it'll come together.”

Maybe, over time, that will happen. There's a political paradox, however, that Occupy Wall Street faces. Without clear and coherent demands, there will be little to inspire ordinary citizens to take to the streets. Articulating clear and coherent demands, however, will destroy the very gestalt that the people currently on the streets seem to like some much.

Still, unions have started to come out in support of this movement. The U.S. economy is in a bad way, and the festering eurocrisis could make it really bad. So maybe external conditions will eliminate this paradox for the protesters.

So that's what I think. What do you think?