"When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals.
We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues"

( JM Keynes, "Economic Possibilities for our Granchildren" 1930 )

Thursday, December 31, 2009

Should Financial Rescue be "Fair"?

It is almost unanimously agreed that the economic crisis and subsequent bailouts were the dominant topics during 2009. The “rise and fall “message delivered by the establishment is the “we saved the world” mantra, supposedly reflected in the rebound of capital markets values since March. This discourse generally focuses on aggregate economic terms and tends to play down the fairness aspects of the measures taken during the crisis.

Professor Brad De Long (Professor of Economics at the University of California at Berkeley) deals directly with the fairness aspect: Prof. De Long believes that the multi trillions USD financial rescue of the banking system was necessary albeit unfair to many other sectors. Let’s see a quote from his article:
The Fairness of Financial Rescue

This response ( EF : the support the prices of risky financial assets) is understandably controversial, because it rewards those who bet on risky assets, many of whom accepted risk with open eyes and bear some responsibility for causing the crisis. But an effective rescue cannot be done any other way. A policy that leaves owners of risky financial assets impoverished is a policy that shuts down dynamism in the real economy”.


I would like to deal with the fairness aspects from many angles, so I will focus on a few terms to explain my point.

Risky Assets: It seems that there is a misunderstanding of the moral foundations of market Capitalism when the “impoverishment of the owners of risky asset” is considered as a bad idea. According to the financial theory, the essence of a risky asset is that its holding entails a possibility to lose (or earn) money. If the system guarantees beforehand that an asset owner would never lose money on an asset (or asset class) then risk disappears and the asset becomes “safe”.

The relation between risk and reward is a cornerstone of the market system. The market ideology considers the extraction of earnings by the asset owners class as a fair compensation for the risk the entrepreneur bears when it invests his capital in a risky project. However, if under a “new paradigm” the system guarantees that the investor will not be impoverished whatever happens, where is the risk to be compensated for ?Why should asset owners benefit from earnings? Isn´t such a position undermining the foundation of the market system?

Dynamism: Prof. thinks that the unfair allocation of means to ensure the wealth of asset owners is a necessary bad to guarantee the dynamism of the system. Well, almost 70 years ago the Austrian economist Schumpeter coined the term “Destructive Innovation” to describe the innovative entry by entrepreneurs which is the force that sustains long-term economic growth, even as it destroyed the value of established companies. Therefore, according to that (widely accepted) view there is nothing really bad in impoverishing asset owners. Moreover, that is precisely the economic mechanism that ensures the growth and prosperity! Is the Professor proposing to eliminate that mechanism?

Fairness: Any social structure relies upon its particular terms of fairness, justice and morality. Even the most ruthless tyrannies, supposedly ruling with high doses of coercion, devote large efforts for propaganda and persuasion. If a major issue like the bailout of the banking system is admittedly solved in an unfair mode (rewards… many of whom …. bear some responsibility for causing the crisis…) why should people common people support a system that exacerbates the unfairness? However, were all the possible efforts made to try and minimize the unfairness related to the bailout? Beyond economics, doesn´t the professor understand that the alternative for a common perception of decent fairness and justice is a society based only upon crude power and coercion?

I will end this post with some open questions: Is the division between effectiveness and fairness rather artificial for social and economic systems? Isn´t “fairness” an essential component of the effectiveness of policies in a Democratic society? In other words, when we say “effective”, effective for whom?

*Professor of Economics at the University of California at Berkeley and a Research Associate at the National Bureau of Economic Research., former Deputy Assistant Secretary of the Treasury under Summers- Clinton)

Thursday, December 24, 2009

Income Distribution ,Bubbles and the Finacial Media

An interest comment regarding the link Debt Bubbles -Income Distribution is presented in this post
The text was published last week at the Financial Times (FT) website and it´s not more than an answer from FT Chief economic Commentator (M. Wolf) to a question raised by a reader. I found the text very interesting as it reflects a seemingly stubborn position of avoiding any serious debate on the above link or alternatively the reejction of any alterantive proposal on economic, political, “theoretical” or practical ground. M. Wolf´s text (FT) is followed by my comments to highlight the main issues in the text

FT : “I am not at all sure about the link between inequality and the bubble. I think that the growth of the financial sector played an important role in increasing inequality in the US and UK. It helped a very small proportion of the population to extract a large amount of rent.”

