Saturday, August 31, 2013

How Wrong Can One Column Be?

In Saturday's NY Times Roger Cohen has a column bemoaning the threat to the so-called "special relationship" between the US and the UK because of the Parliamentary vote against PM Cameron's proposal to support military action against the Syrian regime because of their use of chemical weapons. Who is the villain in this set piece by Cohen? Well it turns out it to be Ed Miliband the leader of the opposition Labor Party. Why? Because Miliband does not want to give carte blanche to the US for determining the direction of the British foreign policy.

Syrian refugees fleeing to Turkey from the NY Times

Cohen, whose newspaper played a sorry role in promoting the lies of the Bush Administration in the run-up to the Iraq War, passes off the lies that infuriated the British public (particularly Labor Party supporters who left the party in droves for the anti-war Liberal Democrats) as "cherry picking". Cohen is sharp enough to understand that the British people are a bit skeptical of US claims (of anything really) that seem to justify war. Yet he ignores the evidence he suggests, and which as a Political Scientist I can see is rather damning for the chance of the US convincing these folks of anything. He also makes reference to disagreements in the past, such as the Suez Crises, but why did those disagreements (the UK left Iraq long before the US) not end the special relationship? Considering the history from colonial times obviously the US and the UK have managed to work together pretty well all things considered. So what if there are different approaches to the value of military intervention with respect to the horrid Assad regime (which has existed through two generations).

Perhaps the weirdest part of the column was his attack on Miliband. He claims that Ed's brother, David, would have supported the motion. He may have but I wonder how much of the labor party would have been left after such an action. Cohen seems to forget that the Blair government went out of their way to deceive the world about the intelligence on Iraq. They sent representatives to DC just before the release of their deceptive dossier and had it edited by the Bush Administration before they released it to the British public. It is entirely understandable that politicians of all stripes (many Tories and LibDems voted against the motion or abstained as well) would be reluctant to go down the road to war. Just a few months ago, Blair in a BBC interview brushed off the lies, justifying the war on the basis of the horror of the Hussein regime. Apparently Cohen and Blair do not find democratic processes more than niceties to be subverted. I wonder how Cameron feels about it today?

(There was some comic relief in his column as he claimed that Miliband's problem was that he had no connection to the US. Apparently he neglected to look at his CV which showed time living in Boston as a child and adult. Ed is a Boston Red Sox and NE Patriots fan to boot. So perhaps this is all Yankee fan claptrap.)

Happily today President Obama decided that the constitutional process could work in the US and he will share decision-making with Congress. Perhaps the discussion will be an honest one and members will point out to the world that their will be innocent loss of life in these strikes. The terrible irony is that   because of the constraint on international action Assad can't be held responsible directly. So civilians will die so we can protect civilians from attrocity. Is this the best way? It would be a good conversation to have as we and the civilian population of the country still pay the price for the Iraq War. Sorry Mr. Cohen but they still are related and we live in a country that has deep suspicion about these types of pronouncements.

Other sources

Friday, August 30, 2013

Capital Flows and QE

There is significant discussion among economists and media observers about the growing momentum of capital flows leaving emerging economies particularly in Asia. In recent weeks we have seen a major drop in the values of currencies such as the Indian Rupee and the Indonesia Rupiah.

US Dollar Value of Indonesian Rupiah

To some extent this is predictable. Because the US Federal Reserve has signaled a winding down of its latest Quantitative Easing (QE) effort, US interest rates have started to rise. The rise in interest rates indicate an expected increase in the rate of return on funds invested in the US. Therefore, funds will flow from other parts of the world into the US. This is seen in the appreciation of the value of the dollar versus the currencies who might have strengthened during the period when interest rates were near 0 in the US.

US Dollar Value and Indian Rupee

This pattern is reproduced in India, Malaysia and Singapore over the same period. Is there a danger to their economies from the depreciation in their currencies? In the capital outflows? Part of the answer comes from the analysis of the source of the capital inflows in previous years. In today's Financial Times there is an in depth analysis of this question and concludes...

"Mr Lai makes a broader point about Asian foreign exchange reserves as a whole. Between 2008 and 2012, the total accumulated by China, India, Korea, Taiwan, Hong Kong, Singapore, Indonesia, Malaysia, Thailand and The Philippines almost exactly matches the growth in the US Federal Reserve’s balance sheet due to quantitative easing. As he says, the correlation appears very high."

