Christopher's Feed
Sep 22, 2009
via Commentaries

Rethinking carbon diplomacy

Climate change was initially billed in a leading role at the G20 meeting in Pittsburgh. Now it looks set to make the briefest of cameo appearances.Nonetheless, the gathering offers a crucial chance to recast the talks. The United Nations carbon process is in deep trouble and desperately needs help from the top. If the G20 heads of government want to avoid embarrassment at the Copenhagen Summit, they need to start to steer the talks in a new direction.The first step is to move away from the flawed Kyoto model on which the talks are based. Haggling over overall emissions caps is unproductive. Nations have an incentive to push for targets that are easy to hit — giving themselves plenty of headroom in the event of faster economic growth.Even then, it is hard to check up on compliance, since countries like China and India lack the ability to track their emissions.And not much happens to countries that blow through their targets. Canada will surpass its Kyoto limit by close to a third. Yet this failure has clearly not turned Canada into an international pariah.World leaders should set aside this failed framework. One way of doing so is to move toward energy efficiency goals — targeting emissions per unit of GDP. Recasting the debate in this way would reassure developing nations that climate talks would not infringe on their right to grow.Blunt overall targets punish nations with vibrant economies and growing populations while rewarding those with a dwindling workforce. Europe was able to breeze through the Kyoto test partly because of the collapse of the Eastern bloc in the 1990s.China has already moved toward targeting the carbon intensity of economic growth, a position outlined today by President Hu Jintao. The concept may have been tarnished when George W. Bush — the nemesis of environmentalists worldwide — used efficiency measures to throw a spanner in the works.But if set at far more ambitious levels than Bush envisaged, efficiency targets would make much more sense. Leaders should also reconsider shifting the base year for reductions from 1990 — an arbitrary date based around the setting up of the U.N. Framework Convention on Climate Change.Resetting the start date to 2005 would better reflect any efforts by China and India, whose emissions have rocketed since 1990.More important still, climate diplomacy needs to descend from the clouds. Nations are far more likely to agree to a series of detailed policies rather than inflexible and grandiose targets. It would also be much easier to monitor compliance and hold leaders responsible.Rich nations would be more willing to stump up cash to promote efficiency if they had a clearer idea where the money would be used.”India’s plan, for example, might include efforts to harness its IT know-how to build a smart-grid and use electricity more efficiently,” notes Michael Levi, a climate expert at the Council on Foreign Relations.In Brazil, where most emissions come from deforestation, there need to be concrete plans to discourage clearance, by promoting greater productivity among ranchers, providing secure titles to land and offering alternative economic opportunities.China could be given greater help achieving its bold efficiency targets. Assistance from the United States in ensuring access to uranium could increase China’s willingness to ramp up nuclear output, some experts argue.This more granular approach offers the best hope of rescuing the climate change talks, which are starting to bear an alarming resemblance to the interminable global trade round.A more detailed agreement might be harder to market as a triumph to voters than a grand accord. But to come out of Copenhagen empty-handed risks creating the impression that the process is a lost cause.

