Opinion

Felix Salmon

Germany, Greece, and the conspiracy of the technocrats

Felix Salmon
Jan 31, 2012 22:56 UTC

Der Spiegel has a long and meticulously reported piece on the state of affairs as it exists right now between Germany and Greece, naturally concentrating on attitudes within Germany. Meanwhile, Yanis Varoufakis has a much more Greek take on the same subject at CNN. And by far the most striking thing, here, is how similar the two pieces are.

The German article is headlined “European Politicians in Denial as Greece Unravels”, while the Greek one plumps for “Why it’s too late to save Greece’s sovereignty”. They’re both saying the same thing: Germany has been treating Greece’s insolvency as though it were some kind of liquidity crisis, which can be solved by lending Greece more money. But of course that’s the worst possible thing you can do with an insolvent debtor: it only makes things worse rather than better.

Here’s Varoufakis:

German leaders, unwilling to confront their bankers and the fault lines developing throughout the eurozone, pretended to believe that the problem was Greece and that Greece could be “cured” by means of loans and austerity. At the same time, Greek leaders, unwilling to confront their electorate, pretended to believe that they could deliver the targets demanded by Germany.

This can be seen as a conspiracy of the technocrats: both sides deliberately agreeing to the impossible so that Europe would be dragged into ever-greater fiscal union. After all, the more money that Germany lends to Greece, the more control it’s going to demand, and the greater the gap between Greece’s promises and its reality, the more control it’s going to feel the need to concede.

But the problem is that the technocrats aren’t managing to bring the two countries’ respective populations along for the ride. The Spiegel article is full of various German politicians saying in no uncertain terms that more money is simply not forthcoming. And the Spiegel article has some very strong demonstrations of why Greece is going to need to devalue if it’s going to have any hope of growing:

In Mediterranean tourism, Greece has to compete with non-euro countries like Croatia, Tunisia, Morocco, Bulgaria and Turkey, which can offer their services at significantly lower prices. The per-hour wage in the hospitality industry was recently measured at €11.39 in Greece, as compared with only €8.49 in Portugal, €4 in Turkey and as little as €1.55 in Bulgaria.

Devaluation alone isn’t enough, of course; it has to be accompanied by a large number of defaults and insolvencies. As the Spiegel article notes, thousands of companies and banks could be forced to declare bankruptcy. But maybe that’s exactly what Greece needs. Bankruptcy is a cleansing process which gives the opportunity to start over.

The Eurocrats are petrified of a Greek insolvency because they know it risks spilling over into Portgual and the rest of the continent. Sovereign defaults tend to be contagious — look at Latin America in the 1980s. But since a default in Greece is inevitable at this point, best it get done sooner rather than later. The German press has worked this out; it remains to be seen how long Europe’s technocrats can remain in denial.

COMMENT

@ GASinclair hit the nail on the head

Felix you need to research Der Spiegel archives – there is a good article on the germans and dutch assisting the greek govt with its admin – like its cadastral land database, the fundamentals of a taxation system etc, computer network – the oligarch politicians did not invest in the rudiments of a government administration sufficient to operate some form of taxation (no surprise)

and Der Spiegel has been sour on Merkel for quite a while, their owner is politically partisan

who would lend greek politicians anything on their current level of behaviour? i support the greek people but not that fakelaki mafia running greece, they are a shameful mendacious mob, who use their inhabitants suffering as a form of economic blackmail

an orderly default by greece is not such a gut wrench for the other eurozone states – 145 billion could do a lot of good than into the fakelaki mafia maw.

it is time to stop the greek-germany binary as well, the IMF has recently warned that fakelaki mafia they will not receive funding if they don’t implement those promised reforms

on a happy note, the greek people are welcome to work in the other regions of europe until the fakelaki political mafia are swept out of office and into the dustbin of history, shame on them and their shameless politics

Posted by scythe | Report as abusive

Udacity’s model

Felix Salmon
Jan 31, 2012 14:36 UTC

Robert Reich has three very good questions about Sebastian Thrun’s new online university, Udacity, which I wrote about last week. I spoke to Thrun yesterday, so I took the opportunity to clear them up.

Reich begins:

1. Why did Thrun need to quit Stanford? Why not pursue the project under the umbrella of Stanford, with its enormous and global reputation? Indeed, hadn’t he already carried out a demonstration proof of the concept with his Artificial Intelligence class at Stanford? Why not just continue with that in expanded form at Stanford?

As Thrun says on his homepage, he quit Stanford on April 1, 2011 — before offering the free class in artificial intelligence — “primarily to continue my employment with Google”. Thrun is a very senior and successful Google employee, and he had somehow been combining that, before 2011, with being a fully tenured professor at Stanford. That was done through something called “leave time” — but leave time is finite, and eventually Thrun ran out of it. When that happened, Thrun told me, “I said I’m not ready to leave Google just yet”. So he gave up his tenure at Stanford, and became an unpaid Stanford research professor.