First of all we can notice that the rise in inequality is undeniable but the real denial is the link to bankers´ greed (the preferred scapegoat) rather than referring to a possible systematic flaw. A serious answer should point to the question of WHY the financial sector expanded to a degree it became a danger to the system and what interests that expansion served. Another interesting point is the irrelevant focus on national (“US and UK”) perspective: even FT agrees that the economic system and the crisis are global, so any economic analysis should be done also from a global perspective.

FT : “…But I am not sure about the reverse causal relationship from higher inequality to the bubble. The argument would, I suppose, be that, lacking higher incomes, a large proportion of the population borrowed in order to sustain consumption. This is possible. But I do not know of any convincing arguments for the proposition”.

The FT previous affirmative tone turns to a more skeptic when he refers to “the reverse causal” (from inequality to bubbles) ,Is it because this causation might oblige us to deal with systematic flaws? Anyhow, this causation seems to be treated as some curious and rather exotic perspective “ I suppose… This is possible… “ are expressions of not taking too seriously the argument. The commentator bothers to specify that “there is no convincing argument for the proposition…”, although a coherent exposition should tell the reader if there are also (not convincing) arguments against the proposition: Maybe there are no evidences against the proposition? Anyhow, there is no mention of any real study about the topic, a weird intellectual lacuna for a discipline like economics that investigates extensively almost any human and social phenomena. Very weird indeed.

FT : “…..In any case, whatever the causal relationship, I cannot see how a more equitable distribution of income would now help solve the crisis. I suppose one might argue that it would increase sustainable consumption, though consumption already looks excessive in the US.

Despite the admission of the ignorance about the topic (“whatever…”), there is no doubt about the conclusion, which is declared in an affirmative tone: “An equitable distribution would not help to solve the crisis”….. So we already admitted that we don´t really know (or pretend that we don´t know) ANYTHING about the issue but we DO know that the solution is not that redistribution ? Doesn’t sound very coherent….

FT ” …I think one would have to argue, instead, that greater equality is a good in itself. The big question is how one could achieve it. There are limits, I think, to how much redistribution one can achieve through the redistribution of pre-tax incomes. So the aim should be to alter the distribution of pre-tax incomes themselves. I know of no easy way to do this, certainly not in the short run”

Now we leave the economic arena to the philosophy realm: Even if we agree that a more equitable society is desirable (which is not an economic issue …), the technical obstacle would be a substantial impediment. Were technical considerations relevant when governments rushed to pour trillions of taxpayer money into failing financial institutions creating the worst moral hazard behavior? How it comes that technical aspects become important whenever we deal with distribution policies, even those considered logical ?And if a measure is right for its own merits, should the easiness of its implementation be an obstacle?

As we have seen along that post, the level of the debate got plenty of room for improvement. Anyhow, the evident attempt to avoid a serious debate on that matter is becoming an unsustainable tactic, so I guess the media and the establishment will intensify the arguments against the calls for a more equitable distribution. On my opinion, the income and wealth more equal redistribution is not only justified by moral foundation but is the only way out from the sub consumption crisis we are stuck in.

Tuesday, December 15, 2009

Should we be worried from lesser violence?

From the Israeli Press: Haaretz 10.12.2009

Defense officials: Palestinians trying to coerce Israel into accepting statehood

The current calm in the West Bank and the Palestinian Authority's crackdown on violence there has prompted to international community to demand Israel advance the political process, said the officials.

"The Palestinians want to continue to build their state from below and at the same time to work with the United States and the European Union to force Israel into an arrangement from above," Yadlin ( Head of AMAN – Israeli Military Intelligence) and Diskind ( Head of SHIN BET : The security service ) told the ministers.

It seems that Top Intelligence Israeli officers are worried from the unexpected, or may I say, undesired consequences of the PNA* conscious effort to reduce the flames of violence and terror. Why to be worried? The relative calm could be be part of a sophisticated strategy traced by the PNA to enforce (!) and agreement on Israel. That sort of “warnings” shed light on some obstacles in the way for achieving an agreement between Israelis and Palestinians : lack of dialogue, violence and mistrust. I will try to do my best and explain myself in the following paragraphs.