Sep 10, 2009
via Commentaries

Banking? Keep it simple stupid

In 1873, Walter Bagehot wrote that “the business of banking ought to be simple; if it is hard it is wrong.” He would have struggled to recognize today’s banking system.It is not just ever more ornate derivatives that bend the mind. Financial firms themselves have become fabulously complicated. Citigroup lists 2,061 subsidiaries and affiliates while the institutional chart of JPMorgan Chase is 267 pages long.Complexity — as Bagehot predicted — has become a curse. If nobody can understand financial firms, they will become ever more accident prone.The crisis that exploded a year ago offered a salutary lesson in the dangers of complexity. Many shareholders and creditors simply did not fully comprehend their investments. Instead they were forced to trust managers and the rating agencies.Regulators too could be forgiven for scratching their heads.”Supervisors are at a decided disadvantage in understanding risk-taking and compliance for firms that might involve dozens of jurisdictions, hundreds of legal entities and thousands of contractual relationships,” former Fed official Vincent Reinhart has written.Indeed Basel II — the international capital code — was an admission of defeat by regulators. The message from the banking accord was that institutions had become so convoluted that only they were able to understand the risks they were taking.Yet many intelligent executives of these same institutions failed spectacularly. It is no mean feat keeping tabs on an army of specialized financial engineers, lawyers and accountants.As Robert Rubin, the former Treasury Secretary and Citigroup executive, acknowledged last year on the Charlie Rose show: “Unless you are either running the trading operations or running the independent risk management, you are not going to know the risk well enough to have a real sense of where those risks are.”Making financial firms simpler will be far from simple.One approach is coercive. Regulators can make it very uncomfortable to be big. Capital requirements that ratchet up with size would encourage firms to split themselves up into their component parts, giving managers and regulators a better shot at following what is going on. On the whole, smaller firms tend to be more straightforward.Failing this, Reinhart has proposed a Lego model, in which financial firms would be composed of “well-defined modules.” A company made of units that can be easily disconnected from the whole would be easier to manage, with individually simple parts. Regulators can foster this model by insisting on a “living will,” complete with plans for how companies would salvage their firm in the event a single unit implodes.Regulators need to make it much easier to understand financial statements. First, they should impose a strict consolidation of bank balance sheets, forcing them to incorporate all special purpose vehicles.In addition, more information should be made available about banks’ risk-taking. Firms should be compelled to publish monthly indicators drawn up by regulators, including a measure of the relationship between short-term borrowing and long-term lending.This would enable creditors to exercise proper discipline over the banks by pushing up their borrowing costs if they become too reckless. The notion that only banks themselves can understand their own risk-taking needs to be jettisoned.Lastly, the government should also reduce the incentives for complexity. Financial institutions mirror the Byzantine structure of regulation, tax and accounting rules. They become complicated in order to shop for the most lenient regulator, lightest capital requirements and most tax efficient structure.Paring down these rules and structures should be an underlying goal of any regulatory overhaul.The first step to reducing the magnitude of future mishaps is to ensure that we can make sense of our financial institutions. The respect and awe often accorded to “black box” financial institutions is misplaced and dangerous. Instead we need to embrace simplicity.The Year Since Lehman — related columns:Living wills” are easier said than doneA year on, it’s still a housing story

Aug 26, 2009
via Commentaries

The mirage of U.S. healthcare


On healthcare, the White House is struggling with a political riptide that threatens to drag it into deep water.Americans, as they contemplate change, have suffered a weakness of nerve. The main reason is that nearly two thirds of Americans are apparently happy with their healthcare coverage, for all its deficiencies. Repeated reassurances from President Obama that those who like the existing set-up will not be forced to change, have had little effect.A change of tactics may be in order. The administration must do a better job of underlining the glaring defects of the existing system. The genius of the U.S. healthcare is in providing the illusion of value and security. For their own sake, Americans must be encouraged to set aside jingoistic claims about having the best care system in the world and look more honestly at its short-comings.

