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?
We live in a world where every other Thomas Friedman column bemoans the lack of global leadership, and every other David Rothkopf tweet bewails the dysfunction of global governance. Phrases like "G-Zero" get tossed around a lot, and trashing global economic governance seems to be a prerequisite for writing in the Financial Times.
Given this climate, I thought it would be useful to take a step back and point out a rather awkward and uncomfortable truth: global economic governance has actually done a surprisingly good job in response to the 2008 financial crisis.
Ludicrous, you say? Well, to make my case, I've written up an IIGG working paper for the Council on Foreign Relations entitled, "The Irony of Global Economic Governance: The System Worked." The opening paragraph:
The 2008 financial crisis posed the biggest challenge to the global economy since the Great Depression and provided a severe “stress test” for global economic governance. A review of economic outcomes, policy outputs, and institutional resilience reveals that these regimes performed well during the acute phase of the crisis, ensuring the continuation of an open global economy. Even though some policy outcomes have been less than optimal, international institutions and frameworks performed contrary to expectations. Simply put, the system worked
Now you'll have to read the whole thing to see if I'm blinkered or not. There's a decent chance that I am, mind you, but I'm pretty comfortable with the empirics of my case. What I'm uncomfortable with is the reasons why things have played out the way that they have. More on that as I work it out in my own head.
Now I've been just as skeptical as the next guy when it comes to some dimensions of global economic governance. Still, this is one of those times when stepping away from the day-to-day of the blog and looking at the overall situation provides some valuable perspective.
Still, feel free to point out where I'm wrong. Cause I suspect that this paper is going to drive some Very Serious People in the foreign policy community absolutely bonkers.
Well, given this morning's headlines, I can't think of a better week for Foreign Policy to put excerpts of my interview with C. Fred Bergsten online. Bergsten is the founder of the hugely influential Peterson Institute for International Economics. At the end of this year, he will be stepping down as president of that institute.
Sometime this week I will post the full interview transcript. In the meanwhile, I found this answer to be particularly interesting:
They were not very literate then, and they're not very literate now. The problem is that the individuals who are at the top of the foreign-policy hierarchy, both at State and at the National Security Council, tend to be less than sophisticated, shall we say, about economic issues. It's not part of their DNA to think about economic topics when they go about their business with Syria or Iran or Russia, not to mention Europe or China.
This observation is ironic, given recent reports that Tim Geithner suggested Hillary Clinton replace him as Treasury Secretary last year. Still, I think Bergsten's proposition has held for quite some time. I don't think it will be able to hold for much longer, however.
If one myth has been slain by the financial crisis and the response to it, it's the idea that central banks ought to be independent and unaccountable politically.
The idea of central bank independence was that it would guarantee good monetary policy. During the Great Moderation it certainly seemed that way. But now it's no longer the case...
[The] point is that the choice between inflation and unemployment is a political, not a technical choice. What's "better"? To screw debtors or creditors? To make millions unemployed or to "debase the currency"? Those are very important questions. More important, they're questions that cannot be solved by economics. They can be informed by them, but at the end of the day what you prefer is going to come down to your own moral value system. In other words, it's a political choice. And the way we make political choices in modern countries is through the democratic process, not through unelected, unaccountable technocrats....
The bottom line is that the argument of supercompetence of central bankers is dead and once that's gone you need to revert those powers back to the political process (emphasis in original).
Now, this is a pretty powerful argument. One would be hard-pressed to say that Jean-Claude Trichet or Alan Greenspan or Ben Bernanke have covered themselves in glory during the past five years or so. Why not return central banking to the politicians?
Well.... before I answer, I want to object to Gobry's framing of the issue in two ways. First, he sets up a too-simple dichotomy between "independence" and "political control." The devil is in the details here. Political scientists have done a lot of research into how legislatures exert influence over supposedly "independent" institutions like courts and regulatory agencies, and this logic applies to central banks as well. Or, to put it another way, I suspect that Ben Bernanke would be pumping more money into the economy were it not for a fear of Congressional blowback. Furthermore, "political control" is unclear here -- which politicians have control? Would central bankers be directly elected? Appointed by the legislature? Appointed by the executive subject to recall? And so forth.
Second, the notion that central banking decisions are strictly political seems as wrong as characterizing them as strictly technical. It is overly cynical to believe that either technocrats or politicians gin up any old theory to justify the policy ends they seek. As with Supreme Court disputes, there are genuine disagreements in economics on the theory side. At this very moment, different central bankers disagree over the best way to reduce unemployment in part because of different economic theories. Expertise is kinda important in these moments.
OK, these contestations aside, I still have a basic problem with Gobry's argument. For Gobry's process to work better, voters have to punish politicians for poor monetary policy and reward them for wise and prudent monetary policies. I see little evidence that voters would have the necessary knowledge and attention span to do this. Instead, they would likely vote on other considerations, or vote based on short-term considerations such as the unemployment rate and GDP growth without considering whether short-term pump-priming is occurring or long-term sustainable growth. Furthermore, politicians would rig the game just a bit. Political scientists have extensively discussed the existence of "political business cycles" due to fiscal policy. I have every confidence that political control over monetary policy would simply extend the phenomenon to that policy lever as well.
The fact that politicians still control the fiscal lever is what leads me to think that central banking should still be independent. A diversification of political controls over the economy seems like the best minimax strategy over the long run. Thinking back to how U.S. politicians would have handled the last 20 years of central banking, I suspect that they simply would have exacerbated the boom-bust dot-com and housing bubbles. It's not clear at all that the added democratic gain outweighs the loss in policy competence.
That said, Gobry makes a powerful argument, and I'd like to hear from readers. Has independent central banking jumped the shark? What do you think?
While I was on the road last week, I see that Greek elections managed to accomplish two things:
1) A requirement for yet more Greek elections; and
Sooo ... what happens then? The Financial Times has a useful article that asks the appropriate big questions while providing some useful information. Particularly interesting is the emerging belief that the eurozone now has erected the necessary firewalls to prevent contagion from Greece to the rest of the southern Med and Ireland:
[W]ith a new, permanent €500bn rescue fund backed by the strength of an international treaty with multiple tools to buy sovereign bonds on the open market and inject capital into eurozone banks, some officials believe the contagion could be contained -- much as it was after Athens finally defaulted on private bondholders last month.
"Two years ago a Greek exit would have been catastrophic on the scale of Lehman Brothers,” says a senior EU official involved in discussions about Greece’s future. “Even a year ago, it would have been extremely risky in terms of contagion and chain reaction in the banking system. Two years on, we’re better prepared."
The new eurozone firewall -- now backed with additional resources for the IMF -- is not the only reason some officials are becoming increasingly sanguine about losing Greece. Spain and Italy, they say, have taken huge steps to put their economic houses in order, enabling them to bounce back quickly if credit markets suddenly dry up and their banks wobble.
Still, uncertainty over how Europe’s banks would be affected has continued to be the primary concern.
Paul Krugman is somewhat more pessimistic. Sketching out the possible endgame, he posits that Spanish and Italian banks would experience massive capital flight, triggering the key decision faced by Germany:
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy -- basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
And we’re talking about months, not years, for this to play out.
Krugman has been predicting Greece's exit from the euro for some time now, but in this case I do think he's correct about the choice posed by Germany -- as yet more signals accrue about Merkel's declining political strength.
Now, actually, I suspect that Greece stays in the eurozone for longer than anyone suspects. That said, based on my two empirical observations during the past two years -- namely, eurogoggles and the Merkel Algorithm. Here is how I would game out the "Grexit" scenario:
1. Greece's departure is announced at the same time as an EU summit announces a boost to its new rescue fund and modest pro-growth German policies. Markets initially react to this news favorably.
2. Within 48 hours, negative news about the Spanish and Italian economies, combined with a second wave of stories revealing that the rescue fund isn't as big as anyone thought it was, rattles financial markets and triggers the behavior described by Krugman.
3. The ECB does nothing, calling on
MerkelEuropean political leaders to take "decisive action."
4. After a week or two of agnonizing non-action, Germany announces half-measures that end the immediate panic gut set up Spain for more stagnation and a new crisis in 2013.
Am I missing anything?
In my experience, pundits tend to be risk-averse in calling out a very rich person on their economic or financial analyses. There's a couple of intuitive logics at work here:
1) Most pundits don't know much about economics, and so are leery of entering those waters;
2) The really rich person likely became really rich because they demonstrated a shrewd understanding of the markets -- therefore, who is the low-six-figure-or-less-earning pundit to challenge such high-yielding wisdom;
3) Most pundits refuse to admit that they don't understand something that reads like gobbledgook, because they're afraid this makes them look like an idiot.
Well, your humble blogger has never been afraid of looking like an idiot... which brings me to PIMCO's Bill Gross. I'll occasionally read his monthly newsletter when a link to it pops up in my Twitter feed. Every time, I'm amazed at the florid, rambling, not-really-related-to-his-main-point way he opens these little essays. Sometimes I find the analysis afterwards useful, sometimes I find it eerily similar to what someone says after spending too much time with Tom Friedman. I gather he's had better years as an analyst than he did in 2011, but everyone has down years and bad predictions.
Here's the thing, though -- I can't understand a word of his latest Financial Times column: Here's how it opens:
Isaac Newton may have conceptualised the effects of gravity when that mythical apple fell on his head, but could he have imagined Neil Armstrong’s hop-skip-and-jumping on the moon, or the trapping of light inside a black hole? Probably not. Likewise, the deceased economic maestro of the 21st century – Hyman Minsky – probably couldn’t have conceived how his monetary theories could be altered by zero-based money.
Things get a little clearer towards the end of the op-ed... but not much. His February 2012 newsletter appears to be an expanded version of this op-ed (plus the usual wacky opening), so let's go there to see what he's trying to say:
[W]hen rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street.