Coercion and dialogue: True, no country likes to be coerced. Anyhow, is it possible to say that what looks as a "coercion" is not more than a compromise? Let me explain: The result of any fruitful dialogue is a “give and take” deal, a compromise that is the outcome of constraints and pressures imposed on decision takers. Therefore it´s quite logical to state that any effective pressure can be ultimately considered as a sort of coercion as it affects the final decision. Bringing that vision to an extreme, the only way to “a no coercion state” is by avoiding any dialogue, a legitimate vision under certain circumstances (for example hostages) but hardly applicable in the political arena. As a matter of fact, the Israeli Government has already decided to negotiate with the Palestinians, so the coercion argument is irrelevant unless there is no real interest in dialogue and compromise.

Violence: If the relative calm is detonating a process which will push the political process forward and might even form international pressures on Israel, what should be the operative suggestion? Can we deduce that any Palestinian violence is “good” for Israel? Or may I say, that the relative calm is good for a peaceful Israel which aims to live peacefully with its immediate neighbors, but “bad” for a belligerent State?

Trust: Unfortunately it is common to hear arguments against the peace process under any, and even contradictory circumstances. Let me explain: When the Palestinians make use of terror, the argument is that Israel should not deal under threats. Now, when the Palestinians try to curb violence in order to get international support (exactly as any weak nation, including Israel would do) the argument is that Israel should not be coerced to a statehood solution by the international community ( or even there is no need to hurry since everything is calm…). There is another subliminal possible underlying message (quite popular in Israel) : Palestinians are just playing the “nice guys” role in order to achieve their statehood. As soon as they get their state they will turn to other means against Israel. The main weakness (and strength) of that sort of conspiratorial theories is their eternal “correctness” as well as “incorrectness”. Intentions, especially future ones are subjective and elusive and hard to prove or refute.

Final comment : The task of leadership is not just “to guess” intentions but also to try to shape the opponents´ intentions and perceptions according to its own national interest. The Mid East conflict has already too much doses of mistrust, violence and lack of dialogue . Therefore what is needed more than ever is less "warnings" and more hope.

*PNA – Palestinian National Authority

Tuesday, December 8, 2009

The Economic of Constipation ( or how to deal with Exit Strategies)

The economic recession is not over yet, the recovery is more than questionable, but Financial Markets and Governments are already engaged in a debate regarding the timing and scope of the “Exit Strategy” (echoed by the mainstream press). For those not familiar with the terminology, “Exit” is a codename for the withdraw of the extraordinary Keynesian style measures applied by governments and Central Banks along the last economic crisis ( more spendings, bailouts, deficits, interest rates reduction etc.). Such a “preemptive” attitude looks somewhat weird considering the shortsighted economic policies carried out by the very same people which brought a financial calamity upon us. Is there any difference between then and now that could explain such a shift? Lets analyze the issue.

I will open with a small confession: I might have missed a few Macro Economics classes at the University, but as far as I remember the classic Keynesian model did not include any “Exit Strategy”. Keynes proposals were a sort of “passive activism” policies advocating for public intervention whenever the private sector is not able to maintain growth and full employment. Keynes was not anti markets, he just thought that markets could be too slow to restore economic activity and in the interim the result could be a huge social cost . Anyhow , the model we had in class showed that when the public sector got into the picture boosting demand and economic activity, it was supposed to remain around for a long time. The assumption was that unless someone could show that (the unreliable) private sector could lead the economy once again the govt. must remain in command. In the meantime , no “Exit” and no “Strategy” , just bigger government..... the equivalent to higher taxes (by the end of the day you cannot run deficits for ever). This is more or less the story of the Western economy for 40+ years since the 30.

An this is exactly what financial markets, their cronies in the political arena and cheer leading press are afraid of : They want big governments around only as saviors or liquidity suppliers , forget about taxes or limitations!. Any remote smell of higher taxes change their mind abruptly and this is the real motive for the “Exit strategy” talk, even in the midst of 16% (!) unemployment rates ( U6 in USA) . Their strategic objective is to restore pre crisis lost paradise : 30 years of smaller government, smaller salaries and ….higher profits.

Don´t bother to ask who is going to replace the government demand given the number of constrains and challenges the global economic is facing , just to name a few: Huge piles of private and public debts, record unemployment figures around the globe, international imbalances , global warming, elder population …... : if you insist on raising the question and you get the answer that market forces will solve the problems, than you can be sure that the lessons from the crisis have not been learned yet and the second round is just around the corner.