This helps to answer another of Reich’s questions. “If Thrun developed [the AI] class as a faculty member at Stanford,” he asks, “then doesn’t Stanford have some claim on at least the course content?” The answer, it seems, is that Thrun developed the class after he gave up his position at Stanford. And as a result, the course content belongs not to Stanford but rather to KnowLabs, Thrun’s company.

What’s more, the online version of the course, which was not hosted at Stanford’s website, was very careful with its Stanford branding. Yes, the online course made no secret of the fact that it was basically exactly the same course that Thrun was teaching a group of Stanford undergraduates. But the final certification made no mention of Stanford.

Leaving Stanford, Thrun told me, “was the only way I could pull this off. The statement that we could let the students take exams and compare themselves to Stanford students, is something I don’t think the university would have approved.”

When NPR interviewed Thrun for a story about Udacity, they also got a none-too-enthusiastic statement from Stanford:

Thrun’s colleague Andrew Ng taught a free, online machine learning class that ultimately attracted more than 100,000 students. When I ask Ng how Stanford’s administration reacted to their proposition, he’s silent for a second. “Oh boy,” he says, “I think there was a strong sense that we were all suddenly in a brave new world.”

Ng says there were long conversations about whether or not to give online students a certificate bearing the university’s name. But Stanford balked and ultimately the school settled on giving students a letter of accomplishment from the professors that did not mention the university’s name.

“We are still having conversations about that,” says James Plummer, dean of Stanford’s School of Engineering. “I think it will actually be a long time — maybe never — when actual Stanford degrees would be given for fully online work by anyone who wishes to register for the courses.”

Stanford, then, has managed to come out of this story smelling reasonably good: it helped give Thrun the launching pad for Udacity, and didn’t visibly complain about his course material appearing online for free. But it didn’t really help him in an active way, and probably, if Thrun had been affiliated with Stanford going forwards, would have ended up hindering what Thrun wanted to do.

Thrun isn’t upset about that: he understands why his dream isn’t really compatible with what Stanford does. “If you grade external people without checking identity,” he says, “you open the floodgate to fraud. Stanford’s position was very well justified. They weren’t being anal, they were concerned. But I felt we should just teach students online for free, and that the engagement we get from this exceeds the uncertainty that comes from these new certificates.”

Indeed, the sign-up rate for Udacity’s new courses seems to be exactly the same as the sign-up rate for the AI class which was co-branded with Stanford: the lack of a Stanford branding doesn’t seem to have hindered Udacity much. And similarly, the incredible success of Khan Academy has taken place without any co-branding with a venerable legacy institution.

There’s no doubt that Stanford is extremely good at doing what Stanford does — which is to hire great research professors, select a tiny minority of the students who want a Stanford degree, and then bring the two groups together in a productive manner, while building up a world-class reputation and acting as the beating heart of Silicon Valley, pumping knowledge out into its surrounding neighborhoods and creating what is arguably the single most innovative region in the world.

But both Stanford and Silicon Valley more broadly are elite institutions, home to the ultra-productive 1%. Thrun’s ambitions are more demotic, and in that sense cut against what Stanford stands for.

Udacity is very much a teaching institution rather than a research institution. “At Stanford, priority is your research career,” says Thrun. “That is counter to teaching 100,000 students, who generate 100,000 emails.” Looked at from a 30,000-foot view, Stanford is the institution being disrupted here, it’s not the institution doing the disrupting.

And that also helps explain why Thrun isn’t doing Udacity under the auspices of Google. He says that Udacity does fit quite easily into Google’s mission of making the world’s information available for free, but that at the same time Google doesn’t need a dog in this particular fight. “Having a clean slate is a better way to start,” says Thrun. “The last thing I want is people asking whether Google is disrupting education. Better to ask if Sebastian is trying to disrupt education.”

(That said, Thrun’s friend and boss Sergei Brin does feature prominently in the launch video for Udacity’s first course; it’s clear that Udacity has Brin’s strong support. And of course Google is also a big supporter of Khan Academy, having gifted it some $2 million.)

So it’s pretty easy to see how Thrun, if he wanted to create an organization which could grow incredibly fast around the world, might want to do so without having to get Stanford’s sign-off on everything first. But that doesn’t answer Reich’s second question:

2. Why is Udacity a for-profit company? Thrun said that Udacity courses would be free to students, and Thrun cited Salman Khan and Khan academy as inspiration and model for what he’s doing. But Khan Academy is non-profit. Stanford University is a non-profit. Thrun says he wants to democratize higher education, offering knowledge to the world for free. How does this mission fit with his for-profit online university?