What perhaps is not so often recognized is that liquidity can be trapped by the “price” of credit, in addition to its “risk.” Capitalism depends on risk-taking in several forms. Developers, homeowners, entrepreneurs of all shapes and sizes epitomize the riskiness of business building via equity and credit risk extension. But modern capitalism is dependent as well on maturity extension in credit markets. No venture, aside from one financed with 100% owners’ capital, could survive on credit or loans that matured or were callable overnight. Buildings, utilities and homes require 20- and 30-year loan commitments to smooth and justify their returns. Because this is so, lenders require a yield premium, expressed as a positively sloped yield curve, to make the extended loan. A flat yield curve, in contrast, is a disincentive for lenders to lend unless there is sufficient downside room for yields to fall and provide bond market capital gains. This nominal or even real interest rate “margin” is why prior cyclical periods of curve flatness or even inversion have been successfully followed by economic expansions. Intermediate and long rates – even though flat and equal to a short-term policy rate – have had room to fall, and credit therefore has not been trapped by “price.”
Even if nodding in agreement, an observer might immediately comment that today’s yield curve is anything but flat and that might be true. Most short to intermediate Treasury yields, however, are dangerously close to the zero-bound which imply little if any room to fall: no margin, no air underneath those bond yields and therefore limited, if any, price appreciation. What incentive does a bank have to buy two-year Treasuries at 20 basis points when they can park overnight reserves with the Fed at 25? What incentives do investment managers or even individual investors have to take price risk with a five-, 10- or 30-year Treasury when there are multiples of downside price risk compared to appreciation? At 75 basis points, a five-year Treasury can only rationally appreciate by two more points, but theoretically can go down by an unlimited amount. Duration risk and flatness at the zero-bound, to make the simple point, can freeze and trap liquidity by convincing investors to hold cash as opposed to extend credit (emplases in original).
And... sorry, I still don't get it. I get why zero interest rates are bad for bondholders like PIMCO. I get that flat yield curves + high amounts of economic uncertainty = cash hoarding. What I don't get is that:
A) Gross himself acknowledges that the yield curve ain't flat;
B) Low interest rates allow for private-sector deleveraging, which is a prelude to stimulating market demand;
C) Low interest rates prevent today's government binge from being even more expensive than it would be in normal times (by keeping financing costs down);
D) If uncertainty is decreasing -- and that appears to be the case with the U.S. economy -- then low interest rates should spur greater entrepreneurial investments.
So, at the risk of threatening my status in the International Brotherhood of Serious Global Political Econmy Bloggers That Talk Seriously About Economics, I hereby ask my commenters to explain Bill Gross' concerns to me. Because I don't get it -- and I'm beginning to wonder if I'm not the only one.
The term "inflection point" has become one of those overused bits of meaningless jargon in political discourse. I'm rather more fond of the notion of a "focal point" -- that is to say, an event or cluster of events in which everyone that cares about a particular problem focuses on the same set of stylized facts -- after which, they conclude that, gee, maybe the status quo set of policies ain't working so well and there should be a new status quo.
The fall of 2008 was one such focal point, during which there was remarkable consensus that a Keynesian boost in public spending was the only way to avert another Great Depression. At the fiirst G-20 leaders summit in Washington, there was consensus on expansionary fiscal policy. Oh, sure, there were grumblings about "crass Keynesianism," but even Germany reluctantly went along.
The Greek sovereign debt crisis was another such focal point. Greek profligacy seemed to be a synecdoche for excessive government borrowing and lax fiscal discipline. With the global economy seemingly still in the doldrums, a lot of Europrean governments climbed on the "expansionary austerity" bandwagon. By the Toronto G-20 summit in June 2010, the consensus had switched from Keynesian stimulus to fiscal rectitude. Oh, sure there were mutterings about "short-term austerity makes no macroeconomic sense whatsoever in a slack economy" but even Barack Obama started talking about slashing government spending.
Are we at another focal point? Consider the following:
1) According to the New York Times' Stephen Castle, European leaders now seem to recognize that austerity on its own ain't working:
Bowing to mounting evidence that austerity alone cannot solve the debt crisis, European leaders are expected to conclude this week that what the debt-laden, sclerotic countries of the Continent need are a dose of economic growth.
A draft of the European Union summit meeting communiqué calls for ‘‘growth-friendly consolidation and job-friendly growth,’’ an indication that European leaders have come to realize that austerity measures, like those being put in countries like Greece and Italy, risk stoking a recession and plunging fragile economies into a downward spiral.
2) The data is starting to come in on governments that have embraced austerity whole-heartedly, and it's pretty grim. Cue Paul Krugman on Great Britain:
Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.
Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.
And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.
3) Even commentators who would be tempermentally sympathetic with austerity are starting to
bash Germany question whether it's a solution. Consider Walter Russell Mead:
It takes some truly talented screw ups to come up with a worse plan for Greece than the one the Greeks have developed for themselves, but the Germans have risen to occasion in fine form....
Deep reform is needed if Greece is to stay in the euro, and so far the Greek political establishment — firmly backed by public opinion — is digging in its heels. Much whining, much talk, many promises and precious little action seems to be the favored Greek approach to the crisis. On the other hand, the austerity policies the Germans favor are hopelessly biased in favor of German banking interests and are aimed more at the preservation of the reputations of German politicians than at helping Greece.
The German political establishment seems willing to destroy Europe to avoid telling German voters the truth about how stupid it has been.
[UPDATE: For exhibit B of this trend, see this Niall Ferguson interview with Henry Blodget. My favorite part of the interview is this quotation: "I think the reason that I was off on that was that I hadn't actually thought hard enough about my own work.... My considered and changed view is that the U.S. can carry a higher debt to GDP ratio than I think I had in mind 2 or 3 years ago."]
4) U.S. 4th quarter data reveals that, consistent with GOP criticisms, the government has been the real drag on the U.S. economy. Not quite consistent with GOP criticisms: the reason why the government is dragging down the U.S. economy. Cue Mark Thoma:
[P]remature austerity -- cutting spending before the economy is ready for it -- is taking a toll on the recovery. The fall in government spending reduced fourth-quarter growth by 0.93 percent; if government spending had remained constant, GDP growth would have been 3.7 percent, rather than 2.8 percent.
This is the opposite of what the government should be doing to support the recovery. We need a temporary increase in government spending to increase demand and employment through, for example, building infrastructure. That would help to get us out of the deep hole we are in. Instead, the government seems to be trying to make it harder to escape.
We do need to address our long-run budget problems once the economy is healthy enough to withstand the tax increases and program cuts that will be required. But the idea of "expansionary" austerity has failed. Austerity in the short-term simply makes it harder for the economy to recover and delays the day when you can finally address budget issues without harming the economy. The lesson is that government needs to support the recovery, not oppose it through a false promise that contraction of one sector in the economy will be expansionary.
5) Central banks are acting more gung-ho on expansionary monetary policy. The unspoken quid pro quo in Europe seems to the that the ECB will expand its balance sheet and turn on the monetary taps in return for some kind of fiscal compact. The U.S. Federal Reserve announced a zero-interest rate policy for the next three years. Even China is showing (halting) signs that its reverted back to monetary easing.
Given that the United States has been the country to move the slowest on austerity, and given that the United States is doing the best job among the OECD economies (an admittedly low bar) of restoring confidence among investors and paying down non-governmental debt, have we reached another focal point?
One could argue that Krugman and Thoma are just biased in favor of Keynesianism, that Greece and the other Club Med countries haven't really embraced austerity, that the Euromess is dragging down British economic growth, and that the long-term numbers on developed country debt are really very scary. There are some large grains of truth in many of those statements.
It doesn't necessarily matter, however. Greece was not a genuine harbinger of the fiscal problems of large markets -- but it was a useful hook for austerity advocates to spread their gospel. What matters now is not whether these perceptions about the failure of austerity are 100% accurate, but whether they are accurate enough to become the new conventional wisdom.
What do you think?
Hey, remember when about ten days ago I blogged that things were getting so bad in Europe that it was legitimate to bring up the 1930's? What's happened since that seemingly hyperbolic warning?
As Felix Salmon blogged earlier this week, the European banking system is headed towards a full-blown liquidity crisis. Yields on Spanish and Italian debt are hovering around the 7% mark, which was the tipping point that forced Greece, Ireland and Portugal to seek assistance from the European Financial Stability Facility and the IMF. Multiple European countries, including France, have had difficulty completing bond auctions this week.
So it would seem that the European Central Bank needs to do something. The New York Times, Wall Street Journal, and Financial Times all have lead stories today pointing out the enormous pressures that are being put on the European Central Bank this week. We'll excerpt the non-gated NYT story to set things up:
Only the fiercely conservative stewards of the European Central Bank have the firepower to intervene aggressively in the markets with essentially unlimited resources. But the bank itself, and its most important member state, Germany, have steadfastly resisted letting it take up the mantle of lender of last resort....
At issue is whether the bank has the will — or the legal foundation — to become a European version of the Federal Reserve in the United States, with a license to print money in whatever quantity it considers necessary to ensure the smooth functioning of markets and, if needed, to essentially bail out countries that are members of the euro zone.
Traditionally, and according to its charter, the European bank has viewed its role in much narrower terms, as a guardian of the value of the euro with a mission to prevent inflation. But as market unease has spread over the past two years, critics say the bank’s obsession with what they say is a phantom threat of inflation has stifled growth and helped bring the euro zone to the edge of a financial precipice.
With events threatening to spin out of control, the burden now rests on Mario Draghi, an inflation fighter in the president’s job at the bank barely two weeks who surprised many economists by immediately cutting interest rates a quarter point.
This morning, however, in his first speech as the head of the ECB, Draghi pivoted and redirected the pressure back at the politicial stewards of the EU:
National economic policies are equally responsible for restoring and maintaining financial stability. Solid public finances and structural reforms – which lay the basis for competitiveness, sustainable growth and job creation – are two of the essential elements.