Sunday, December 6, 2009

The Show Must Go On

The Israeli government has recently decided to “temporally freeze” any new construction in the settlements in the Occupied Territories. The Israeli press praised the decision labeling it as a brave concession toward the Palestinians done by a right wing Government. Is it a real step forward for Peace ? Or alternatively should we consider that decsion as another needless chapter in the drama we have being watching for decades in the Mid East?.

Lets face it from the outset: The Israeli Palestinian conflict does not lie behind freezing permits for new balconies or schools , THE issue is the vast israeli colonization on Palestinians lands during more than 3 decades . The “Strategic” objective of such a colonization process is self evident: To obstruct the viability of any possible Palestinian sovereignty thus ensuring the Israeli control of these territories. The "security" argument is more than questionable as the security of the State of Israel was never based upon isolated settlements in the midst of Arab population. The outcome is a 42 years old Israeli occupation (with a nuance since the creation of the PNA) and the denial of human civil and political rights from millions of human beings. Therefore , any temporal freeze does not deal with any real issue and should be considered as an empty gesture. Nevertheless, that sort of development fits perfectly the key players short term strategies in the play. Lets see how that decision serves them .

Actual US President is a Master of gestures and speeches. Since the unprecedented decision is the outcome of US administration pressures, it can be considered as a political victory . This observation is partially right as it fails to recognize the fact that as long as core issues remained unsolved, hard liners got another break to “buy time” to create more obstacles for a reasonable solution. These sorts of empty gestures could be sufficient to receive the Noble Prize .....but in real life they are irrelevant.

Prime Minister Netanyahu fits into the tragic character of the play : the man who must face his destiny , forced to choose between political pragmatism and his lifetime beliefs (Israeli sovereignty on Eretz Israel). Recent media spinoffs confirm that description about the endless dilemma PM went through before having that decision.

The settlers are supposed to play trouble makers. Their expected resistance to any freezing will be the evidence that any change in the Status Quo or real concession in the future might bring to heavy internal conflicts in Israel. That behavior will put the Israeli Government under a more positive light as it dares to confront hard liners.

Israeli Left will maintain its ambigious position toward the conflict: The Israeli “generosity” is expected to become, once again, the perfect alibi for the Israeli “Left” to remain under the (Hard Line) consensus toward Palestinians. That consensus could also includes any future possible violent (even disproportionate) Israeli response to any hostility from the Palestinians.

Extremist Palestinians: The limited achievement cannot satisfy hard liners and in certain way not even more pragmatist factions. As a matter of fact, more than 15 years of Oslo process and negotiation with Israel achieved too little for the palestinian people . If palestinians feel that this is all they can get throigh negotiations they can be tempted to go back to the hostilities field.

It seems that the anonymous script writer insists on maintaining that horrible tragedy with no real happy end in sight and that sort of temporal freezing is another evidence of the short sight persepctive of the main players. We should alway rememeber that real life theater is a bit different : The real players which bear the burden of their leaders failures are the Israeli and Palestinians . There are no spectators but very real players.

Wednesday, November 25, 2009

On Rationality and Financial Markets – A note

Whenever I listen to the daily financial news, especially the details about market turnover (millions of shares or USD) I cannot stop wondering: These turnovers are made of millions of transactions, each one of them involving a buyer and a seller that agreed on a price and quantity. The former enters into the deal expecting a positive yield, while the later assumes exactly the opposite. Someone must be wrong, isn´t it? Better said , who is the smart guy and who´s the sucker? The seller or the buyer? From the outset, it is impossible to know, but what it is clear is that someone MUST BE wrong. If is this the case, how can anyone claim that financial markets are rational or “Efficient”??

The Efficient Market Hypothesis (a leading theory behind financial models) tries to explain that apparent incoherence through an interesting mechanism: Individually, the market players can be wrong, but collective wisdom (i.e. “The Market”) is always efficient /correct. The explanation goes like this: Markets are efficient in the sense that prices reflect all the available information in the market, visible and invisible as well .Nothing escapes from the definition for “information”: Raw data, analysis, beliefs, technical analysis, crystal ball , dart throwing monkeys on a WSJ table, etc. As a matter of fact, that definition is a tautology since it is obvious that prices are the ultimate output of all the inputs involved in the process.