Aug 11, 2009
via Commentaries

Bernanke: Back to Clark Kent

Having averted a disaster, cartoon superheroes typically revert to their bland civilian identities. With the recession loosening its grip, Ben Bernanke is trying a similar trick.After a period of heroic boldness and creativity, the Fed is determined to be dull. Wednesday’s statement from the Federal Open Market Committee may well be calculated to bore.Yet Bernanke’s reversion to Clark Kent is premature given the dangers still posed by a fragile U.S. economy. The Fed’s more timorous approach in recent months seems due to an increasingly hostile political environment combined with an improving economic one.But until the United States is well on the road to recovery Bernanke should try to hold on to his swashbuckling spirit.The Fed has every reason to be politically intimidated. Relations between lawmakers and the Fed are close to an all-time low.Much congressional ire has been focused on the Fed’s role in bank bailouts. There has been nervousness over its expanded balance sheet, which more than doubled during the crisis to around 14 percent of GDP.For some Republican Senators such as Jim DeMint, the Fed’s purchase of U.S. Treasuries has been aiding and abetting “reckless” spending by Obama. DeMint is not alone in believing that credit easing is a covert means of devaluing the dollar. In the House an increasing number seem willing to listen to obsessively anti-Fed Congressman Ron Paul.It is a bad time for the Fed to have so many enemies. As lawmakers mull an overhaul of financial regulation, the stakes are high.Firstly, they could refuse to bestow responsibility for “systemic risk” supervision on the Federal Reserve — a role Ben Bernanke seems eager to secure. The central bank already looks likely to see its powers over consumer protection takenaway. (Both decisions may be good for America but they would be defeats for the Fed.)More worrying still, support has been building to give the investigative arm of Congress the right to audit Fed policy. A Ron Paul-inspired bill to do just this recently attracted 276 co-sponsors in the House.Allowing the Government Accountability Office to second-guess Fed monetary policy decisions would be more than just a territorial loss for the Fed; it would be bad for the nation too.”Headlines declaring that the investigative arm of Congress had cast doubt on the latest rate hike, for example, would certainly undermine the perception of an independent Fed,” says Vincent Reinhart, a former Fed official and now a scholar at the American Enterprise Institute.Lawmakers could also strip Fed regional bank presidents of a vote on monetary policy, leaving just the Congress-approved Fed governors in charge. This would be another erosion of Fed independence.With these swords hanging overhead, the Fed can be expected to take the safest path. All care will be given to restore the image of prudent, gray-suited central bankers.The Treasury purchase scheme — the most controversial of the credit easing policies — will most likely be allowed to expire, followed shortly afterward by the mortgage-backed security program.It is disappointing that the Fed is willing to tolerate the gloomy economic outcome it has been forecasting. A final burst of credit easing would not be without risks, economic as well as political.But it could help ensure that any economic recovery will be self-supporting. More creative action to support the commercial mortgage-backed security market would be especially welcome. Meanwhile, providing further details of the exit strategy would allay fears that the Fed is going too far.Hard as it may be, the Fed should try to block out the noises coming from Congress. Even if it means taking more political heat, Bernanke should not be willing to accept an anemic recovery and high unemployment.

Jul 14, 2009
via Commentaries

Could US growth hit 4 percent?

Many optimists on US growth base their upbeat projections on hopes that inventories are reaching a low. Even a slow down in the rate of inventory drawdown can produce a rise in GDP.

This argument underpins a highly bullish forecast published by Brian Westbury and Robert Stein of the First Trust Advisors in Wheaton.