But in the euro area there is a third essential element for financial stability and that must be rooted in a much more robust economic governance of the union going forward. In the first place now, it implies the urgent implementation of the European Council and Summit decisions. We are more than one and a half years after the summit that launched the EFSF as part of a financial support package amounting to 750 billion euros or one trillion dollars; we are four months after the summit that decided to make the full EFSF guarantee volume available; and we are four weeks after the summit that agreed on leveraging of the resources by a factor of up to four or five and that declared the EFSF would be fully operational and that all its tools will be used in an effective way to ensure financial stability in the euro area. Where is the implementation of these long-standing decisions?
The truly scary thing is that, given the state of the Italian and Spanish bond markets, even the full EFSF won't be enough to calm markets down.
And so the pressure gets redirected back to Germany, as the most powerful actor in the ECB and EU. As Matthias Matthijs and Mark Blyth explain in Foreign Affairs, however, Germany has not been reading its Charles Kindleberger:
In order to guarantee the strength of any international economic system, Kindleberger explained, a stabilizer -- only one stabilizer -- needs to provide five public goods: a market for distress goods (goods that cannot find a buyer), countercyclical long-term lending, stable exchange rates, macroeconomic policy coordination, and real lending of last resort during financial crises. The United States did not supply these things in the 1930s. Germany fails the test on all five items today.
First, rather than providing peripheral countries with a market for their distress goods, the Germans have been enthusiastically selling their manufactured goods to the periphery. According to Eurostat, Germany's trade surplus with the rest of the EU grew from 46.4 billion euro in 2000 to 126.5 billion in 2007. The evolution of Germany's bilateral trade surpluses with the Mediterranean countries is especially revealing. Between 2000 and 2007, Greece's annual trade deficit with Germany grew from 3 billion euro to 5.5 billion, Italy's doubled, from 9.6 billion to 19.6 billion, Spain's almost tripled, from 11 billion to 27.2 billion, and Portugal's quadrupled, from 1 billion to 4.2 billion. Between 2001 and 2009, moreover, Germany saw its final total consumption fall from 78.5 percent of GDP to 74.5 percent. Its gross savings rate increased from less than 19 percent of GDP to almost 26 percent over the same period.
Second, instead of countercyclical lending, German lending to the eurozone has been pro-cyclical. Indirectly (through buying bonds) and directly (by spreading its exchange rate through the euro), the country has basically given the periphery the money to buy its goods. During the economic boom of 2003-2008, Germany extended credit on a massive scale to the eurozone's Mediterranean countries. Frankfurt did quite well for itself. "European Financial Linkages," a recent IMF working paper, reveals that in 2008, Germany was one of the two biggest net creditors within the eurozone (after France). Its positive positions were exact mirrors of Portugal, Greece, Italy, and Spain's negative ones. Of course, as the financial crisis began to escalate in 2009, Germany abruptly closed its wallet. Now Europe's periphery needs long-term loans more than ever, but Germany's enthusiasm for extending credit seems to have collapsed.
And what about the third public good, stable exchange rates? By definition, the euro gives the countries that choose to join it a common external float, the credibility that comes with banking in a potential global reserve asset, and the credit rating of its strongest member. This is both true and where the problems begin. At the core of the eurozone lies a belief that, if countries adhere to a set of rules about how much debt, deficit, and inflation they can have, their economies will converge, and the same exchange rate will work for all members. This is true in theory, but only so long as countries obey the rules. And, despite being the author of many of those rules, Germany showed a singular lack of leadership and responsibility when it came to following them. When it broke the Stability and Growth Pact (SGP) in 2003, it sent the signal to the smaller countries that fiscal profligacy would go unpunished. The result was heightened public sector borrowing and increased public spending. Germany's enthusiastic lending to the periphery only exacerbated the problem.
Fourth, economic health requires the stabilizer to coordinate macroeconomic policy within the system. In this domain, Germany failed spectacularly, by insisting that the rest of the world follow its peculiar ordoliberal economic philosophy of export-oriented growth. By ignoring long-established ideas such as the Keynesian "paradox of thrift" or the "fallacy of composition," Germany is advocating a serious dose of austerity in the European periphery without even a hint of offsetting those negative economic effects with stimulus or inflationary policies at home. German growth, after all, was partially fueled by demand in Southern Europe (made possible by excess German savings). By the iron logic of the balance of payments, one country's exports are another country's imports and one country's capital inflows are another's capital outflows. So, the eurozone as a whole cannot become more like Germany. Germany could only be like Germany because the others countries were not. Insisting on ordoliberal convergence is guaranteed to produce economic instability, not stability.
Finally, Kindleberger would want Germany -- or, rather, the ECB, which is dominated by Germany -- to act as a lender of last resort by providing liquidity during the current crisis. Germany instead insisted on IMF conditionality for the bailout countries and on severe fiscal austerity measures in exchange for limited liquidity, thus failing Kindleberger's final test. The most obvious example is German obstinacy against letting the ECB play the role that the Federal Reserve played in the United States in 2008 and 2009. By lending heavily, the Fed was able to arrest the United States' slide into despair. Only a couple of days ago, Jens Weidmann, the president of Germany's powerful Bundesbank, flat-out rejected the idea of using the ECB as "lender of last resort" for governments, warning that such steps "would add to instability by violating European law." It is hard to see how yet one more violation of European code will add significantly to the already horrendous levels of instability, when brushing democracy aside is considered good for the euro.
It looks as if there's a plan in the works for the ECB to do a legal end-around by loaning money to the IMF and then having the Fund loan to the GIIPS economies. If that happens, however, it won't be announced until next month. And the way credit markets are playing out right now, I'm not sure the eurozone has that much time.
Now is usually the point in the post at which the instinct to provide some sweeping narrative about the state of the eurozone -- a la David Brooks -- is very compelling. What's the point, however? The eurozone is in contagion mode right now, which means it doesn't matter which countries were virtuous and which countries weren't during the last decade of binge borrowing. They're all on the same sinking ship, and the Merkel Algorithm seems to be playing out again.
Developing.... in a way that truly scares the living crap out of me.
I swear, I wasn't going to watch tonight's CNBC debate on economic policy. I'd had a long day, I was tired, and Wednesday night at the Drezners we watch The Middle and Modern Family. But since neither of those shows were on the air tonight, I switched over to the debate.
While Rick Perry's major league gaffe will command all the headlines, I thought the most reealing answers were given to the first question of the night -- what to do about Italy? Here are the responses of the co-frontrunners:
HERMAN CAIN: "There's not a lot that the United States can directly do for Italy right now, because they have -- they're really way beyond the point of return that we -- we as the United States can save them."
MITT ROMNEY: "Well, Europe is able to take care of their own problems. We don't want to step in and try and bail out their banks and bail out their governments. They have the capacity to deal with that themselves."
The responses by Ron Paul, Rick Perry and Jon Huntsman were similar in tone and content.
Now, philosophically, there's a logic to these answers, avoiding moral hazard and all. But recall how earlier this week conservatives were castigating Barack Obama for giving Western Europe the cold shoulder? I believe Michael Goldfarb phrased it as a problem of Obama "abandoning allies."
I raise this because, if the eurozone actually did need American help, the response by the GOP candidates for president would be to... abandon America's allies.
One of Richard Nixon's saltier lines on foreign economic policy was, "I don't give a f**k about the lira." I think it's safe to say that the current GOP doesn't give a f**k about the euro.
The National Journal's Jim Tankersley frames this exactly right:
Europe’s problems should absolutely terrify anyone who cares about the American economy; its sovereign debts could infect banks around the world, potentially triggering a new wave of financial crisis, and a European recession would drag on already slow U.S. growth.
But the candidates who assembled at the CNBC debate in Detroit treated those threats as a far-away nuisance, like famine in Africa or an earthquake in Mongolia: very serious, very sad, not our problem....
It’s stunning that a Republican field that includes a former ambassador, a former House speaker and two successful former businessmen – and which, to a candidate, gushed over the virtues of markets throughout the debate – so casually brushed aside the struggles of the world’s largest collective economy (the Eurozone is bigger, economically, than the United States) and America’s largest trading partner.
You don’t have to believe America should bail out Italy, Greece or the entire Eurozone – a straw-man concept that no one in Washington is even floating, but several candidates took pains to denounce on Wednesday night – to recognize that the United States has a role to play in averting another global financial crisis. At the very least, you should expect lawmakers, and presidential candidates, to be making plans for how to respond if the European crisis escalates.
There were no such plans to be found on the debate stage on Wednesday.
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.
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 interwebshave 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.
[NOTE: the following reads much better if you read it using the voice of Rod Serling!--ed.]
There's a subtle art to reading broadsheet American journalism. Reporters strain for objectivity, and in the process, strain to avoid anything that smacks of the prejorative. If you squint real hard at the text, however, you can occasionally detect moments when the reporter is dying, just dying, to state their blunt opinion on the matter at hand.
I bring this up because Liz Alderman of the New York Times, in her story on the possibility of a big deal in Europe to enlarge the European Financial Stability Facility, appears to be ever-so-subtly banging her head against her keyboard:
The rally in American stock markets was set off by a report late Tuesday on the Web site of The Guardian, a British newspaper, that France and Germany had agreed to increase the size of the rescue fund — the European Financial Stability Facility — to as much as 2 trillion euros to contain the crisis and backstop Europe’s banks. But almost as soon as those hopes soared, European officials quickly brought them back to earth, with denials flooding forth from Brussels, Paris and Berlin.
This latest round of rumors and rebuttals about a European solution was a repeat of earlier situations. Such episodes have played out several times since the debt crisis intensified this year. Most recently, investors have been pegging hopes on a meeting of Europe’s leaders set for this coming Sunday in Brussels, anticipating that a comprehensive solution to the debt crisis might be unveiled (emphasis added).