The main practical conclusion from EHM is self evident: Since all the info is on the table, there is no one with a real advantage so excessive returns in the long run are due to luck (i.e. the fees you pay to your fund for stock picking or the “analysis” is a waste of money….). From an academic point of view, EHM is the epicenter of passionate debates until these very days. I will not enter into a wonkish zone since my main concern is the broader aspect of the market efficiency postulates.

Financial market “efficiency” corresponds to the (quasi religious) belief that markets are the best mechanism for resource allocation. That questionable theory got several implications beyond the finance arena, well into the social and economic life, and I could mention at least two conclusions from EHM, relevant in a broader context:
First: If financial markets are efficient, external intervention should be minimized, including regulation of governments and public entities.
Second: Since financial markets are supposed to be the best proxy to a pure version of a free market and as such serve as a model. The logic is simple: If financial markets are efficient, then society should apply the magic “free market “formula to other markets as well.

As mentioned above, the first conclusion is questionable as the efficiency of the market is not more than a tautology. On my humble opinion financial markets are the sum of clashing forces (supply vs. demand etc.) which get into terms by the end of the day through the exchange mechanism. The price is the outcome of perceptions, expectations, alternatives; cash constrains, bargaining power and other, so there is nothing really right, wrong per se in the price set. The concern from social point of view which justifies a strict oversight on these markets is possibility for more than probable bad repercussions (externalities) from the market could affect the whole society.

The second conclusion could be interpreted in a different way. If free markets are not more than clashing interests and perceptions, the internal oversight (such, auditory work) is there to deal with these forces that market mechanism alone cannot handle properly (inside information as an example). In that sense, since society is a much bigger fighting arena of clashing interests, it can also define those the areas beyond the arm reach of market mechanism and its clashing forces.

Summarizing: There is nothing really magic in the price mechanism of financial markets, it is just a balance between clashing forces, which requires oversight and vigilance, sometimes even offsetting “efficiency”. The same applies to the economic structure of the society

Tuesday, October 27, 2009

Distribucion de Riqueza y Crisis Economica ( Spanish)

El breve documento es un resumen en un modesto intento de arrojar luz sobre uno de los aspectos relacionados con la actual crisis económica pocas veces tratado: la relación entre la formación y el estallido de la burbuja de crédito y las tendencias en la distribución del ingreso y la riqueza. El espacio limitado de este blog me obliga a tratar el tema de una forma bastante esquemática , cubriendo solo aspectos generales y especialmente los acontecimientos de la última década, centrándome en EE.UU. debido a su posición dominante en la economía global y la disponibilidad de datos.

Se reconoce comúnmente que el detonador de la actual crisis ha sido el colapso de la burbuja crediticia que se ha venido desarrollando en EEUU desde los años 80 del siglo pasado. Durante estos últimos 30 años la relación crédito / PIB aumentó de un nivel estable (hasta el 80) de ap. 100% hasta un nivel de 350% en 2007. Este nivel de endeudamiento no se veía desde el estallido de una crisis financiera del 1929 que llevó a la Gran Depresión de los 30. La parte del león del aumento de la deuda estaba en las instituciones financieras y los hogares. Resumiendo, se trata de un fenómeno casi sin precedentes y la correlación entre las crisis y la formación de la burbuja crediticia y el posterior estallido de las crisis ( Minsky ) es evidente.

Analizando el asunto desde una perspectiva mas teórica: Deuda, por definición es una transferencia temporal de recursos entre prestamistas y prestatarios. Viéndolo de esta manera, podemos analizar el tema desde la burbuja crediticia desde una perspectiva de ambos lados. Desde la perspectiva del endeudado nuestro análisis sostiene que la expansión de la deuda, especialmente del sector de los hogares americanos esta vinculada al deterioro de los ingresos de la mayoría de los ciudadanos Americanos en términos relativos y absolutos. El endeudamiento masivo sirvió para contrarrestar los efectos negativos relacionados con el estancamiento del ingreso medio ( no promedio!!) por hogar que se mantuvo estable en términos nominales desde 1998 sobre el consumo agregado (Ap. 70% del PIB) y el crecimiento constante del PIB ( ap. 3% anual) . La magnitud de la tendencia se refleja en la creciente brecha de la distribución de las rentas desde los años 80: sólo para la ilustración, el ingreso del 1% mas rico en EEUU antes de impuesto sobre la renta total subió del 9% en 1976 hasta 21,8% en 2005 (el máximo anterior en 2008 fue de 23,9%). O sea los mega ricos aumentaron su participación en la riqueza por más del doble mientras que los ingresos del “ Average Joe”.