It will take a bit of time to make sure this correlation reveals causality but it does match theory. The flood of cash used to prop up the banks in the US and other advanced economies flowed to emerging economies which had potentially higher rates of return. Unlike the 1990's when that flow represented loans denominated in dollars recent capital flows have been int he form of FDI (Foreign Direct Investment) which might not be so destabilizing unless there is wholesale divestment. So far there is a split in this analysis with Krugman saying it is a natural rebalancing and not much of a problem and others saying a new crisis could be on the horizon.

The issue that comes to mind is whether these countries have the capability of protecting their currency and their capital basis from these runs. Economists hate capital controls and see them as an impediment to further investment and inevitably ineffective. But if the recent depreciations herald a major outflow with consequences (stagflation on a major scale say) then the emerging countries will need to examine these tools to control capital in and out.

Sunday, August 25, 2013

Constraints II - College Loans

This summer we went to the brink on the student loan bill and the Congress eventually passed a version that had overwhelming support. The President signed the bill into law and said, "our job is not done". The President is correct because due to the self imposed constraints on the discussion, the result is a bill which potentially leaves higher education in significant financial straits. The goal for reasons unknown, was to allow college loan rates to fluctuate with the market. Apparently members of Congress and the President think there is a market for interest rates. The public justification was this would get "politics" out of setting the rates, apparently Congress couldn't be trusted to balance the concerns of affordability of education, "costs" and interest rates.

Since 2007 Congress had fixed interest rates which reached a level on Stafford loans at 3.4% for undergrad and 6.8% for graduate loans. We will skip the obvious question as to why there is a surcharge for graduate students (obviously causing bigger interest costs hopefully offset by higher lifetime earnings, unless you are a public school teacher who is required to take the classes and pay the money). As you can see from the following graphic, interest rates in recent years have been very low as a result of extraordinary efforts by the Federal Reserve to keep the economic implosion from getting worse. So the federal government   has been taking in more money than they have been lending as a result of the fact that the Feds can borrow at far less than the rates charged to students.

One important constraint is the justification for the surcharge in the form of a claim of high collection costs for student loans. The theory goes that because there is a default rate for student loans there should be a recovery in the form of higher rates for all borrowers? Why should a diligent repayer have to shoulder the burden of a higher cost because a small number of students default? How is that their fault exactly? In essence the government is increasing the likelihood of default by making students pay higher interest rates as a result of some other students defaulting (many of whom never graduate and never get to benefit from the higher lifetime earnings). 

The major issue is the contention that somehow the market sets interest rates. Nothing could be further from the truth. Go back to the graphic which shows the Federal Funds rate over the past six decades. This is the rate set by the Federal Reserve s a result of their open market operations. Notice the large fluctuations? It is because they set the rates in response to the goals of monetary policy. Higher rates, less demand in the economy. So how does the market set 10 year government debt rates? The market determines whether the rate is 2.8% or 2.9%. The Federal Reserve determines whether it is 2.8% or 4%; what does this have to do with a fair rate for student loans?

Since Congress has rarely used fiscal policy in recent decades, monetary policy has become more salient. So why should college student loans be tied to the tool of monetary policy? Wouldn't a more rational policy based on some idea of fairness and the acknowledgement that market mechanisms overprice college loans (the whole reason we have government loans and guarantees in the first place)? If the societal return is such that permanent rates of 3.4% work why not leave them there permanently instead of the possibility of huge fluctuations causing problems for the higher education sector? 

Friday, August 16, 2013

The NYTimes and Math

My internet friend Dean Baker (whose blog is a daily breakfast treat) was a bit busy to take on this whopper from Thursday's NYTimes on economic growth. Apparently the reporter was bound and determined to show that growth in the advanced countries (US, Europe and Japan) was taking over the BRIC's as an engine of worldwide economic growth. After telling us that the EU posted a 1.2% annual growth rate for the second quarter over the first, Nathaniel Popper claimed that economic acceleration is coming from the "old world".