I asked Thrun about this, too, and he replied by saying that “for profit is not forced to make profit. I needed to get people together really fast, and it’s much easier to do that under the ways of a Silicon Valley company.”

Certainly the speed with which Udacity launched, complete with a high-quality staff, is testament to the natural velocity with which things get done in Silicon Valley. Driving the launch was seed funding from Charles River Ventures, while the site’s jobs page proudly offers “Competitive salary, benefits, and Series A stock options” to anybody thinking about working at Udacity.

This is an interesting model, and it’s not necessarily the one I would have chosen. Salman Khan, for instance, is quite vocal about why it’s good that he’s a non-profit, and the way in which the dreams of venture capitalists who have approached him conflict with his fundamental vision. What’s more, Khan did end up receiving $5 million from Irish venture capitalist Sean O’Sullivan — just as a philanthropic grant, rather than as an equity investment. And certainly Thrun has no desire to join the ranks of America’s for-profit colleges, which make their money from tuition fees.

But still, online education is young enough that it’s worth trying many different models to see which ones work. Udacity seems to be built on the standard VC model of get scale first, worry about monetizing it later. And if Udacity does end up with millions of students, I should imagine that there are quite a lot of companies which would pay Udacity to be able to reach those students. Simply charging technology companies to put job opportunities in front of students with given grades and qualifications would probably generate quite hefty fees. So long as the education itself remains free, I don’t think that being a for-profit is in and of itself a bad thing.

“We should try many different things,” says Thrun. “I believe in the educational revolution that Salman started. I believe that education can change the world. So why not try a hundred of those things.”

This seems reasonable to me. A large part of the success of both Khan’s courses and Thrun’s is the way that they’re presented and executed, rather than any business model behind them. Khan, in particular, is a hugely gifted natural educator. And what both of them aspire to doing is to build what Thrun calls “magic” into the way that they teach. Thrun wants to add another element, too — community. His courses have a start date and an end date and deadlines, with thousands of students all taking the same class at the same time; that makes them inherently social in a way that Khan’s YouTube videos aren’t.

Finally, asks Reich,

3. What to make of Thrun’s apparent pleasure at the fact that 170 of the 200 Stanford students who had enrolled in the real, not online, version of the Stanford AI class stopped coming to class, preferring the online Thrun to the flesh-and-blood Thrun?

That pleasure, I’m quite sure, is genuine. I think that Khan and Thrun are at the forefront of a new, more personal way of teaching — think of them as having screen-actor skills in a world which has historically rewarded stage-actor skills. When you teach online, you’re teaching in a conversational manner, in a one-on-one space. And it turns out that many students — quite possibly most students — prefer being taught that way, as opposed to the old-fashioned model where a lecturer stands up in front of a crowded classroom and declaims to many people at once. Most students are naturally shy; they don’t like speaking up in class and saying that they don’t understand something. Online, they can just rewind and replay, or pause and look it up on Wikipedia.

And then of course there’s the fact that the incentives for the teacher are so much greater online, if like most teachers you’re driven by the opportunity to impart knowledge to students. “This is the best thing I can do in my life,” says Thrun. “I empowered more students in 2 months than in my entire life before. On that scale, I was off the charts in the last quarter.” And of course Thrun is barely on the charts if you compare him to the number of students that Khan has reached.

What Khan and Thrun and others are creating is a new educational paradigm, which promises not only much greater scalability than anything we’ve had until now, but also higher-quality education. That’s the real lesson of Thrun’s Stanford students taking his class online: it means that the online model really can have its cake (reach millions of people) while eating it too (be better for students than the courses offered at elite institutions).

The trick is intimacy, in a way which takes full advantage of the lean-forward nature of computer screens. I’m in England right now, where the Open University has been around for over 40 years. The OU has historically reached students through the lean-back mediums of TV and radio, which in turn encouraged its lecturers to behave as though they were trying to reach a large audience. When you see Salman Khan or Sebastian Thrun drawing pictures on the computer screen in front of you, while listening to them talk to you through headphones you’re wearing, the experience is very different — it’s a much more immersive and intimate experience. Blow that YouTube video up to full screen, and jump down the rabbit hole. You might just learn something.

COMMENT

This is an excellent piece, Felix.

I like your comment about Thrun and Kahn having “screen-actor skills in a world which has historically rewarded stage-actor skills”, and your observation that we “lean forward” when watching a video on a computer screen. In a similar way, a podcast of a radio interview is much more engaging than an audio recording of a lecture – again, it is more conversational and recognizes the presence and proximity of the listener.

I’ll follow your work. Many thanks.