El punto de vista del prestamista seria el próximo paso: la distribución desigual del ingreso y la riqueza entre los estratos de ingresos más altos (estudios de la Fed muestran una relación de ahorro más elevada entre los quintiles más altos) formaron una enorme masa de riqueza disponible y prácticamente obligaron al sistema financiero a encontrar salidas a esa masa de , canalizadlos a los mercados financieros y el consumo. Algo parecido sucedió en los años 80 cuando el enorme flujo de petrodólares fue canalizado por la banca a América Latina, causando posteriormente varias crisis de deudas.

Viendo el esquema desde punto de vista de las corporaciones, parecía que el círculo estaba cuadrado: El estancamiento de los costes laborales junto con la expansión del consumo impulsado por el endeudamiento se convirtió en la combinación perfecta para mayores ganancias y / o salarios más altos a los altos directivos.

Una fuente adicional de financiación para el consumidor estadounidense fue el sector exterior ( países extranjeros) que debido a su propia falta de demanda efectiva se vieron obligados a mantener a flote la economía de los EE.UU. mediante la compra de las obligaciones publicas y privadas de Estados Unidos y creando un tasa de déficit de mas de 2 Billones de USD al dia!. El caso de China es interesante, ya que la política de desarrollo del país como el taller del mundo se basa en los costos laborales bajos, y las tasas de ahorro elevadas debido a la falta de red de seguridad social produce una débil demanda interna ( siguiendo la tesis "Que algunas personas hacerse ricos primero" de Deng Xiao Ping). La consecuencia de esta política mercantilista es una dependencia brutal en la demanda externa para garantizar una tasa de crecimiento acelerado para absorber la inmigración de población rural , lo que obliga a los Chinos a mantener un tipo de interés fijo con el dólar a pesar de un enorme superávit en cuenta corriente (especialmente desde 2004) y el flujo de capitales. La consecuencia era inevitable la acumulación de reservas ( de casi 2 billones de dólares a partir del 12/2008), aparentemente muy por encima de las necesidades reales de la economía china.

En algún momento el régimen comenzó a ser sostenido por el aumento de los precios inmobiliarios y una política de bajos tipos de interés que “prometia” un aumento eterno del valor de los inmuebles. Además, las expectativas sirvieron como garantía para prestar mas hipotecas sobre el mismo inmuebles. Como es evidente que este sistema no es viable a medio plazo, los bancos prefirieron empaquetar estos prestamos como productos “serios”y fueron vendidos por una comisión, los que les permitió quitar del balance pasivos y poder siguiendo prestando dinero. El crédito de los titulizados creció de 0,5 a 2,5 billones de dólares entre 1996 y 2007 y una fuente de riqueza para el consumidor que se refleja en el amplio uso del plan de financiación a MEW (MEW: Endeudamiento garantizado por el aumento del valor del inmueble) de lo que explica hasta el 3% de crecimiento del PIB desde 2001 (J. Kennedy y A. Greenspan). Dado que el rendimiento económico real de este régimen es bastante bajo (el análisis de la ROE ROA, en contraste de los bancos de inversión, por ejemplo demuestra los pobres rendimientos de las inversiones reales) los bajos intereses y la falta de regulación es esencial para mantener un nivel de rendimientos decente (y bonos de alto para los altos directivos) y para convertir la deuda dudosa en algo mas respetable. El colapso de los valores inmobiliarios marcó el comienzo de la contracción de la deuda (des apalancamiento) que sufrió el generador de consumo y el valor de las garantías.