It would appear that Ms. Alderman has discovered that there is a fifth dimension of reporting, beyond that which is known to ordinary economic journalism. It is a dimension as vast as developed country sovereign debt and as timeless as currency itself. It is the middle ground between austerity and stimulus, between national sovereignty and supranational authority, and it lies between the pit of man's fears and the summit of his knowledge. This is the dimension of European political economy. It is an area which we call... the eurozone.
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.
I thought I'd said my
peace piece about Occupy Wall Street earlier this week -- interesting, but in all likelihood not going to amount to much unless it resonated culturally with broad swaths of American society.
I think it's safe to say that these protests don't resonate with OTB's Doug Mataconis. So this would seem to be a data point to support my argument. In his rant against the We Are the 99% crowd, however, Mataconis says something that triggered my history alarm:
The first thought I had when I looked through the Tumblr account is that these people can’t be doing all that bad if they’ve got access to the internet and a computer with a webcam necessary to create the posting that they put up at Tumblr. In any event, though, what strikes me more than anything else is that alot of these people are frustrated 20-somethings who have gotten out of college and found that the road to the good life isn’t quite as smooth as they thought it would be. Of course, things are more difficult today than they were ten years ago but that doesn’t mean they were easy back then. Establishing yourself in life is always a challenge, especially if you run up tens of thousands of dollars in student loan debt without really thinking about how you’re going to pay it off.
What comes across to me the most, though, is a sense of entitlement from some people and they idea that the situation they’re in clearly can’t be their fault so it must be the blame of someone else. There’s an attitude about the protests that there is something morally wrong about the fact that not everyone is suffering equally in the current economy as well. So when they look up and see that some people have managed to succeed during these rough economic times, that sense of entitlement becomes intermingled with a sense of envy and the belief that the only way these other people could have succeeded is by cheating....
There’s something pretty immature about blaming other people for your situation in life.
Now this strikes me as a bit harsh in judgment, but that's neither here nor there. What I can't help wondering, however, is whether Mataconis has also described the necessary conditions for a movement like Occupy Wall Street to sustain itself. Young people with a lot of time on their hands and prior entitlements possess both the will and the assets necessary to sit in for a looooooooooooong time.
There's something else: Mataconis' description of entitled young people used to peace and prosperity and demanding more of it sounds like... like... the people that decided to protest the Vietnam War after they began to realize that they might get drafted once they graduated college.
If the job prospects for twentysomethings are that bleak, then it really doesn't matter whether the protestors are responsible for their student loans or not. If they feel like the system has screwed them over, then they'll take to the streets and stay there. And in a society where the overwhelming majority of people haven't seen their wages or net wealth trending in the positive direction, I can't say they they'll necessarily trigger that much resentment.
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?
I'm in Shanghai to discuss how the G-20 has been doing as the world's "premier economic forum." As fate would have it, the G-20 actually opened its collective mouth in response to the market convulsions of this week:
The Group of 20 leading economies pledged a “strong and co-ordinated” effort to stabilise the global economy in an attempt to calm tumbling equities markets spooked by fears of recession in the eurozone and a gloomy economic outlook in the US.
Bowing to pressure from investors to take action, finance ministers from the G20 economies said in a communiqué issued late on Thursday that they would stop the European debt crisis from deluging banks and financial markets, and take the necessary steps to bolster the eurozone’s rescue fund and assist banks to boost capital reserves in line with new global regulations. The statement followed a day in which the equity markets suffered some of the biggest falls since the collapse of Lehman Brothers in 2008, as investors rushed to safety in a widespread sell-off.
“We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required,” the group said in a statement. “We will ensure that banks are adequately capitalised and have sufficient access to funding to deal with current risks and that they fully implement Basel III along the agreed timelines.”
The G-20's near-total muteness in the face of European sovereign debt convulsions had begun to raise some eyebrows -- particularly as it was the G-7 economies rather than the G-20 that pledged to provide dollar liquidity to European financial institutions.
Unfortunately, if you read the actual communique, you discover... well.... let's describe the statement as very optimistic about what the G-20 countries have done to promote both growth and fiscal rectitude.
One of the takeaways from my conversations so far in Shanghai has been a sense of disappointment about what the next G-20 summit in Cannes will accomplish. The Financial Times' Chris Giles provides some background on the demise of the France's grand ambitious for that summit:
In mid-February, G20 finance ministers gathered in Paris for what turned out to be a harbinger of the challenges that have beset the French G20 presidency ever since. The meeting was supposed to be routine, with finance ministers agreeing a set of indicators that might be used to assess whether their economies and policies fostered balanced global economic growth.
Far from France undermining the meeting with excessive ambitions, countries struggled to agree even the most basic steps to a more stable world economy.
A country’s current account surplus or deficit is the accepted measure of balance in its relations with other countries, but the Chinese arrived in Paris in intransigent mood. Their negotiators refused to let the G20 use the current account as an indicator of balance. After an all-night session, the absurd compromise China accepted was that countries were allowed to assess every component part of a country’s current account, but the term “current account” was banned.
That ended the French presidency’s lofty plans. From then on, limited goals became the order of the day, a shift that has been reinforced as the year has progressed.
I'd quibble a bit with Giles -- any meeting that details indicative guidelines on macroeconomic imbalances is not gonna be a routine meeting. [Um...could you translate that last sentence out of bureaucratese, please?--ed.] Sorry, to rephrase -- any meeting in which the G-20 points out that China's trade surplus is part of the problem in the global economy is not going to be a smooth meeting.
I was pretty dismissive of Standard & Poor's debt downgrade last month. Re-reading that post, I stand by my political analysis of events going forward. Furthermore, the recovery of U.S. equity markets, the sharp reduction of yields on U.S. debt, and the failure of the other ratings agencies to follow suit are further data points suggesting that the S&P decision was flawed.
There's reality and perceptions of reality, however. On that latter front, after a recent expedition to Washington, I've concluded that regardless of whether S&P was right, they've won the argument in terms of perception. The summer debt debacle is, in many ways, the political equivalent of Hurricane Katrina. Perceptions of the Bush administration never recovered from that event, even though one could plausibly argue that the policy outputs of Bush's second term were better than the first term. Neverthelesss, Katrina was an inflection point that has caused a number of actors to reassess their perceptions about the political and policy competency of the White House and Congress.
Something similar seems to have happened with the debt deal. Politico's Ben White relays the dramatic effect on consumer confidence:
The Conference Board this week reported the biggest monthly decline in consumer confidence since the height of the financial crisis in 2008, its consumer confidence index falling from a reading of 59.2 to 44.5, the lowest in two years....
“The debt ceiling negotiation is an extremely significant event that is profoundly and sharply reshaping views of the economy and the federal government,” Republican pollster Bill McInturff wrote in a presentation of survey work he has done recently that suggests the debt ceiling debate has led to a significant shift in public opinion.
The partisan struggle over raising the debt went on for weeks before Obama finally announced on the night of Aug. 1 that a deal had been reached that resolves the issue for now. But while Washington has moved on to its next drama — the deliberations of the so-called supercommittee agreed to in the deal — its psychological impact has resonated widely.
McInturff said the result has been “a scary erosion in confidence” in both the economy and the government “at a time when this steep drop in confidence can be least afforded. … The perception of how Washington handled the debt ceiling negotiation led to an immediate collapse of confidence in government and all the major players, including President Obama and Republicans in Congress.”
A recent Washington Post poll found that 33 percent of Americans have confidence in Obama to make good decisions on the economy and just 18 percent have confidence in Congressional Republicans to do so.
These are especially dangerous readings when Federal Reserve Chairman Ben Bernanke has essentially said it is up to politicians to help boost the economy now that the Fed has fired nearly all its monetary policy bullets.
Speaking of Bernanke, he had this to say at Jackson Hole last week:
[P]erhaps most challenging, the country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses. Although details would have to be negotiated, fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals.
Ten days before Bernanke's speech, FP's Josh Rogin reported that Secretary of State Hillary Clinton had acknowledged the global ramifications of the debt fracas, telling a forum at National Defense University:
I happened to be in Hong Kong a few weeks ago, and I said confidently that we were going to resolve this; we were not going to default; we would make some kind of political compromise.
But I have to tell you, it does cast a pall over our ability to project the kind of security interests that are in America’s interest. This is not about the Defense Department or the State Department or USAID. This is about the United States of America. And we need to have a responsible conversation about how we are going to prepare ourselves for the future
Clinton's statements were confirmed by officials I talked to while down in DC.
So, can this perception be changed? Here, I'm bearish in the short-term. These kind of perceptions can be self-fulfilling. Economic growth is a remarkable political palliative, but growth looks anemic for a good long while. The Obama administration can try to change the narrative, but that's almost as difficult as Inception -- for the same reasons:
As Reinhart and Rogoff have observed, the economic aftereffects of debt crises are long-lasting. From here on out, the political effects of such crises will be on full display.
As someone who studies global political economy, this is fascinating. As a U.S. citizen, this is utterly depressing.
[WARNING: THE FOLLOWING IS AN OPTIMISTIC GLOBAL POLITICAL ECONOMY POST]
Note: in my last blog post, I might have sounded juuuuust a wee bit pessimistic about the state of the global political economy. That was my intent, but it wasn't necessarily how I actually felt. My aim was to assemble as negative a brief as possible about the state of the global political economy. The aim of this post is to argue that, despite all the recent bad news, the fundamentals of the global political economy are surprisingly sound. I'm not actually as optimistic as the rest of this post suggests, either -- but I do lean more in this direction. The fact that I'm blogging this from a zombie-proof vacation redoubt should in no way affect your evaluation of the following few paragraphs.