Mark McGuire
Blog: http://markmcguire.net/
Twitter: @mark_mcguire

Posted by mark_mcguire | Report as abusive

Freddie Mac gets paid to obstruct refinancings

Felix Salmon
Jan 31, 2012 09:10 UTC

Jesse Eisinger and Chris Arnold have a really good story about Freddie Mac today, a company which is preventing mortgage refis at the same time as it’s making enormous prop bets that homeowners are going to continue to find it hard to refinance.

Back in September I noted that mortgage bonds are trading well above par just because investors are well aware that refis are hard to come by for many homeowners, and said that those investors were “taking unfair advantage of the fact that homeowners are locked into above-market mortgage rates”. What I never dreamed of was that the investors and the rule-setters were the same people — in this case, Freddie Mac.

But here’s what Freddie is doing. In the past two years, it’s bought $3.4 billion of hugely-risky “inverse-floater” notes — essentially bets that homeowners with above-market mortgage rates won’t be able to refinance to market rates. And then it turns around and implements rules which prevent homeowners like Jay and Bonnie Silverstein from refinancing. The Silversteins have made all their mortgage payments on their current home in full and on time, despite the fact that they’re paying an interest rate of 6.875%. They’d love to refinance to get that rate lowered, but Freddie Mac won’t let them — because of the way they sold their previous home.

The Freddie Mac rule certainly maximizes Freddie Mac’s income, but it’s dreadful and unfair public policy. At the same time, it’s also policy which is very much in line with the FHFA’s stance on principal reduction, or anything else which might help homeowners. Given the choice between extracting short-term cashflows from homeowners, on the one hand, and improving the all-over health of the housing market, on the other, the FHFA will always choose the former.

Check out the long-awaited letter from FHFA director Ed DeMarco, for instance, justifying the fact that he won’t allow Frannie or Freddie to do principal reductions. It’s basically a long list of tables with precious little annotation or explanation, but at heart it seems to be based on two ideas. The first is that if you reduce principal to 115% of the value of the home, that doesn’t help very much. Well, duh. The whole point of principal reduction is to give homeowners back some equity in their home, and if they’re still underwater, you’re not doing that. And the second reason is just that Frannie’s computer systems aren’t really set up for principal reductions:

Neither Enterprise can accommodate the new accounting and tracking of principal reduction without operationally challenging changes to the existing IT systems, which are outdated and inflexible. The team did not require the GSEs to provide FHFA with cost projections, but experience implementing the HAMP program suggests that each Enterprise would need substantial funds and would rely upon scarce personnel resources to make the necessary IT modifications.

This is pretty desperate stuff — “we don’t know what the IT costs might be, and we didn’t bother to try to find out, but trust us, they’d be substantial”. In the wake of ProPublica’s story today, I don’t trust the FHFA at all. It signed off on all of Freddie’s trades, and its actions are entirely consistent with a regulator perfectly happy with Frannie taking on massive bets at the expense of homeowners, just to try to make some extra money. Oh, and the chap at Freddie in charge of buying these inverse floaters is paid $2.5 million a year.

It’s all quite a disgusting spectacle, really. Matt Levine attempts some kind of defense of Freddie’s actions, based on the idea that the inverse floaters are just what’s left after Freddie sells off everything it can easily sell — but that’s not what actually happened. In fact, Freddie went out and bought these instruments, on the open market. It almost looks like inside trading: they’ll pay off handsomely, just so long as Freddie continues to make it hard for homeowners to refinance. Which means that refinancings in general, and principal reductions in particular, are still going to be rare to nonexistent going forwards. Which is bad for homeowners, bad for the housing market, and bad for the economy as a whole. Even if it’s good for Freddie’s prop book.

COMMENT

RobinBrownDavis, sorry to say whatever agro you had has nothing to do with this story. The author simply didn’t understand what he was writting. If it makes you feel any better this is apparently normal for him.

Posted by Danny_Black | Report as abusive

Jackie Ramos vs Bank of America, part 2

Felix Salmon
Jan 30, 2012 19:18 UTC
YouTube Preview Image

Remember Jackie Ramos? She caused a huge stir by going public, on YouTube, with her story of working for Bank of America, which fired her for allowing customers to pay off their debts with installment loans.

Now Ramos is back, and her latest story of Bank of America is even worse. The short version: BofA started charging her extra money, on her mortgage bill, for mortgage insurance she’d never asked for. Eventually, when she found out what the charges were for, she agreed to keep on making those insurance premiums, since they would allow her to stay in her home if anything ever happened to the other person on the mortgage, her son’s father Tim.

