Adam Smith on morality

Adam Smith's Lost Legacy: The Limits of Self-Interest According to Adam Smith http://adamsmithslostlegacy.blogspot.com/2012/02/limits-of-self-interest-according-to.html?m=1

Ukraine

EconoMonitor : Don't Shoot the Messenger » Staring Into the Ukrainian Economic and Political Abyss http://www.economonitor.com/edwardhugh/2012/02/26/staring-into-the-ukrainian-economic-and-political-abyss/

Market mechanisms and climate change

Beyond Cap and Trade, A New Path to Clean Energy by Ted Nordhaus and Michael Shellenberger: Yale Environment 360 http://e360.yale.edu/feature/nordhaus_shellenberger_beyond_cap_and_trade_a_new_path_to_clean_energy/2499/#.T0u4RUu6f14.twitter

World Bank report in China for Macro and Political Economy Students

NYT: A Call for Beijing to Loosen I http://mobile.nytimes.com/2012/02/28/business/global/world-bank-calls-for-changes-in-chinese-economy.xml

Excellent overview of fiscal policy for students

Quick Thoughts on Modern Monetary Theory | CEPR Blog http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory

Goldman, AIG and More

           The news this week that Goldman Sachs purchased a significant amount of mortgage based securities from the Federal Reserve brought several issues to mind. This story illustrates the capability of politically and financially powerful individuals to profit off government actions. It also reveals some of the darker history of the financial crisis that began in 2007, but resulted from actions taken years and decades earlier.

            

             This week the NY Federal Reserve bank announced that Goldman Sachs purchased over $6 Billion in bonds from the Maiden Lane fund it established to handle the ownership of assets it received while facilitating the infusion of capital to AIG. The monies ($182 Billion) were originally used to allow AIG to make counter party payments to firms that had bought credit default swaps (insurance) against the default risk of mortgage backed securities (CDOs). It is anticipated that the Federal Reserve will receive just fewer than 50% value on the bonds. The $6 Billion in bonds will bring $3 Billion in payments. Here is an article from the WSJ giving technical details of the recent purchase by Goldman Sachs (http://online.wsj.com/article/SB10001424052970203824904577213681132892356.html#articleTabs%3Darticle).  Here is one from The New York Times (http://dealbook.nytimes.com/2012/02/08/goldman-wins-auction-for-6-2-billion-of-a-i-g-assets/).

            The irony comes from the final year of AIG’s life. As recounted in the book, All The Devils Are Here by Bethany MacLean and Joe Nocera, in 2007 Goldman Sachs started to put pressure on AIG. At the time AIG was the firm Goldman went to for insurance against the mortgage backed securities it was creating or buying from other firms (credit default swaps). As the value of those securities started to fall (with housing prices dropping and mortgage defaults rising) Goldman demanded that AIG take assets to post as collateral in case of the need for insurance payouts. This meant that the asset position of AIG was significantly weakened. AIG as an insurance firm had long traded on its solid reputation and AAA rating. As the exposure increased to insurance claims related to the mortgage backed securities (which AIG issued far in excess of its equity) concerns rose about the financial stability of the firm.

            

           Goldman recognized this and at the same time it was demanding further collateral it was betting against the financial health of AIG. (Goldman’s explanation of their behavior http://www2.goldmansachs.com/media-relations/comments-and-responses/archive/aig-summary.html). Goldman did this buy selling short the stock of AIG and buying insurance against AIG. The irony was that Goldman was also AIG’s investment bank., meaning that Goldman had a trusting relationship and financial benefit from AIG. So as AIG declined, Goldman made money. When the federal government stepped in to backstop AIG then Goldman was one of the firms (including many other banks in the US and abroad), which received money.

            

           With this auction, Goldman is getting another chance to make money off of securities they have already been paid on by the government. They also made money on these transactions buy betting against AIG, a firm that failed. This is the perfect illustration of the libertarian point about the risk of government intervention in the economy. It results in transfers of resources from the taxpayers to the most powerful. The question remains; should the government have taken these actions? Where would we be if they had not? Even more important, should firms like Goldman Sachs be allowed to these types of trades where they are betting against a customer?