Perhaps the most invidious aspect of the article was the info graphic here which shifted to nominal dollar figures to compare the four BRIC countries against the US, the 27 European Union Countries and Japan. Outside of comparing 29 countries (with larger economies) with 4 (with larger populations) and the fact that the graphic still showed the 4 with nominal increases greater than than the 27, and ignoring whatever index they use for the various currencies, they then slip in a pretty picture about relative stock market performance. Apparently they didn't read any of the many articles in the NYTimes about the huge injections of liquidity into the economies of Japan and the US, and to a lesser extent Europe, which have helped propel the stock markets to new highs. The BRIC's haven't been participating in the same manner. In fact, what they have showed is that stock market performance looks to be a function of central bank activity (that would be an interesting article).

Now the reporter might be forgiven for all of this if he wasn't very adept at simple excel formulas where he could have compared the relative sizes of the US and China economies and their growth over the past year. Basically China and 7% is bigger than the US and 1.4%, even given that the US economy is a bit bigger than that of China. The punch line of course is the press release from the EU indicating that year over year growth for the EU was a NEGATIVE 1.4%. They will not be much help to the global economy until they get off the austerity kick which has decimated the economies of Spain, Portugal, Greece, Ireland, Latvia, Cyprus, Italy, etc... Need more proof, check out the shrinking workforce in these countries, here. I get that the newspaper business is a bit stretched these days which is why we have seen such rapid changes in ownership, but I would hope the NYTimes could invest in some editors that could force their reporters to do some basic math.

Wednesday, August 14, 2013

Constraints I - Home ownership

I am outlining a work on public policy focusing on a theory of public policy constraints, meaning what limits are placed on the discussion of policy solutions based on what is acceptable within the political, economic and social environments. I want to illustrate this with a discussion here of homeownership policy. In a subsequent post I will use the same framework to discuss the last phase of the debate over college loans.

Gretchen Morgenson has a piece in Saturday's NY Times (August 11) on the Administration's proposals related to the secondary mortgage market. She makes the point (primarily that there are many details still to be revealed by the Admin and the Senate which is working on a bipartisan solution), that in mortgages there are two primary types of risk; default risk and interest rate risk. Fannie Mae and its little cousin Freddie Mac are in the business of providing secondary support for the mortgage market. As banks provide mortgages that meet the underwriting requirements of the firms, they purchase the mortgages which provides a fee for the banks and further liquidity to make more home loans.

The firms went public and had a Board and management that operated them in a "for-profit" manner. They got into serious trouble last decade as their portfolio of Mortgage Backed Securities (MBS) ballooned. Apparently the Board was concerned that they were losing market share to firms actively engaged in the sub-prime market. Since they were prohibited from purchasing loans from that segment they instead purchased MBS which tanked in value as the housing bubble burst. To compound the problem, Fannie and Freddie were highly leveraged and nobody thought to point out the difficulty of a business model that involved borrowing money to buy risky bonds. As they went under in 2008, the Bush Administration stepped in and seized the firms resulting in overwhelming government ownership of the entities. Even though there was no explicit government backing of the firms, the government determined that the impact on the housing market and the economy would be too bleak if they were left to fail. The government injected significant capital into the firms; and after a few years the firms are now repaying the government at a fast enough pace that there is a good chance of a profit.

The fate of the firms has improved because of the decrease in the default rate on loans as shown in the figure above. The firms have a commitment to repurchase mortgages that they package into securities if the mortgages fall into delinquency. With less delinquencies and stronger numbers in the housing market the firms are strengthened and profitable. This is despite the fact that with the crash of the housing bubble Fannie and Freddie were responsible for almost 90% of the underwriting of the market. The credit crunch after the crash meant that the private market for secondary mortgages dried up. With Fannie and Freddie under government control the mortgage market was able to recover even after the devastation of MBS and other forms of securitization.

Given strong quarterly results they are paying substantial dividends to the government. Yet, the President and Congress are working on proposals to return control to the private sector. It is not entirely clear how much of the slack the private sector will be able to absorb. The interesting question is why? Given the progress and stability of Fannie and Freddie under government control (which is how they started many years ago) why is there concern about ending that steady hand? This is the point of the concern about constraints. In US policy discussions and the development of solutions, why have the government do it if the private sector is willing?