Then, in April 2011, Tim died — and the mortgage insurance didn’t pay out. Instead, BofA foreclosed on Ramos, and she lost her house. When she tried to ask why the insurance didn’t pay out, they wouldn’t answer her questions, on the grounds that she and Tim weren’t married.

Over email, Ramos told me that the insurance in question was absolutely mortgage life insurance, over and above the standard mortgage insurance which they already were paying for from another provider. That’s what BofA explained when they agreed to keep on paying the premiums. And Ramos also passed on a tax form 1098 from Bank of America to Tim, which clearly shows that Tim had paid mortgage insurance premiums in 2011 — even as the bank is now telling Ramos that there was no mortgage insurance at all.

At the very least, this is a case of Bank of America communicating in an absolutely atrocious manner with one of its homeowners. And at worst it’s a case of BofA foreclosing on and evicting someone who should instead have had her home paid off. One can’t expect that anybody at BofA realized that the person they were talking to was that Jackie Ramos. But it’s unfortunate for them that they didn’t. Because I suspect that this video might prove just as popular as the last one — which received more than 440,000 views, at last count.

COMMENT

There’s nowhere near reportable information in this video. Only accusations, assumptions, hearsay and possibly slander. I can’t believe we have devolved so badly that our society follows someone’s personification of a bank like mice following the Piper

Posted by Spazmaster | Report as abusive

The Troika vs Greece

Felix Salmon
Jan 30, 2012 13:19 UTC

Are you worried about Greece failing to come to some kind of agreement with its bondholders? If so, you’re far behind the curve. Because the new big worry is that Greece will fail to come to some kind of agreement with the Troika — the official-sector entities which are going to fund its deficits for the foreseeable future.

To understand what’s going on here, you really need to read two different things. The first is the latest paper from Mitu Gulati and Jeromin Zettelmeyer, entitled “Engineering an Orderly Greek Debt Restructuring”. It’s clear, it’s clever, and it explains exactly what Greece’s options are. The second is the leaked document from Germany, which has effective veto control over the Troika, laying out proposed conditions under which it’s willing to continue to fund Greece.

The mechanics of a Greek debt restructuring, as laid out by Gulati and Zettelmeyer, are absolutely fascinating to a sovereign-restructuring geek like me. But I’m not going to get into the details here. Suffice to say that in order for the restructuring to work, the Greek bonds currently held by the ECB need to be tendered into the exchange, somehow. There are various ways that this can happen: the ECB can tender its bonds directly; it can sell them to the EFSF, which would then tender them; or it could even sell them to Greece, which would tender them. But what it can’t do is sit back and continue to collect interest on those bonds while expecting all the private-sector bondholders to voluntarily take a massive haircut. Too many hedge funds own Greek debt now; if the old bonds continue to get paid out, then the hedge funds will simply refuse to tender, and the exchange offer will fail.

The point here is that the Greek bond exchange has to be worked out in very granular detail with the Troika, because the ECB is going to have to play a central role in making it work. If the markets think for one minute that the ECB’s bonds won’t be tendered into the exchange, the deal is almost certain to fail. On the other hand, as Gulati and Zettelmeyer explain, if the ECB’s bonds are certain to be tendered into the exchange, then Greece can structure a deal where it makes no sense to hold out at all, since holdouts would end up with illiquid and hair-cut Greek-law bonds, while anybody tendering would end up with English-law bonds which had much stronger bondholder protections and much greater liquidity.

So, what’s the Troika going to demand, in return for cooperating with the exchange and helping to ensure its success? More of a fiscal union, that’s for sure — which means real European control over how and where Greece spends its money. As the leaked document explains, “Greece has most likely missed key programme objectives again in 2011,” and “will have to significantly improve programme compliance in the future”, by “shifting budgetary sovereignty to the European level for a certain period of time”. That’s the reality of how bankruptcy works: if you run out of money, then anybody willing to lend you money can generally call whatever shots they want. And the fact is that monetary union, as we’ve seen, simply can’t work if there’s no fiscal union, with Europe having some kind of fiscal control over its member states.

The big problem with the leaked document is not the violation of Greek sovereignty, then. Rather, it’s the manner in which Greece’s new fiscal overlords are intending to treat the country’s debt burden. “Greece has to legally commit itself to giving absolute priority to future debt service”, it says, which is fair enough — California does something similar. Some bondholders like such things. But they don’t mean much to me: as I said in the Californian context, if you can break your promise when you default, you can break your promise to privilege bonded debt over other obligations, as well.

But the document goes significantly further than just giving Europe a say in Greece’s fiscal decision-making and asking for largely-meaningless promises from Greece. Check this out:

De facto elimination of the possibility of a default would make the threat of a non-disbursement of a GRC II tranche much more credible. If a future tranche is not disbursed, Greece can not threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement.