Jul 8, 2009
via Commentaries

Smart immigrants will help US prosper

NEW YORK, July 8 (Reuters) – It’s hard to believe that just a few years ago many American were worried about a wave of aspiring immigrants. The recession has proved a more effective solution to the problem than miles of walls and an army of over-zealous border officials.
Illegal crossings from Mexico are at their lowest level since the 1970s and U.S. companies no longer have to grapple with unrealistically low quotas to bring in skilled foreigners.
But this is clearly just a lull. With Obama nudging immigration back on the nation’s agenda, the need for overhauling the current policy is as obvious as ever.
A report published today by the Council on Foreign Relations makes a convincing case that America’s immigration laws have become a competitive liability. The inflexibility of border and immigration rules threatens to hamper U.S. growth once the economy crawls back from recession.
As the United States has tightened its rules post-9/11, rival nations have been taking full advantage — nabbing more of the world’s most highly desirable workers. “The US needs to worry as much about attracting good immigrants as keeping the bad ones out,” says the report, which was headed by former Florida governor Jeb Bush and former Clinton White House chief of staff Thomas “Mack” McLarty.
America’s current cap on skilled immigration is appropriate only for the deepest recession. Since the September 2001 attacks, the United States has halved the number of H-1B visas available to just 85,000. As recently as 2007 they tended to sell out faster than U2 concerts. Even Google found they could get only half the visas the company asked for in 2008.
Frustration with the H-1B cap appears to have been behind Microsoft’s decision to establish a research center across the border in Vancouver in 2007 rather than expanding in Washington state.
After years of ranting from anti-immigration zealots like CNN’s Lou Dobbs, few Americans see the upside to letting in foreign workers. Yet many of America’s corporate giants — including Google Inc , Intel Corp and eBay were all built by recent immigrants. Talented immigrants also produce nearly a quarter of U.S. patents, twice their share of the population, the Council report says.
Immigrants and foreign students account for more than half the scientific researchers in the United States and in 2006 received 65 percent of computer science PhDs. Taking such people for granted or abusing them will eventually backfire.
America now has a window of opportunity to put things right before demand for skilled labor picks up. To keep up with other industrial nations it will need to move fast.
The European Union is working on a “blue card” that will give talented foreigners the right to work in any member country. Canada now has a points system that identifies foreign workers likely to make the greatest economic contribution. Australia, New Zealand and Britain have followed Canada’s lead. Unlike the United States, they have not put a ceiling on the number of workers that can be admitted under these systems.
China and South Korea too are becoming more interested in attracting immigrants, the Council on Foreign Relations says. The Obama administration, while making some positive noises, has not yet responded to the challenge. Despite modest efforts to trim the unnecessarily time-consuming background checks on foreign scientists and engineers, he has yet to lay out a vision on high-skilled immigration.
After decades of taking its pick of the world’s best talent, the United States has become complacent. The country still boasts most of the world’s finest universities, innovative companies and a most appealing culture. But America will face ever steeper competition for the brightest and the best. A more welcoming immigration policy is vital if America wants to stay on top.
(Editing by Martin Langfield)

Jul 7, 2009
via Commentaries

Banks must brace for creditcard pile-up

NEW YORK, July 7 (Reuters) – Credit card delinquency figures bring to mind the rock classic “You Ain’t Seen Nothing Yet.”
    Ever after today’s record report — delinquencies jumped to 6.6 percent of all card debt in the first quarter from 5.52 percent — the peak may still be far off.
    The sunniest forecast in the Obama administration’s stress test suggested that credit card loss rates for banks would climb to between 12 and 17 percent in total over the next two years. This assumed an unemployment rate averaging just 8.4 percent in this year. Based on the gloomier scenario of 8.9 percent joblessness, the two-year write-off climbs to 20 percent. 
    As we race past the government’s worst assumptions, the risks mount that consumer distress will plunge the banks back into crisis. Despite recent rising profits, bankers will need to make sure that their seat belts are fully fastened for the turbulence ahead. 
    The dismal job market bodes ill for default rates. The United States is continuing to hemorrhage jobs at an unexpectedly rapid pace. It would take only another few months of job losses at last month’s rate to push unemployment above 10 percent, according to Decision Economics. If June’s payroll loss is sustained — an unlikely but possible outcome — unemployment would climb to 11 percent in less than six months. 
   Credit card issuers may also be dismayed that once Americans lose their jobs they are taking ever longer to find new work. The share of the jobless without work for more than six months is up to almost 30 percent — the highest level since records began in 1948.
    While many people can continue to service their debts for a couple of months, half a year of unemployment can cause all but the most prudent saver to default. Benefits replace roughly half of previous wages, according to the Economic Policy Institute in Washington. A report issued Tuesday by Standard & Poor’s indicates that the loss rate on credit cards has risen faster than joblessness over the past six months.
   It’s not just the unemployed that will find themselves increasingly stretched. Wage deflation is now a real threat — magnifying the challenge of servicing debt. Weekly earnings fell at an annualized 0.6 percent in the three months to June. This may help explain why an increasing number of Americans are late even in paying their home equity line of credit — usually a priority for those who want to keep their homes.
    America’s banks have at least had a little time to buckle up. The Federal Reserve warned the top 19 banks to brace for losses of up to $600 billion. The more vulnerable have raised extra capital to cushion themselves and with the yield curve so steep even the dullest bankers can produce strong profits.
    Even so, at current trends the banks will need all their energy to keep ahead of rising defaults. It is increasingly clear that the bank stress tests were not stressful enough.
 (Editing by Martin Langfield)

Jul 6, 2009
via Commentaries

A stress test for consumers

NEW YORK, July 6 (Reuters) – People can be divided into three classes, it has been said: the haves, the have-nots and the have-not-paid-for-what-they-haves. The prevalence of the third category may be the biggest single source of vulnerability for the U.S. recovery.

