"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.