In English, what this means is that Greece has to open itself up to a double fiscal whammy. Greece is going to be running deficits for the foreseeable future, and needs to get the money to cover those deficits from the Troika. Now, what happens in future, post-restructuring, if Greece gets into a fight with the Troika, and the Troika doesn’t give Greece the money it needs? As things stand, that would be a very bad outcome indeed. Greece could default on all its debt obligations, but it’s still running a primary deficit, so it would need to make even bigger fiscal cuts, or try to raise taxes even more, in order to bring its budget into balance. The result would be worse austerity, and an even deeper recession.

Under the German proposal, things get significantly worse than that, for Greece. Essentially, if the Troika cuts off funding, then Greece still needs to make all of its debt payments, on top of its primary deficit. The resulting austerity would be devastating — as Germany, of all countries, should know. After all, the burden of crushing German obligations after the Great War was largely responsible for the rise of… OK, enough. I’m not going Godwin here. But the point is that Germany is trying to take away Greece’s option to default. Interfering with Greece’s fiscal sovereignty is one thing, but this goes way too far.

I can see how Europe might want to give itself some kind of control over total expenditures and revenues in Greece. But the relative priority of expenditures — whether Greece wants to spend its tax revenues on debt repayment or on hospitals, for instance — must be left to the Greeks.

The reason all of this is going on, of course, is that the Troika’s interests and Greece’s are far from aligned. The Troika wants to stop having to fund Greece, and therefore wants Greece to regain access to private markets as soon as possible. Greece, on the other hand, is more interested in domestic growth at this point, so long as the Troika will continue to provide funding while private markets are closed. At the margin, then, the Troika wants more fiscal constraints (and hoped-for access to bond markets in future), while Greece just wants to get out of recession and start seeing some kind of light at the end of the tunnel.

Or, put it another way. Greece wants long-term debt sustainability, which means growth. The Troika, on the other hand, is less interested in the long term: it just wants the private sector to take over in terms of funding Greece as soon as possible. And the private sector, while it does care about long-term debt-sustainability calculations, also cares about many other things, like governing law and the constitutionality of default and the probability that Greece will continue making bond payments even if Troika funding dries up.

All of which means, weirdly, that bondholders would be better off lobbying the Troika than they are negotiating directly with Greece. After all, the Troika is really calling the shots here. And the Troika wants bondholders treated extremely well — after the restructuring. So if bondholders want things like English-law bonds and constitutional amendments, they should probably be asking the Troika for them, rather than Greece. Greece has no real reason to give them such things. But it can easily be forced to, if that’s what the Troika demands.

COMMENT

Everybody knows, that Greece has again failed to fulfil the commitments. GDP deficit is not even falling. Stop all payments, and let this sovereign nation chart its own course, without our money. Seize all assets, close the borders. period.

Posted by genauer | Report as abusive

Job creation in Davos

Felix Salmon
Jan 30, 2012 05:46 UTC

Many thanks to Vikram Pandit for so perfectly encapsulating the hypocrisy of Davos with a pair of big announcements, seven weeks apart.

December 7, 2011:

Citigroup to Cut 4,500 Jobs on Slumping Revenue

Citigroup Inc. Chief Executive Officer Vikram Pandit will cut about 4,500 jobs in coming quarters as he seeks to reduce costs amid slumping revenue and “unprecedented” market conditions.

January 29, 2012:

Jobs are Top Priority, Business Leaders Say as World Economic Forum Annual Meeting 2012 Closes

The 42nd World Economic Forum Annual Meeting closed today, with business leaders urging resolute action to promote growth and employment, particularly among young people. “Jobs should be our number one priority,” declared Annual Meeting Co-Chair Vikram Pandit, Chief Executive Officer of Citi, in a session on the global agenda for 2012.

There was a lot of talk about jobs in Davos, in a way which was directly related to the talk of inequality. The assembled plutocrats had their party line on the latter — that the best way to address inequality is to make poor people richer rather than rich people poorer. (See James Q Wilson for the ur-example of this meme.) And clearly, the best way to make poor people richer is to give the unemployed jobs.

But beyond that, things got very fuzzy very quickly, and more than a little depressing. LSE economist Christopher Pissarides, for instance, basically said that it was delusional to hope for significant job growth from the technology sector or from manufacturing, and that if employment is going to go up, it’s going to be from people basically acting as servants to the rich — whether it’s looking after their children, giving them personal-fitness sessions, or making them coffee.

The sad thing is that I think he’s probably right. The likes of Vikram Pandit can declaim ad nauseam about the importance of creating jobs, but no matter how successful Citigroup becomes, it’s never going back to the headcount it had pre-crisis. And everybody knows, in any case, that profits are Pandit’s number one priority; to be honest I’d be surprised if jobs are on his priority list at all. The markets like it when big banks cut jobs, and hate it when they add jobs. And Pandit’s job is to do what the market wants. Which is, fire people.