Saying goodbye to my landlord's husband

The passing of Vaclav Havel silences an important voice for truth and morality in public life. The writing of Timothy Garton Ash, who watched the historic events of 1989 first hand with Havel, says it far more eloquently than I could ever hope to scribble:

Havel was a defining figure of late 20th-century Europe. He was not just a dissident; he was the epitome of the dissident, as we came to understand that novel term. He was not just the leader of a velvet revolution; he was the leader of the original velvet revolution, the one that gave us a label applied to many other non-violent mass protests since 1989.

Havel was one of many. The women and men who brought about the great peaceful change that swept across Europe and pushed aside the corrosive effects of communist dictatorship. Havel's genius was in defining for us what that era meant, or rather what living in that era cost those that needed to trade their humanity to avoid persecution. They lived the lie. This is how he described it in Living in Truth...

not on soldiers of its own, but on the soldiers of the enemy as it were—that is to say, on everyone who is living within the lie and who may be struck at any moment (in theory, at least) by the force of truth.

But in perpetuating the lie, we make the persecution real in society as a whole. A generation before Orwell saw and warned of the same thing. John Jay writes about his in his reflection on Havel in the FT.

The central figure of his famous dissident essay, The Power of the Powerless, was a greengrocer with a placard in his window saying: “Workers of the World Unite!” Havel asked an apparently simple question: what is the purpose of this display?

We might console ourselves that this sloganising is characteristic of their totalitarian societies, not our liberal democracies. But are we sure? Are corporate mission statements, or motivational displays in offices and factories, really spontaneous demonstrations of sincerely felt sentiments? Or do people say these things or hang them on the walls with the same indifferent resignation as the greengrocer? Is there much distinction between official exhortations to drive well, recycle conscientiously and to celebrate diversity, and official exhortations to redouble efforts to build a workers’ paradise? Would a visitor from Mars find it easy to distinguish commercial advertisements from political slogans? Is the capitalist assertion that the client always comes first more honest, or more informative, than the socialist proclamation of the unity of the workers of the world?

We face this issue constantly in American public life. When is a lie not a lie? Does it matter if the offense is related to health care for seniors? Or does it have to be a major issue like "voter fraud"? Havel would contend that you do not let the small issues become big ones. I have confidence that he would scoff at the contention of Politifact that you can call something Medicare and have it be that based on the title. War then becomes peace, if you declare it so.

We can't let the reminders of the moral force of truth elude us because those who tried to promote truth are gone. Truth is not an easy pursuit. Even Havel missed it sometimes, joining others supporting the Bush Administration's reckless adventure in Iraq. He forgot that Central Europe has been a tool of the great powers. The lens of those who recruit you into war isn't concern for your people or truth, but rather there own policy and political ambitions.

The Czech's experienced this in the 20th Century. First it was the waning days of the Hapsburg domination. Then self-determination for a period (sort of, did Masaryk push too much into CZ?). Then the Nazis came and split the country into parts. The Soviets came and put it back but at a great expense forty years of persecution and stagnation.  Finally 1989, preceded by the heady days of 1968. Is it too much to hope that they have the peace and cooperation dreamed of for all of Europe? Yet, with the leadership of Merkel and Sarkozy and the indifference of Cameron; the European project is threatened in a way that will cause the smaller states to be exposed to economic and political danger. In Hungary we see that immediately, democracy is endangered by what could be a throwback to the bad old days of their interwar years. Where is the clear voice of European truth now? Who will pick up the mantle and speak for the powerless to prevent sliding back into the haze of authoritarianism?

I had the pleasure of renting an apartment from President Havel's widow. I still have the lease with the signature of Dagmar Havlova. It was a pleasant connection to my landlord and her husband. His writings live on and should be a welcome refuge to those who want reinforcement against the onslaught of lies in public life. We (in the US) are deep in an election year now and could use that type of clarity. Sometimes the rhetoric confuses us about the goal. It is Christmas, Hanukkah and the New Year. It is a time to focus on peace and self determination. We certainly deserve it.