So, when we last left off this debate, things were looking grim. My concern in the last post was that the persistence of hard times would cause governments to take actions that would lead to a collapse of the open global economy, a spike in general riots and disturbances, and eerie echoes of the Great Depression. Let's assume that the global economy persists in sputtering for a while, because that's what happens after major financial shocks. Why won't these other bad things happen? Why isn't it 1931?
Let's start with the obvious -- it's not gonna be 1931 because there's some passing familiarity with how 1931 played out. The Chairman of the Federal Reserve has devoted much of his academic career to studying the Great Depression. I'm gonna go out on a limb therefore and assert that if the world plunges into a another severe downturn, it's not gonna be because central bank heads replay the same set of mistakes.
The legacy of the Great Depression has also affected public attitudes and institutions that provide much stronger cement for the current system. In terms of publuc attitudes, compare the results of this mid-2007 poll with this mid-2010 poll about which economic system is best. I'll just reproduce the key charts below:
The headline of the 2010 results is that there's eroding U.S. support for the global economy, but a few other things stand out. U.S. support has declined, but it's declined from a very high level. In contrast, support for free markets has increased in other major powers, such as Germany and China. On the whole, despite the worst global economic crisis since the Great Depression, public attitudes have not changed all that much. While there might be populist demands to "do something," that something is not a return to autarky or anything so drastc.
Another big difference is that multilateral economic institutions are much more robust now than they were in 1931. On trade matters, even if the Doha round is dead, the rest of the World Trade Organization's corpus of trade-liberalizing measures are still working quite well. Even beyond the WTO, the complaint about trade is not the deficit of free-trade agreements but the surfeit of them. The IMF's resources have been strengthened as a result of the 2008 financial crisis. The Basle Committee on Banking Supervision has already promulgated a plan to strengthen capital requirements for banks. True, it's a slow, weak-assed plan, but it would be an improvement over the status quo.
As for the G-20, I've been pretty skeptical about that group's abilities to collectively address serious macroeconomic problems. That is setting the bar rather high, however. One could argue that the G-20's most useful function is reassurance. Even if there are disagreements, communication can prevent them from growing into anything worse.
Finally, a note about the possibility of riots and other general social unrest. The working paper cited in my previous post noted the links between austerity measures and increases in disturbances. However, that paper contains the following important paragraph on page 19:
[I]n countries with better institutions, the responsiveness of unrest to budget cuts is generally lower. Where constraints on the executive are minimal, the coefficient on expenditure changes is strongly negative -- more spending buys a lot of social peace. In countries with Polity-2 scores above zero, the coefficient is about half in size, and less significant. As we limit the sample to ever more democratic countries, the size of the coefficient declines. For full democracies with a complete range of civil rights, the coefficient is still negative, but no longer significant.
This is good news!! The world has a hell of a lot more democratic governments now than it did in 1931. What happened in London, in other words, might prove to be the exception more than the rule.
So yes, the recent economic news might seem grim. Unless political institutions and public attitudes buckle, however, we're unlikely to repeat the mistakes of the 1930's. And, based on the data we've got, that's not going to happen.
[WARNING: THE FOLLOWING IS A VERY PESSIMISTIC GLOBAL POLITICAL ECONOMY POST]
So, just to sum up the past week or so of global political economy events:
1) U.S. government debt got downgraded by Standard & Poor;
2) Global equity markets are freaking out;
London Britain is burning;
This all sounds very 2008, except that it's actually worse for several reasons. First, the governments that bailed out the financial sector are now themselves the object of financial panic and political resentment. Second, the tools used to try and rescue the global economy in 2008 are partially to blame for what's happening right now. Despite all the gnashing of teeth about the Fed twiddling its thumbs, it's far from clear that a QE3 would actually stimulate anything besides a rise in commodity prices.
With both Europe and the United States unable to stimulate their economies, and China seemingly paralyzed into indecision, it's worth asking if we are about to experience a Creditanstalt moment.
The start of the Great Depression is commonly assumed to be the October 1929 stock market crash in the United States. It didn't really become the Great Depression, however, unti 1931, when Austria's Creditanstalt bank desperately needed injections of capital. Essentially, neither France nor England were willing to help unless Germany honored its reparations payments, and the United States refused to help unless France and the UK repaid its World War I debts. Neither of these demands was terribly reasonable, and the result was a wave of bank failures that spread across Europe and the United States.
The particulars of the current sovereign debt crisis are somewhat different from Creditanstalt, and yet it's fascinating how smart people keep referring back to that ignoble moment. The big commonality is that while governments might recognize the virtues of a coordinated response to big crises, they are sufficiently constrained by domestic discontent to not do all that much.
So... is this 1931 all over again?
There are three aspects of the current situation that make me fret about this. The first is the sense that developed country governments have already tapped out all of their politically feasible methods of stimulating their economies. This is the time when both politicians and voters start to ask themselves, "Why not pursue the crazy idea?"
The second is whether the Chinese government will do something to satiate their nationalist constituency. Neither Joe Nye nor James Joyner thinks this is likely, and I tend to agree that any effort at economic coercion will hurt China as much as the United States. When autocrats are up against the wall, however, then they might take risks they otherwise would never consider.
The third is this working paper on what causes societal unrest in developed economies (h/t Henry Farrell). The abstract suggests more trouble on the way:
From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble crosscountry evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor.
So... there are, unfortunately, numerous reasons to think that we're headed down a bad road... which is the pretty much point of this post.
Readers are encouraged in the comments to offer counterarguments for why things aren't as bad as 1931. I'll be offering some thoughts about why 1931 won't happen again later in the week.
I suspect public and/or media relations is one of those jobs that's way more glamorous in fiction than in fact. In film, being a master of public relations seems like one of those cool jobs a young hotshot possesses right before meeting Mila Kunis and having the epiphany that Love and Truth and Beauty are the only things worth a damn. In reality, however, there's the drudgery of sending endless e-mails, faxes, and voicemail messages to market one's clients. Rarely do the twain meet.
I bring this up because every once in a while, even a PR flack can scale the heights of greatness. Today's New York Times story by Julie Creswell, Louise Story and Edward Wyatt -- ostensibly an attempt to find out about the inner workings of Standard & Poor's sovereign debt committee contains one such moment:
When asked whether the company’s raters were hiding behind the secretive committee, Catherine Mathis, a spokeswoman for S.& P., said, “We do this to maintain our analytical independence in much the same way that the editorial board of The New York Times does not discuss its deliberations.” Ms. Mathis was a spokeswoman for The Times until two years ago.
To which I must say:
I mean this seriously and not facetiously. By implicitly linking S&P's practices to those of the New York Times, Mathis sells the elite credentials of her institution. It's a brilliant gambit because it leaves the Times' reporters with unpalatable options. Either they try to detail the precise differences between the Gray Lady and S&P, which would have seemed like total hair-splitting -- or they just move on to the rest of the story.
If Mathis was the S&P person handling the Times reporters, she earned her money's worth with this article. Despite myriad qualms with S&P's methodology, and despite that whole $2 trillion math error, the story has nary a critical or investigative word to say of Standard & Poor's.
Instead, first half of the story story consists of anodyne biographic material of the ratings committee leadership. The second half of the story focuses solely on an IMF report that provides a partial endorsement of S&P's sovereign debt ratings -- including this nugget:
One chapter of the report said that all nations that had defaulted on their sovereign debt since 1975 had been placed in a noninvestment-grade category at least one year before the default.
So, in other words, S&P hasn't missed a single basket case in the past 35 years. Is it just me, or is that setting the bar pretty low?
Regardless of how one feels about Standard & Poor's
contribution to the decline and fall of western civilization decisions, however, one must step back and respect the yoeman efforts of an outstanding public relations team. The hard-working staff here at ForeignPolicy.com therefore toasts Catherine Mathis and her team for some quality PR work. One can only hope that, in the near future, Ms. Mathis stumbles across Justin Timberlake at a New York bar and finds the True Meaning of Life.
American politicians are super-mad at Standard & Poor's for downgrading U.S. debt even after the debtopocalypse was averted earlier this week. These same politicians seem torn between pointing out that S&P sucks at math and blaming the other political party for the S&P screw-up.
I really don't care about that as much as the debate over whether S&P got its political analysis right. Here's the key paragraphs of the actual Standard & Poor statement:
[T]he downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011....
Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.
Felix Salmon, thinks that this analysis is spot on:
[T]he US does not deserve a triple-A rating, and the reason has nothing whatsoever to do with its debt ratios. America’s ability to pay is neither here nor there: the problem is its willingness to pay. And there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default. The Tea Party is fully cognizant that it has been given a bazooka, and it’s just itching to pull the trigger. There’s no good reason to believe that won’t happen at some point.
David Weigel concludes that the S&P political analysis is fair:
This is not crazy.This what Republicans imply about the supercommittee -- they will not accept plans that increase taxes, and despite the fact that they've agreed to let the Bush tax cuts lapse on January 1, 2013, they are making noises about not accepting a return of the rates. The best possible scenario, if we assume that stance, is what I wrote about today -- tax reform plans that start in the supercommittee and win over a committed Congress.
Kevin Drum, however, thinks that S&P's political analysis is way off:
S&P shouldn't be in the business of commenting on a country's political spats unless they've been going on so long that they're likely to have a real, concrete impact on the safety of a country's bonds. And that hasn't happened yet. There's no serious macroeconomic reason to think Americacan't service its debt and there's no serious political reason to think the Tea Party has anything close to the power to provoke a political meltdown in which wewon'tpay our debt....
[S&P]should care only about the safety of U.S. bonds, and for the moment anyway, there's no legitimate reason to think either that we can't pay or that we won't pay. The bond market, which has all the same information as S&P, continues to believe that U.S. debt is the safest in the world, and in this case the market is right. S&P should stop playing dumb political games and stick to its core business.