This prejudice against government activity smacks more of ideology rather than analysis of what works for the public. The US Government supports the market for homeownership in a thousand ways big and small. The imputed rental value of owner occupied housing (wonkish), the deductibility of mortgage interest, the deductibility of property taxes, some purchase expenses, the capital basis of housing investment, etc... are all valuable means the government has for participating in the market. They represent a subsidy for the ownership of housing at the expense of those that rent (and the benefits largely to those with high incomes that can itemize). There are some small programs that subsidize and encourage the development of affordable housing, but the major constraint in this area, as well as others, is the prejudice against overt government action. It is fine if government support comes through tax expenditures, just don't have government do something where there is a potential profit to be made by the private sector. And oh by the way, it is fine if you keep the government in the business of guarantees so they can help insure the private sector risk. As Joe Nocera of the NY Times points out, Fannie and Freddie are very effective at both the underwriting risk and the interest rate risk. They can afford to hold the mortgages and hedge risk so the value of their binds does not crater as interest rates rise. Why foist this problem on the private sector only to come to their rescue when the trouble starts?


Wednesday, August 7, 2013

Perspective on youth unemployment

The World Economic website which provides economics commentary and research has an interesting piece on youth unemployment. They compare the experiences of Germany and Singapore with that of the rest of the advanced world. They are particularly interested in the variables of education, meaning do the standard western universities prepare students for todays jobs (with the emphasis on ICT) or they based on an outdated model? They find that Germany has much less of a problem of youth unemployment than the rest of Europe (7.9% versus 22.6% in the rest of the EU). Singapore, which wins raves for its efforts to promote innovation, rates highly in their index for Global Competitiveness.

Yet they seem to miss the point. Germany and Singapore have lower unemployment rates in general compared to the EU and most all advanced economies. Why? Is it because of their specific policies related to innovation? Or rather their efforts to promote exports which allow them to run a decided current account surplus. I conclude it is more the latter than the former, and as always it can't be sustainable or rather transferable to other economies.

The observation is not unique and has been commented on by other economists such as Krugman. If you want to lower unemployment you need to generate demand. While not everyone can do that through exports (for every surplus dollar in places like Germany, Singapore and China there must be a deficit in the US, Greece, Spain, and elsewhere), everyone can do it through fiscal and monetary policy. Instead of using the "race to the bottom" wage policies advocated by Tse, Esposito, et al which will only displace unemployment from children to parents, why not generate enough demand to increase employment across the board?

Of course doing that implies you end austerity.

Saturday, August 3, 2013

Thoughts for the road

After three weeks on the road some random observations, quirky thoughts and a thank you or ten.

It doesn't matter if you are at the equator or not, in the summer it is hot. Singapore is just a bit above the equator, certainly as close as I have been. It is in the low 90s there every day all year. It is also as humid as I have ever experienced. But it was even more brutal in Vienna and Prague. Just brutally hot all three weeks. The greatest service invention ever is free laundry at hotels. In the Sheraton in Singapore and the small Hotel Louren in Prague they give you that lovely service. I booked the Louren because it had air conditioning and it was a good choice. Otherwise I would have slept even less. Add in the weather at home before I left and I have seen over 90 ever day for over 6 weeks I think. All this is a long way around to saying that I was silly to bring jeans on this trip as I never wore them.

Public transit is awesome. As someone who has a long commute by car (the only option) and rarely gets to take a subway, tram or bus it has been great fun to have great mass transit at my disposal for three weeks. In all three cities the service ends at midnight, so without giving too much away (really about how boring I am) I think I have only done cab rides to and from airports (3) and two or three late nights. Otherwise I was walking or riding and haven't driven a car since July 12. 

Tourist passes are great inventions and used them in all three places. The quirky thing is where you can buy them. In Singapore they make you travel one station in either direction from where I was to get the pass so you had to waste a fair. Same in Prague except the hotel sold them. Not sure why you can't just get them in the machine. By the way Prague you have to retrofit the machines to take the new 50 karuny coins. 

Street food in Singapore is the best though obviously exists everywhere. Danieli in Vienna is my fav Italian restaurant anywhere as weird as that seems. See above for an example.

I have been making halusky wrong for years. Need sauerkraut not spinach, but might not ever change.