El colapso de la demanda efectiva tiene muchas manifestaciones, incluidas las cifras récord de desempleo (casi 10% en EE.UU.), el colapso de la utilización industrial , el estancamiento del crédito, caída de los precios de los inmuebles, entre otros. Hoy en día el consumidor estadounidense está agotado y finalmente consciente de que el el estilo de vida de “0” ahorro garantizado por el aumento eterno delos precios inmobiliarios se ha terminado. Están subiendo las tasas de ahorro para cubrir las deudas del pasado y para recuperar el ahorro necesario para jubilarse. ¿Existen sustitutos para el consumidor estadounidense como motor de la "demanda" mundial (aproximadamente el 16% del PIB mundial)? Descartamos el modelo europeo, especialmente el alemán se basa en la demanda externa, y el Japónes que es más de lo mismo (con una enorme deuda nacional), con el agravante que se trata de economías en envejecimiento. China y otros países en desarrollo (BRIC, por mencionar sólo algunos), aplican modelos de crecimiento basados en salarios bajos y distribución del ingreso enormemente desigual (coeficiente de Ginny en 200 M Brasil se acerca a 60) con una dependencia brutal en la demanda externa. En estas circunstancias, es difícil esperar que las empresas privadas para impulsar la demanda a través de inversiones.

El Salvador se convirtió en el sector público, paradójicamente considerado a lo largo de las décadas de oro del laissez faire como "el problema". Las instituciones públicas son hoy en día participan en una mezcla de políticas keynesianas y monetaristas, vertiendo miles de millones de dinero público en planes de rescate para instituciones financieras, industrias, consumidores, etc, y proyectos públicos para reactivar la demanda agregada.

Dejando de lado la cuestión relativa a la eficacia (y la justicia!) De estos esfuerzos, el gasto adicional será financiado de alguna manera en el futuro por los impuestos, la deuda y / o la monetización. Dado que es difícil ver cómo la economía sin estas herramientas (y, a pesar del efecto multiplicador) se encargará de volver a anteriores agregados normal.

Aquí el espectro de distribución de rendimientos en el debate. Si aceptamos las líneas básicas de este análisis, la reactivación de la economía debe incluir un mecanismo de ingresos importante y redistribución de la riqueza a escala global (la redistribución del ingreso en la escala nacional es un pariente cercano al proteccionismo) para asegurar una generación de demanda duradera basada en el principios económicos sólidos.

Sunday, February 22, 2009

Financial Crisis and Wealth Distribution

It is commonly agreed that the detonator of the current crisis was the collapse of the credit bubble which have been developing since the 80. During that period the US Credit/ GDP ratio increased from a stable level up to 350% (a level not seen since the 30). The lion share of the debt increase was at financial institutions and households sectors

By definition debt is a temporal transfer of resources between a lender and a borrower .From the borrower side our approach claims that the debt expansion, especially of the American household sector, served to counterweight the detrimental effects related to the stagnation of the median household incomes on consumption (ap. 70% of GDP). The magnitude of the trend is reflected in the widening gap of income distribution since the 80 : just for the illustration , “Top 1% Pre Tax Income Share” ascended from 9% in 1976 up to 21.8% in 2005 ( the previous peak in 2008 was 23.9%). From the lender side, the vast accumulation of wealth among higher income stratus (Fed surveys show a rather high saving ratios among the higher quintile) was channeled to the financial markets and consumption (Corporations apparently did not need finance due to their positive cash position along the last decade). It seemed that the circle was squared: Stagnating labor cost combined with expanding consumption means higher profits.

An additional source of finance was the foreign sector as a result of their own lack of effective demand which obliged them to keep financing the US economy by purchasing American obligations. The case of China is interesting since the country development policy as the workshop of the world is based upon low labor cost , and high saving ratios which means weak internal demand (“Let some people get rich first“ Deng Xiao Ping ) The consequence was an inevitable accumulation of reserves (almost 2 Trillion USD as of 12/2008) much above the real needs of the economy.

At some point the scheme began to be sustained by increasing real estate prices (and low interest rates). The expectations served to guarantee mew mortgages ( which were packed and sold for a commission) and a source of wealth effect for the costumer reflected in wide use of MEW finance scheme which explains up to 3% of GDP growth since 2001 (J. Kennedy and A. Greenspan). Since the real economic yield of that scheme is rather low (analyzing the ROE in contrast ROA of investment banks for example) the huge leverage and lack of regulation was essential to maintain decent yields (and high bonuses for top managers) and to turn dubious debt into respectable stuff. The collapse of real estate values marked the beginning of the debt contraction (deleveraging) which sustained the consumption generator and the value of collaterals.