I side, mostly, with Drum. It's totally fair for S&P to factor politics into their assessment of sovereign debt. Indeed, a key trend in sovereign debt analysis over the past five years has been the recognition that political fundamentals can matter as much as economics. That said, if ratings agencies are going to do this, then their political expectations can't just be retrospective -- they need to do some actual forecasting. Instead, they looked at recent weeks and extrapolated into the future.
There are three factors that should give S&P pause before assuming that political dysfunction could lead to no increae in tax revenue. First, as Drum points out, despite all the displays of ideological inflexibility, in the end the debt ceiling vote secured a strong majority of the GOP House caucus. Some Tea Party members were willing to risk a crisis, but not actually go and perpetuate one. It was not a Great Moment in Democracy, but in the end a deal was done. You can't dock for intransigence without noting the outcome.
Second, unlike the debt ceiling, deadlock in late 2012 means that the Bush tax cuts expire. Either a lame-duck Obama or a newly-re-elected Obama will be able to make that fiscal decision (no way any faction in Congress musters the 2/3 vote necessary to override). As Jonathan Chait has repeatedly observed, that dynamic is the opposite of the debt ceiling episode, in which case paralysis led to bad fiscal outcomes. If S&P thinks partisan gridlock will persist on Capitol Hill, then the conclusion to draw is that taxes will go up.
Third -- and this is pretty important -- S&P has failed to observe the political aftereffects of the debt deal. As I argued previously:
[T]he thing about democracy is that it has multiple ways to constrain political stupidity and ideological overreach. The first line of defense is that politicians will have an electoral incentive to act in non-crazy ways in order to get re-elected. The second line of defense is that politicians or parties who violate the non-crazy rule fail to get re-elected. So, in some ways, the true test of the American system's ability to stave off failure will be the 2012 election.
The first line line of defense has been breached, but the second line of defense looks increasingly robust. Public opinion poll after public opinion poll in the wake of the debt deal show the same thing -- everyone in Washington is unpopular, but Congress is really unpopular and GOP members of Congress are ridiculously unpopular. At a minimum, S&P needs to calculate how the current members of Congress will react to rising anti-incumbent sentiment. If they did that analysis and concluded that nothing would be done, I'd understand their thinking more. I didn't see anything like that kind of political analysis in their statement, however.
In the end, I suspect Moody's and Fitch won't follow S&P's move, so this could be a giant nothingburger. Still, if these guys are going to be doing political risk analysis, it might help to actually have some political scientists on the payroll. Based on their statement, S&P is simply extrapolating from the op-ed page, and that's a lousy way to make a political forecast.
Am I missing anything?
As the markets begin their full-on freak out over the failure of Washington to raise the debt ceiling, I must confess to having a semi-out-of-body experience about the whole thing. The American in me is simply appalled by the stupid, self-destructive behavior that led to this thoroughly avoidable apocalypse. The political scientist in me, however, is utterly fascinated by the whole shebang. I understand that wartime photographers have the same kind of problem -- I wish they had a word for it.
So, taking my American hat off and putting my poli sci hat on, I find it fascinating that House Speaker John Boehner is having so much difficulty whipping a debt ceiling bill that is already a dead letter in the Senate. Conventionally, whipping is done through a mixture of cajoling, coercing and cash -- with an emphasis on the latter. A pet project here, a pet project there, and presto, you have a majority.
The problem is that the nature of the GOP House caucus, combined with the party's anti-government ideology, has stripped Boehner of everything but the cajoling. First, here's the Politico story on last night's whip effort:
Boehner and his top lieutenants worked deep into Thursday night trying to find a just-right solution that would attract 216 votes for the package of $900 billion in new borrowing authority, $917 billion in spending cuts over the next decade, and a process for entitlement and tax reform legislation that could lead to $1.6 trillion or so in deficit reduction and a second increase in the debt limit.
They don’t have available to them the same tools as past Republican leadership teams: There are no earmarks to hand out, nor any to take away, for example.
Rep. Jeff Flake (R-Ariz.), one of the last holdouts and a candidate for the Senate in Arizona, spoke of how “refreshing” it was to see a lobbying effort bereft of the legislative grease that used to secure last-minute votes in the House. He said the vote-building would have “cost $20 billion” in the past.
Yes, it's totally refreshing. It's also totally f**king useless, because Boehner isn't trying to cajole moderates, he's trying to cajole ideological hardliners. David Weigel explains in his wrap-up:
The Republican dilemma quickly revealed itself. In other situations where a majority party needed to grind out a few final votes, it called on members who agreed with the concept of legislation but quibbled with the text....
John Boehner and Eric Cantor couldn't sell their Republicans in the same way. Their diehards never wanted to raise the debt limit. They had supported a strict, doomed version of a debt ceiling deal, Cut, Cap, and Balance, which did that, but even then, they weren't really comfortable with the concept of what they were doing. They did not want to raise the debt limit. Their constituents were uncomfortable with the idea, at first. And now they were being asked to raise the limit, without the conditions they liked, because... why? Because they were told that failing to do so would give Barack Obama all the leverage in the debt fight. That was too clever by half for some Republicans. More than 24 Republicans, it seemed.
Tonight, reporters stalked outside the offices of Boehner and Cantor as members walked in and out for meetings. This wasn't like health care, or even the continuing resolution. We were watching diehard conservatives, who had never wanted to raise the debt limit, and who had never done so in their careers, being begged for votes. As the night dragged on, the visitors did not look like the sort who could cave on big, existential votes. Louie Gohmert, one of the diehards who believes that Tim Geithner is lying about the threat of default, was dragged in. Tim Scott, the co-president of the freshman class, was dragged in; he walked out nonplussed, walked past reporters, and took out his iPod earbuds to confirm he was a "no." Roscoe Bartlett, an octogeniaran, who's not usually counted on for tough votes, entered the hot room telling reporters he didn't want to choose between "bad and really bad." The farce peaked when Gohmert joined freshman Rep. Jeff Duncan, R-S.C., for a prayer session in the House's chapel. It can't be good when members of Congress are literally asking for salvation.
If you are looking only to God for a clue about how you should vote, neither material incentives nor political rhetoric is gonna sway you. And now you know why I think there's a 50/50 chance that no deal occurs by August 2.
UPDATE: Megan McArdle has some similar reactions to the same Politico story as I did.
Win McNamee/Getty Images
After last night's stunningly useless set of speeches, I'd put the odds of the U.S. not raising the debt ceiling by August 2nd at 1 in 2. Like many other observers, I'm finding it increasingly difficult to envision a deal that would get through the Senate while attracting a majority of House Republicans [You meant a majority of the House of Representatives, right?--ed. No, I meant a majority of House Republicans. I'm pretty sure that Boehner and the rest of the House GOP leadership will refuse to pass any debt ceiling plan that relies too much on House Democrats.]
So, it's gonna be a fun few weeks for those of us who study the global political economy. Let's start by thinking the unthinkable -- what will happen if there is a default?
I've expressed my feelings on the matter already, and I'm hardly the only one. That said, I've also
hedged my bets been flummoxed by the lack of market reaction to the DC stalemate. The lack of market reaction to date has emboldened House GOP members to stand fast. Could they be right?
Tom Oatley, who pooh-poohed my fears of the debtpocalypse last week, makes an interesting point about the composition of U.S. debt-holders:
By these figures, about 63% of US government debt is owned by central banks (foreign and domestic) and/sovereign wealth funds. Most of these entities are American friends and allies. Another 4% is owned by US state and local governments. That leaves 33%--about $4.8 trillion--in private hands. Of this, the financial institutions with the most restrictive regulations regarding asset ownership (depository institutions) own only 2% of the total ($290 billion). Mutual Funds, who may or may not have to dump downgraded debt, hold another 9% ($1.35 trillion).
What's the point? The discussion about the impact of US default revolves around the market response to default. Useful to recognize that most of the US government debt is held by public-sector agents who are much less sensitive to balance sheet pressures and regulatory constraints. These public sector agents are also substantially more sensitive to "moral suasion" and direct appeal than private financial institutions. The structure of ownership of US debt might dampen the negative impact of any default that does occur.
This is pretty interesting. Oatley focuses on "moral suasion," but there's also a national-interest motive for many U.S. debtholders. Most of the official holders of U.S. debt have a strong incentive for a) the value of their holdings not to plummet; and b) the United States economy to continue to snap up other their exports. If China, for example, is buying up U.S. debt to sustain its own growth, then neither a technical default nor a ratings downgrade should deter China or other export engines from continuing to buy U.S. debt even if there's a spot of trouble.
So it appears that complex interdependence will force America's rivals to continue to hold U.S. debt even after the debtpocalypse!! The United States in the clear, right?
Not so fast. Here are five "known unknowns" I can think of that might complicate Oatley's analysis:
1) What if the creditors form a cartel? In my 2009 paper, this was the one scenario that gave me the heebie-jeebies, because it's the one scenario under which creditors can wring geopolitical gains from debtor states. Any kind of default can act as a focal point moment in which U.S. creditors decide it's time to apply a haircut to American power and influence.
I don't think this is going to happen, because the national interests of American debtholders remain divergent. That said, if U.S. allies interpret default as a signal of U.S. unreliability in times of crisis, then all bets are off.
2) What about the economic nationalism of China? China is the largest foreign debtholder, which gives it a certain agenda-setting power in moments of crisis. There are a lot of compelling reasons why China would decide to try to minimize the economic disruptions . On the other hand, there's a lot of resentment on Chinese Internet boards already about the Chinese purchases of U.S. debt. During a period in which the CCP is already concerned about domestic instability, one could envision a scenario whereby they try to mollify nationalists at home by acting out against the United States.