A stress test of the consumer could reveal more distressing results than the one conducted on the banking system.

Jul 6, 2009
via The Great Debate

Stress test the consumer


– Christopher Swann is a Reuters columnist. The views expressed are his own –People can be divided into three classes, it has been said: the haves, the have-nots and the have-not-paid-for-what-they-haves. The prevalence of the third category may be the biggest single source of vulnerability for the U.S. recovery.A stress test of the consumer could reveal more distressing results than the one conducted on the banking system.Debt is at high levels — 130 percent of disposable income, or more than twice its peak in the late 1980s. A slide in net wealth has reduced the collateral Americans can draw upon for emergency loans. Finally, it is now harder to borrow money for new consumption or to roll over existing debt.Like a compromised immune system, this weakness makes consumers extremely susceptible to further shocks. Traumatic as the recent bout of retail restraint may have felt, worse may be in store. After all, consumption rose by 18.5 percent in the seven years to 2008. So far it has only fallen back by less than 2 percent.There are several potential mishaps that could swiftly undermine consumer spending and set the recovery back to square one.Among the most likely problems would be a continued slide in house prices. Even on the conservative measures used by the Federal Reserve, the value of residential real estate has fallen 18 percent since 2006.With signs of recovery still tentative, a further 10 percent slide is well within the realm of possibility — inflicting a further blow on the balance sheet and sense of well-being of American households. (If nervousness over swelling government debt pushes up bond yields, the outcome could be still worse.)Homeowner’s equity, already down to 40 percent from close to 60 percent, would plunge to 35 percent. This would send household wealth down to its lowest level since the mid-1980s. While Americans can’t immediately rebuild the $12 billion of net worth lost over the past 2 years — equivalent to more than a year’s worth of consumption — further losses will heighten their sense of caution.A second threat is also looking increasingly likely — wage cuts. Fifteen percent of employers surveyed by the Society for Human Resource Management reduced pay in the past six months, a threefold increase from earlier this year. It is no longer implausible to imagine nominal wages starting to decline on a nationwide basis.The Employment Cost Index is already rising at its slowest rate since the early 1980s. Wage deflation would make it even harder for Americans to repay the $10.5 trillion of mortgage debt they hold or the $2.5 trillion of consumer credit.Martha Olney, a professor at Berkeley, envisages disproportionate cuts in spending if wages dip. “For households that are paying 60 percent of their income in mortgage and credit payments a 10 percent pay cut does not mean a 10 percent fall in disposable income,” she says. “It’s a 25 percent fall.” This is the danger of leverage.Even under a rosy scenario it could take years for American consumers to repair their finances. If the savings rate rises to 8 percent of disposable income — about $860 billion a year — it will now take four years for debt to return to its 2002 level. This steady drain alone is equivalent to almost 10 percent of consumer spending.After such a substantial loss of wealth, Americans will be pressed to be even more frugal. Along the way American will be hyper-sensitive to any jolts from weaker than expected employment, house prices or financial markets.Consumer spending may not merely stagnate as most economists expect. It could yet decline more sharply. And like the banks, consumers will almost certainly need more support from the central bank and government before this economic malaise is over.

Jun 30, 2009
via The Great Debate

Don’t trust the false dawn in housing

Economists should not take too much comfort from this month’s Case-Shiller index.

The pace of decline slowed to just 0.56 percent in April. But as last year confirmed, house prices are heavily seasonal. During the busy spring and summer period, the speed of the slide more than halved in 2008.

    • About Christopher

      "I am a columnist at Thomson Reuters focusing on the energy industry and hedge funds. Prior to this I worked at Bloomberg and the Financial Times."
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