Public institutions are nowadays engaged in pouring trillions of public money on bailout plans for financial institutions, various industries, consumers, etc, and public projects to reactivate aggregate demand. Leaving aside the question regarding the effectiveness (and fairness!) of these efforts, the extra expense will be financed somehow and here the distribution specter returns to the debate. If we accept the basic lines of the above analysis, the reactivation of the economy must include a major income and wealth redistribution mechanism on global scale ( income redistribution on national scale is a close relative to protectionism) to ensure a lasting demand generation based upon sound economic principles.

Sunday, February 8, 2009

Lieberman and Israel do not cry anymore

This week Israel will celebrate elections for the Knesset which cording to latest polls seems to remain undecided until the very last minute (and even afterwards if the vote is too fragmented). Though, the most interesting story is the spectacular rise of Lieberman's Right Wing party "Israel our home" to the status of third political power, surpassing the traditional Labour party which led the Zionist movement and Israel for decades.

Lieberman's party main message is “No citizenship without loyalty”," No rights without duties”. From the outset these requirements sound logical: After all, every state confines the right of citizenship according to its dominating values or interests. But Lieberman's message is not destined for aspiring Israelis (an option practically available only to immigrants Jews) but to actual Israeli citizens, a newspeak terminology which leaves many questions unanswered: How can you measure loyalty? Who will decide what loyalty is? In addition , we know from recent history that Afro American were denied for decades to exercise their Civil Rights in USA by requesting arbitrary criterion (such as reading tests, etc.) thereby circumventing formal equality.

I guess that Lieberman will not require hundreds of thousands of Israelis carrying a foreign Passport (Israel permits double nationality) or those living abroad to choose between "Us or Them". I am afraid that he doesn't really mean to verify the Jewish roots or creed among hundred of thousands of Ex USSR immigrants, which their Jewish ness, (according to the Jewish Code "Halacha”) is rather questionable. Its main target is the 20% plus Arab minority, and in that sense, his proposals are racist.

Arab "brotherhood" is rather limited (as have been demonstrated in the last war in Gaza) and the Palestinians are fully aware of it. Thus, what interest has reasonable Israeli Arab to betray his country? What for? Arab Israelis are connected to the Arab world, but they are clever enough to recognize the benefits of belonging to Israel. On my opinion the issue is not the loyalty to the country but an attempt to maintain the minority in its current conditions. It is well known ( and even PM Olmert recently admitted) that Arab Israelis have been suffering for too long from discrimination .Their political demands rights within the political democratic game are the real reason for the Lieberman's loyalty test.

Other claim that Israel should guarantee its identity as a Jewish state and the demand for loyalty comes from this aspect. What is the meaning of a Jewish State and where is the Jewish ness of Israel is reflected is a heavy issue but I will limit myself to mention R. Ovadiah Yosef words , he spiritual leader of oriental Jews , which stressed that voting for Lieberman is like voting for the Satan ! . Anyhow, as long as Israel sees itself as the spearhead of democracy in the Mid East it must comply with basic democratic rules, including basic and equal rights to minorities. Democratic country cannot launch pre-emptive measures against one fifth of its population. `

From a Jewish perspective the loyalty test is rather dangerous beyond its unmoral aspects. Jews were accused along history for "double loyalty", bearing the harshest and tragic consequences for these unfounded accusations. Will someone dare to question the loyalty of top Jewish politicians in the Western countries (US, France just to mention a few)?

Many people will claim that the comparison is inadequate: Jews were never really tied to "enemies" as Arab Israelis are linked to the Arab world. Historically, this argument is flawed: for example, in WWI Jews actually fought in all armies, Allies and Axis as well (the division even went through the Zionist movement .Just for an illustration young Ben Gurion - was enlisted to the British Army and M. Sharet - the future PM - was an officer in the Turkish army).

The most amazing aspect of Lieberman rise is the crippling acceptance of his ideas and the ambiguous response from the main parties, which penlights the long run erosion of basic democratic and human values. Twenty years ago Rabi Kahane and his Kakh movement were banned from participating in the elections for their explicit call for a massive transfer of Arab citizens from Israel.

Israel was proud in the past for its ambiguous attitude toward war “Shooting and crying ".Israel doesn't cry anymore, the country has changed since and not for better.