3) What would be the effect of a mild market reaction on the House of Representatives? The less the markets react, the less that the House GOP will feel a need to do anything. There will come a point, therefore, when official debtholders might need to signal to the House that, in IPE lingo, "s**t needs to get done." That signal would in and of itself roil markets, not to mention the effects the current uncertainty is already having on the real economy.
4) What is the fiscal shock from a default? There are two causal mechanisms through which a default could affect the global economy. The first is through panic and uncertainty roiling financial markets. The second, however, is from a dramatic fiscal contraction due to limited government spending. Given the lackluster state of the current recovery, it wouldn't take much to tip the United States back into recession.
5) What if there's another AAA bubble? FT Alphaville's Tracy Alloway provided another interesting chart earlier this month on the distribution of AAA securities:
As Alloway warns:
[W]atch what starts happening from 2008 and 2009.
The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world’s triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it’s true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral. Where ABS dissipated, sovereign debt stood in to fill the gap. And more.
It’s one reason why the sovereign crisis is well and truly painful.
It’s a global repricing of risk, again, but one that has the potential for a much largerpop, so to speak.
We know that a downgrade of U.S. Treasuries would likely lead to a downgrade of state and municipal bond ratings as well. We also know that the ripple effects from the collapse of asset-backed securities were much larger than anticipated before the 2008 crisis. This is why the possible knock-on effects of downgrade so many AAA asserts makes me itchy. Even if banks and other financial institutions have minimal exposure to U.S. Treasuries, I don't think it's possible for them to have minimal exposure to all U.S.-based AAA sovereign debt.
These are just the five known unknowns that I could think of in the past hour -- there are probably many, many more. Readers are strongly encouraged to add them in the comments.
Hmm... let me think about this for a second....
It's hard to deny Boot's assertion that, over the past century, U.S. military power has been a necessary and successful tool to advance American national interests. That said, however, if we look only at last decade, the picture darkens considerably. After Afghanistan and Iraq, is it really possible to claim that the U.S. armed forces have been our most effective instrument of power projection? Have we purchased more than $1 trillion worth of increased security since 9/11? No, I don't think that we have.
My opinion doesn't count all that much, but former Secretary of Defense Bob Gates's opinion should. While in office, he wasn't shy in observing that the U.S. military was playing too outsized a role in the crafting of foreign policy.
Furthermore, let's take a look at this graph, courtesy of the Heritage Foundation:
The striking thing about this chart is that we're spending more on the military now than we did during the peak of Cold War tensions and Reagan's military build-up in the mid-1980's -- especially since military spending by the rest of the world has fallen dramatically since the end of the Cold War.
Just to repeat a point I made last fall:
AEI's latest "Defending Defense" paper doesn't do it either. Despite numerous claims about the hollowing out of the U.S. military, I didn't see a single instance in the report in which American military capabilities were compared to either extant threats or possible security rivals.
Neoconservatives are going to have to present more reasoned arguments for why defense spending should not be on the chopping block than the scare tactics of Boot -- or, for that matter, this whopper from Robert Kagan:
Spit-take!! Look, I'm just as scared of the AARP's political muscle as the next foreign policy wonk, but to claim that there is no domestic interest group support for more defense spending is just as bad as, oh, I don't know.... writing a whole book pretending to discover that there's an interest group lobby that supports Israel without defining it properly.
This critique of Kagan's assertion is pretty overwrought, but the core point ain't wrong.
Question to readers -- what is the best logical, empirically grounded argument you can make for not cutting the defense budget?
UPDATE: For more on this point see Christopher Preble, as well as Shadow Government's Kori Schake. Schake makes a trenchant point -- if there are to be serious cuts, defense experts need to start thinking seriously about the best way to do it, rather than simply lopping a certain percentage off the top.
Chinese overlords alien visitors robot masters zombie hegemons post-apocalyptic historians:
Greetings. My goal in this message is to explain to you why the most powerful country in the world committed financial seppuku in the summer of 2011 AD*.
To set the stage: by now you know that the U.S. Congress was obligated to increase the debt ceiling in order for the United States government to continue to function normally. President Obama, Democrats in Congress, and most of the Republican leadership recognized the gravity of the situation. The GOP leadership, however, wanted to use the debt cekiling vote as leverage to get President Obama to commit to significant deficit reduction. After much haggling over "grand bargains," there was a recognition that no such deal could be passed. As a backup, leaders from both parties reluctantly advocated a bill that hiked the ceiling and put off questions about long-term deficit reduction to the future.
The problem was, a political faction emerged that some called "debt kamikazes." These were politicians and interest group leaders -- all Republicans -- who genuinely believed that nothing of consequence would happen if the debt ceiling wasn't raised. There were a few others who did believe it and were nevertheless copacetic with that outcome -- I'll get to that group later.
Sounds absurd to your futuristic ears, you say? Consider my evidence. The Daily Beast's John Avlon detailed the position of the 2012 GOP presidential candidates:
There were also interest group coalitions called "Tea Party" organizations that pressured their members of Congress not to raise the debt ceiling. As CNN's Shannon Travis chonicled, these organizations believed that the effects of more government spending were far more disastrous than defaulting on the debt:
Similarly, Red State blogger Erick Erickson wrote an open letter to the House GOP that boiled down to "do not believe the doom and gloom."
Now, future historians, you might argue that neither Tea Party activists nor presidential candidates (Bachmann excepted) were in Congress and therefore did not matter. However, what's important to understand is that these views were prevalent inside the House GOP caucus as well. The Washington Post's David A. Fahrenthold provided a detailed description of the members of the House of Representatives who thought a default wouldn't be such a big deal. Rep. Mo Brooks (R-AL) offered the most extreme example of House GOP thinking:
Lest you think the view that a default was not such a big deal was limited to backbenchers, Outside the Beltway's Steven Taylor found House Budget Chairman Paul Ryan telling CNBC that a "technical default" of a few days wouldn't be a big deal:
Now, at this point, I'm sure you, future post-apocalyptic historians, must be scratching your
third eye heads, thinking the following:
Why, why did these human beings maintain these beliefs in the face of massive evidence to the contrary? Why did these people continue to insist that default wasn't that big a deal when Federal Reserve Chairman Benjamin Bernanke (a Republican first appointed by Republican president George W. Bush) insisted that there would be a "huge financial calamity" if the debt ceiling wasn't raised? Why did their belief persist when Moody's, Standard & Poor's, and Fitch Ratings all explicitly and repeatedly warned of serious and expensive debt downgrades if the ceiling wasn't raised? Why did they stick to their guns despite news reports detailing the link between the rating of federal government debt and the debt of states and municipalities? Why did they stand firm despite the consensus of the Republican Governors Association and the Democrat Governors Association that a failure to raise the debnt cailing would be "catastrophic"? Why did they refuse to yield despite bipartisan analysis explaining the very, very bad consequences of no agreement, and nonpartisan analysis explaining the horrific foreign policy consequences of American default? Why did they not understand that even a technical default would cost hundreds of billions of dollars**, thereby making their stated goal of debt reduction even harder?
Most mysteriously, why did these people throw their steering wheel out the window despite witnessing the effect of the 2008 Lehman Brothers collapse, which revealed the complex interconectedness of financial markets? Treasuries were far more integral to global capital markets than Lehman, but the debt kamikazes refused to recognize the possibility that a technical debt default would have unanticipated, complex, and disastrous consequences. Why?
I would like to be able to offer you a definitive answer, I really would, but I can't. The implications listed in the previous paraqgraph seemed pretty friggin' obvious to a lot contemporaneous observers at the time. As near as I can determine, there are four partial explanations for why the debt kamikazes persisted in their belief that nothing serious would happen: One explanation, which I've detailed here, is that the debt kamikazes refused to budge because refusing to budge had yielded great political rewards in the past.
Another explanation is that the debt kamikazes convinced themselves that no possible alternative was worse than the federal government accumulating more debt. They looked at countries like Greece and Portugal and decided that the U.S. was only one more Obama administration away from such strictures.
A third explanation was the general erosion of trust in economic experts during this period. To be fair to the debt kamikazes, many of the prominent policymakers who warned about calamities if the debt ceiling wasn't raised had pooh-poohed the effects of the housing bubble in 2005, or the collapse of that bubble in 2007.
The final explanation goes back to those people who acknowledged that a default might be a big deal, but were nevertheless OK with the outcome. These debt kamikazes had undergone a fundamental identity change. That is to say, despite all their protestations to the contrary, they were no longer loyal Americans. They were loyal to Republicans first and Republicans only. Erick Erickson made this logic pretty clear in his open letter to Congress:
As Outside the Beltway's Doug Mataconis explained in response:
That's the best set of answers I can give you. I'm sure, future post-aopocalytpic historians, that you have devised new and sophisticated methodologies to unearth the mysteries of the past. I hope you can solve this historical puzzle -- because me and my contemporaries are thoroughly flummoxed.
I wish you the best of luck, and once again, apologies for the whole collapse-of-Western-civilization-thing that happened in 2011. Our bad.
*To translate into your time scale, 15 B.B. (Before Lord Beiber, Praised Be His Hairness)
** 100 billion U.S. dollars = 15 BieberBucks
For the past two years, staunch monetarists and economic conservatives have warned about the evils of massive deficit spending and quantitative easing. They have argued that such policy measures are inevitably inflationary and will debase the currency and raise nominal interest rates. By and large, supporters of Keynesian policies have responded by loudly pointing to the data on core U.S. inflation and the dollar's performance as falsifying the conservative argument. And, by and large, they have a point. If inflationary concerns really were prominent, the dollar should have depreciated in value an awful lot, and nominal interest rates should have soared. Neither of these things have happened. Point for Keynesians.
Right now, however, markets are providing a pretty powerful data point for Tea Party supporters who argue that hitting the debt ceiling is not the end of the world. Last week Moody's issued the following warning:
Moody's Investors Service said today that if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the US government's rating under review for possible downgrade, due to the very small but rising risk of a short-lived default. If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody's to change its outlook to negative on the Aaa rating.