Venture capitalists in pre-IPO Silicon Valley circles are good at rewarding companies for growing fast and hiring lots of people. But they’re pretty much the only ones. Once you’re public, your shareholders generally don’t like it very much when you hire rapidly, especially if those new hires don’t immediately feed through into increased profits. And so long as the CEOs in Davos prefer empty exhortations to actually doing something, it’s fair to assume that when they talk about job creation being a high priority, they mean it should be somebody else’s high priority. After all, when was the last time that you heard a public-company CEO boast that she was hiring lots of new people, with money that would otherwise go directly to shareholders?

COMMENT

“What percent of sales at Wal-Mart (soon to be a global monopoly) do you suppose come from welfare checks?”

Not terribly high… Walmart is the largest retailer in the world — you can’t get that kind of scale from welfare alone.

Moreover, Walmart locations are typically in the suburbs, unreachable by public transportation. Those on welfare are far more likely to live in the cities.

Finally, from anecdotal evidence, it would appear to me that most shoppers at Walmart are working-class. Many, of course, are elderly. Shall we shower hate on them too?

Must be nice to live in your world where all that is beneath you…

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Summers: “Inside Job had essentially all its facts wrong”

Felix Salmon
Jan 27, 2012 09:19 UTC

In mid-2009, I went on a search for apologies, from the people who laid the intellectual and regulatory foundations for the financial crisis. I wondered whether and when Larry Summers, in particular, would apologize for what he did at Treasury, and I was heartened when Bill Clinton came out and said that, with hindsight, he was wrong about derivatives regulation.

Then, in 2010, Inside Job came out, and demonstrated the need for the likes of Summers to be asked direct questions about their culpability on the record, on-camera. But Summers refused to be interviewed for that film, despite having known its director, Charles Ferguson, for many years. And when he does sit down for a rare on-the-record video interview, these questions never seem to get asked.

So I was very happy to see that Krishnan Guru-Murthy at least tried to ask Summers these questions earlier this week. Krishnan starts off with standard Summers-interview questions, asking him what he thinks about UK fiscal policy, and Summers gives his standard wise-man answers. But then Krishan gets steadily tougher, asking Summers about the advice he gave the president-elect in 2008, and eventually about his deregulatory tenure at Treasury.

And Summers doesn’t even come close to apologizing, or admitting that he made any kind of mistake at all. Quite the opposite: he starts getting very touchy, telling Krishnan that he’s reducing complex questions to overly simplistic black-and-white narratives. Halfway through the interview, Krishnan asks Summers whether laissez-faire capitalism isn’t working for the middle classes. And Summers pushes back. “I’m a Democrat,” he says, adding that “I’ve long been someone who favored significant interventions to protect the environment.”

Protect the environment?” responds Krishnan. “Didn’t you advise the president not to sign up to Kyoto?”

“No, no,” replies Summers.

“You didn’t?”

“No. I advised that an agreement be designed in order to protect the American economy, and the United States not take on obligations that would render its businesses uncompetitive.”

Summers never explains how this differs from advice not to sign up to Kyoto, nor does he give an example of any “significant interventions” he pushed for to protect the environment. Because the interview soon moves on to the subject of deregulation, with Summers saying that he “was for moving derivatives to exchanges” — something Krishnan lets stand — and deciding to pick the ground of Glass-Steagal on which to fight, saying that Lehman and Bear Stearns might have survived had they been part of bigger banks.

Well, yes, they might — but then again, they might also have just created another Citigroup, requiring massive bailouts from the government. Personally, I don’t think that repealing Glass-Steagal was in and of itself a major cause of the financial crisis, but Summers goes further, saying that huge financial supermarkets are a good thing (he holds up Canada as a model).

Krishnan continues to push. “Even Bill Clinton says that he was wrong to listen to the wrong advice when it came to derivatives. And that was your advice.” (Has Summers ever been asked questions like this, on camera, by an American reporter?)

Summers responds, again, that “it’s complicated”, and then builds up to attacking Krishnan:

Would it have been better if the whole of the 2010 financial reform legislation had passed in 1999 or 1998 or 1992? Yes, of course it would have been better. But at the time Bill Clinton was president, there essentially were no credit default swaps. So the issue that became a serious problem really wasn’t an issue that was on the horizon… If you want to assign responsibility, If you take a market that essentially didn’t exist in the 1990s, that grew for eight years from 2001 to 2008, and then brought on a major collapse, if you were looking to hold people responsible, you would look to… officials of the Bush Administration. I’m not going to tell you that I foresaw this crisis in all its dimensions, but without sounding like Newt Gingrich here, for you to read two articles that a researcher handed you and sling this stuff is not really to give your viewers a very clear chance.