No need for a camera as between my phone and ipad I think I got great photos of the journey.

The Austrians are as proud of their wine as the Czechs are of their beer. Both are right.

The street cafes in Prague close at 10 PM. There are some interior courtyards and beer gardens open late. The beer garden in Vinohrady is a gem.

The coffee everywhere has been universally excellent and I am very picky. The Bakeshop Praha on Kozi is a marvelous institution and I have visited here for many years. The new owner is doing a great job maintaining this gem. The original owner, a wonderful American woman who came here right after the revolution, passed away late last year in London. RIP Anne Feeley.

Too much graffiti in Prague, too little in Singapore.

Happy birthday today to Dennis, Brianna and Barack.

Looking forward to reading Catherine Schine's new novel "Fin and Lady". My friends who already think I am too nerdy will groan that I brought and read so many academic books. I have gotten used to reading on the iPad and appreciated the company from old friends Phillip Kerr (Prague Fatale) and Robert Littell (Young Philby, largely set in Vienna).

There are many thank yous to give. Riley Ohlson and Silvia Romanovich for fitting me into their respective travel plans and introducing me to some super folks in Prague, only sorry they never met. NK KT and Rodney for taking time from their work to show me some of real life in Singapore. The group from CGU including Tim Howard, Ankur Mehta, Carlos, Neim and many students and faculty who made Singapore such a fulfilling experience. Common Ground publishing who hosted the conferenceon social sciences at CharlesUniversity. The folks from the hotels in the three cities and London who kept me clean and sane. All the folks from home who have read and liked my posts. And Meghan whose infinite patience and indulgence made this adventure (and everything else) possible. 

I am listening to a giant thunderstorm in the middle of the night and ready to be home. Soon, but one more stroll before I go.

Thursday, August 1, 2013

The familiar far away

I had to take a bit of time from writing here in order to finish the paper that I delivered yesterday at the conference. Very interesting international group of scholars talking about every conceivable topic related to the social sciences. So now my professional responsibilities are over for the trip and I can enjoy three free days in Prague. Last night I had dinner at Cafe Slavia on the banks of the Vltava with a perfect view of the castle. I had the chance to share the dinner and some highlights of the Old Town with two grad students from China who had never visited here before. I am always pleased how much I remember and can find here without getting lost.

Beauty doesn't adequately describe the vista here. Certainly my photos don't do it justice. As you walk and look around it is as if every step has some significance. Here was where the police beat a student leading to the events of fall 1989. A few steps away is the jazz bar where President Clinton played the sax with Havel on stage. Oh look that theatre, not the classic one, but the modern building, the Magic Lantern is where they made plans for the revolution. Here is Slavia where they went to talk nonsense that the secret police could hear and report something to the ancient regime about to fall.

And there is the view, the river and castle and all the eager tourists gasping at the architectural detail of the buildings and the cameras lifted up and up. Now the bridge, the heart of the tourist center, the religious statues ready to come to life agin and haunt Kafka's nightmares once more. The narrow passageways through the old town that lead past the iconic clock and suddenly into a massive open square. There is Hus, patiently waiting and contemplating the irony (very typical Czech) of being a religious martyr that symbolizes Czech nationalism in a nation where next to no one is religiously observant.

Another two blocks and Wenceslas Square where the tanks took position in 1968 and poor, brave Jan Palach self immolated in 69 and hundreds of thousands gathered in 1989 chanting the name of the leader who defied the Soviets and wanted to lead with a human face. I wonder if the younger Czechs understand the importance of the museum they live in here. The 20th century happened here with a vengeance. It would be wonderful if it was some kind of respite from the 21 st but real people live here in this museum. They are dealing with all the challenges typical of the contemporary world. 

The people seem distant on the street but stop and ask something in polite czech and they help, smile and send you on your way. I have been lucky to get to know some folks here over the years and they are very warm and friendly. They know what a special place this is and why so many of us come from abroad and clog their streets all year round. They are still growing as a nation. Small and uneven heir progress in fits and starts another government fell in a bizarre scandal a few weeks ago and there will be elections soon.

I have seen the future and the past on this trip. The precise (Singapore), the regal (Vienna) And the profane (Prague). As always when I leave I hope to keep some of this place with me and to be back soon.