Although Moody's fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations. The heightened polarization over the debt limit has increased the odds of a short-lived default. If this situation remains unchanged in coming weeks, Moody's will place the rating under review.
Make fun of the ratings agencies all you like, but this was front-page news last week. One would think that markets would be pricing in the possibility of institutional investors diversifying away from dollar-denominated debt, a collapse in the dollar, skyrocketing interest rates, a drastic reduction in nominal GDP, dogs and cats living together, and so forth. Or, as Tim Geithner put it, "catastrophic economic and market consequences."
And yet.... last week, the yield on 10 year Treasuries fell below three percent. Maybe markets are underestimating the likelihood that a debt ceiling deal won't happen, maybe they are underestimating the damage caused by hitting the debt ceiling, or maybe they think the Chinese will continue to buy dollar-denominated debt no matter what happens on the debt ceiling (though read this). Or... maybe the Tea Party activists have a point.
So, my question to readers, investors, and experts on the global political economy -- why aren't markets freaking out more about the rising probability of hitting the debt ceiling?
Your humble blogger has not been
contributing to the Osama-a-thon here at FP blogging all that much, because he was busy being a moosehead attending the 2011 Estoril Conference. Many Important topics were covered at this conference, including:
1) The eurozone crisis;
2) The global governance crisis;
3) The crisis in the Middle East;
4) Other global security challenges;
5) The life and times of Larry King.
It was that kind of conclave.
Actually, that really doesn't do it justice. Here's a link to the opening video. Even that doesn't do it justice -- the opening ceremonies featured a sporano suspended 50 feet in the air, a gospel choir, a drum corps, and what I can only assume are the backup dancers for Lady Gaga's music videos.
For a rundown of what the Big Cheeses said at the conference, check out my Twitter feed. The major substantive takeaway I got from the conference is that Portugal would like to do a serious hurt dance on Fitch, Moody's, and Standard & Poor. Half of the conference presenters were Portuguese, and most of the audience was as well. Here is a sampling of the questions the Portuguese asked anyone talking about anything remotely related to economics:
"Why do the bond rating agencies still influence markets after they failed so badly in 2008?"
"Shouldn't the bond-rating agencies be punished for their malfeasance last decade?"
"Aren't the bond-rating agencies to blame for everything bad that has happened since 2008?"
"What do you think of the idea of creating a European standard-ratings agency?"
"Say, has anyone thought about taking the heads of the bond-rating agencies and putting them in a duffel bag?"
OK, I made that last one up, but not the others.
Obviously, the Portuguese have very good reasons to be stressed out. And the bond-rating agencies deserrve an awful amount of flack. Still, the idea that they -- and they alone -- triggered both the 2008 financial crisis and Europe's sovereign debt crisis is absurd. They are far more the symptom than the cause of the crisis.
More blogging after
my eyes adjust to not seeing Lady Gaga's backup dancers everywhere I turn the weekend.
Hey, remember the rest of the world?
The Financial Times' Ben Hall and James Blitz report on a surprising degree of defense cooperation between London and Paris:
David Cameron, British prime minister, and Nicolas Sarkozy, French president, hailed their summit in London on Tuesday as an unprecedented move towards closer integration between Europe's pre-eminent military powers brought on by budgetary austerity but also a closer alignment of the two countries' foreign policies.
They signed two treaties: one covering the sharing of technology used to maintain nuclear warheads and another on initiatives about conventional forces.
Mr. Sarkozy said the agreement to share a new research facility in France for the testing of nuclear warheads was testament to a "level of confidence between our two nations unequalled in history".
Until now, France and Britain have closely guarded the secrets of their nuclear deterrents, regarding them as the bedrock of their independence.
Mr Cameron said the two treaties would commit the French and British armed forces to working "more closely than ever before".
Paris and London also agreed to set up an "integrated carrier strike group", allowing each to fly combat aircraft from the other’s carrier once Britain has an operational ship equipped with its U.S.-built Joint Strike Fighter jets, by the beginning of the next decade. In the next 10 years, the French and British navies would centre co-operation on the Charles de Gaulle, France’s only carrier.
What's interesting about this is not the military effects -- in the end, this is about trying to do more with less -- but the political ones. In a world of austerity, there is some logic in close allies working together to eliminate redundant platforms and/or other fixed costs that could be pooled across countries. Furthermore, this kind of defense integration, once started, would strike me as very hard to reverse.
This year has seen a lot of people predicting the end of the EU and NATO as Europe struggles with its economic misfortune. I wonder, however, if hard times are actually having the opposite effect of forcing European and NATO countries closer together. This might not be popular, but it's the only viable policy option in some instances.
The Troubled Assets Relief Program expired yesterday. I've blogged about how this program was both cost-effective and a pretty significant policy achievement. This appears to be the expert assessment as well. The Wall Street Journal's Deborah Solomon and Naftali Bendavid explain:
It will ultimately cost far less than the initial $700 billion price tag that stunned a nation. Major banks are profitable and can raise capital. Credit spreads -- a key measurement of risk -- are down to pre-crisis levels.
The White House now projects TARP will lose at most $50 billion, down from $105 billion projected earlier this year. Privately, Treasury Department officials say the U.S. may not lose a dime, and could ultimately make money depending on how some investments fare, in particular American International Group Inc. and General Motors Corp. In a $14 trillion economy, $50 billion is less than 1% of economic output.
"The incredible irony here is that TARP probably succeeded wildly beyond anybody's imagination," said Alan Blinder, a Princeton University economist who co-authored a paper crediting the administration's economic policies with preventing a second Great Depression. "Suppose the original TARP bill had been to spend $50 billion to avert a catastrophe. Would anyone have blinked?"
Or consider the Financial Times story by Tom Braithwaite:
[A]ll of the consequences have to be judged against late 2008 and early 2009 when fear stalked the markets and nationalisation of the biggest US banks looked a possibility.
Making a play on a famous MasterCard commercial, Mr [Lee] Sachs outlines what the country got in return for its investments in the banks. “Dividends? Five per cent. Equity warrants? Two per cent. The economy not turning into the second Great Depression? Priceless.”
Despite this fact, however, TARP is ridiculously unpopular with the American people.
Oddly enough, this might be a very good thing, for two reasons. First, the likelihood that the latest financial reform bill will prevent a future financial crisis is exactly nil. There will be moments down the road when the financial sector will come crying to Washington.
TARP's biggest problem, however, was that it badly exacerbated the moral hazard problem. If banks know that they are insured against catastrophe, this gives them an incentive to act in a more risk-loving manner to maximize profits -- thereby increasing the probability of a catastrophe. While this might be a good thing in some sectors of the economy, finance is not one of them.
TARP's political unpopularity, however, could help to eliminate the moral hazard problem. As Solomon and Bendavid observe:
Perhaps the biggest fallout from TARP is that it precludes another TARP. Should the financial sector run into trouble, the chances of another government bailout are essentially nil. For many on Capitol Hill and beyond, the end of bailouts is a good thing. But some worry TARP's legacy could be a more devastating financial crisis down the road.
"The greatest consequence of the TARP may be that the government has lost some of its ability to respond to financial crises," concluded the Congressional Oversight Panel, which oversees TARP and has been one of its biggest critics.
Now, truth be told, I'm not sure this is entirely accurate. Sure, rescue packages are unpopular now -- but let the Dow Jones Industrial Average fall 800 points and politicians might react differently. If, however, the political perception is that no more bailouts from D.C. will be forthcoming, then it might condition financial players to act in a more prudential manner.
In other words, the Tea Party activists on the right and the netroots activists on the left might be the political lobbies that do the most to preserve the integrity of the U.S. financial system.
I'll be spending the rest of the day savoring this irony. I welcome commenters trying to burst my cognitive bubble, however.
Gideon Rachman notes that the WTO has been denuded of controversy, and wonders why:
It’s strange to recall that - just a decade ago - the World Trade Organisation was a deeply controversial organisation. It was the WTO that was fingered by the anti-globalisation movement as the handmaiden of ruthless western capitalism and oppressor-in-chief of the poor. The WTO summit in Seattle in 1999 degenerated into a street riot.
On Wednesday morning, however, the WTO staged a public forum in Geneva, without the need for riot police - and indeed without much public fuss at all. I chaired the opening session at the organisation’s modest headquarters on the banks of Lac Leman.
I think that one of the main reasons why the WTO is no longer in the line of fire is that the change in the pattern of world trade over the last decade - combined with a slump in the West and a boom in China and India - makes the idea that global free trade is a tool of western domination look increasingly absurd. The world has got a lot more complicated than that; and even the anti-globalisation movement has had to acknowledge that complexity, if only tacitly. These days, it is the developing nations that are pressing for completion of the Doha Round and the rich countries that are dragging their feet.
Hmmmm..... well, let's call Rachman's explanation the optimistic interpretation for why the WTO doesn't attract demonstrators anymore. Let me offer a more pessimistic explanation, which consists of two parts:
1) Finance is the new bogeyman. The 2008 financial crisis and the subsequent Great Recession were caused by bubbles in financial markets -- trade, at best, played a marginal role. Perhaps it's not that trade has become less controversial so much as finance and capital flows have become way more controversial.
2) The WTO is no longer liberalizing. The WTO does an impressive job of ensuring that the status quo of a (largely) open trading system keeps functioning. What has exercised protestors in the past however, was the notion that further liberalization was going to take place. Since the Doha round is deader than a doornail. why bother with protesting?
Now imagine a world where there was forward progress on the Doha round -- do you seriously think there would be no protests associated with the WTO? Oddly enough, in this case, a lack of protest is a bad sign for trade.
I would much prefer Gideon to be right -- but I'm pretty sure he's wrong.
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.