0396m.gifSummers is absolutely wrong about credit derivatives not existing in the late 1990s. He was Treasury secretary from 1999 to 2001; Euromoney Magazine had splashed the words “Credit Derivatives” all over its front cover in March 1996. And Brooksley Born, between 1996 and 1999, was literally losing sleep over those things as head of the Commodity Futures Trading Commission. Summers’s response to Born? To make sure she was marginalized, and, eventually, pushed out of her job entirely.

And of course it’s a bit rich for Summers to criticize Krishnan for asking uninformed questions (they’re not uninformed at all, actually), when he has steadfastly refused to answer informed questions from the likes of Charles Ferguson.

Eventually, Krishnan attempts another tack. “It’s not to put all the blame on you,” he says. “But you started on a trajectory that was then continued by the Bush Administration.” The reply is a classic:

“No, no, no, no. That is just not credibly correct.”

Krishnan then brings up Inside Job and the issue of the revolving door, which of course Summers took full advantage of with his $5-million-a-year job working one day a week for DE Shaw.

“Inside Job had essentially all its facts wrong,” replies Summers, unbelievably, resorting to an argument based on timing: because he didn’t work in financial services before he was Treasury secretary, and because he waited a few years before taking that job at DE Shaw, Summers says it’s “absurd” to blame the revolving door for any of his actions.

It’s weird that Summers, who loves debate, generally refuses to sit down in some public forum and answer serious, informed questions about the legacy of his tenure at Treasury; it might well be that this single interview is the closest we’ll ever get. And on the basis of this interview, it’s clear that, far from apologizing for his actions, Summers is going Full Bluster, denying any culpability, and choosing instead to violently reject and belittle any suggestion that he holds any responsibility for the crisis at all.

COMMENT

I couldn’t believe this interview. As you suggest, Felix, the guy is not only mendacious but a deeply unpleasant human being. I did my own, shorter blog about the interview here:- http://www.ianfraser.org/larry-summers-w ashes-hands-of-all-responsibility-for-cr isis/ The very idea that Summers should even be considered for the World Bank role shows how little we seem to have learnt since the crisis and fills me with mild horror.

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Why Davos is ignoring Occupy

Felix Salmon
Jan 26, 2012 13:44 UTC

If you’re Europe, and your struggling people are called “Greeks”, and your rich people are called “Germans”, then the World Economic Forum will spend pretty much limitless amounts of time and effort on attempts to understand the dynamics between the two and (doomed) plans to try to prevent it from turning into a fully-blown crisis.

On the other hand, if you’re a country — the USA, say — and your struggling people call themselves “the 99%” while your rich people are called “Davos delegates”, then your fundamental asymmetries will be studiously ignored — and, indeed, encouraged.

I went to one session on executive compensation yesterday, which was filled with global CEOs of various stripes. And a couple of questions that Lance Knobel would like to ask were, amazingly, raised: should there be some kind of cap on CEO compensation? Maybe in terms of the ratio between the CEO’s pay and that of the average employee? The answer came swiftly and unanimously: no.

The problem of CEO compensation, it turns out, is not really a problem at all: if you look at most companies, the amount they spend on executive compensation is not really a big part of their revenues. Of course there shouldn’t be any kind of regulation. And capping pay only makes sense if you cap corporate size, and no one wants to do that.

That said, there is one outstanding problem with CEO pay: the time when you most need executive talent is not when things are going great, but rather when things are going badly. And often, in that case, compensation structures linked to stock options and the like turn out to be largely worthless. We’re good at paying CEOs in good times, but we should probably come up with ways of paying them more in bad times, too. After all, that’s when they really prove their mettle.

That panel really helped me understand the general Davos attitude towards Occupy. The delegates here don’t feel threatened by it, so much as they just feel a bit indignant at how misguided it is. Obviously, in a big inchoate sense, inequality is a problem. And maybe Occupy is a manifestation of that problem. But the Davos crowd is not even close to listening carefully to what Occupy has to say: they’re evidence of the problem, but they’re not remotely helpful when it comes to solutions.

As Lance says, “an organization that is at heart a grouping of the world’s largest corporations isn’t necessarily in the best position to improve the state of the world, particularly in an era of the Arab Spring and Occupy”. It’s another way in which Davos feels past its prime. It’s not helping to change the big world problems, in Europe: the best it can do is identify them. And it’s utterly divorced from the movements which really might make a difference.

But hey, at least the skiing is good this year.

COMMENT

y2kurtus, I looked at the figures provided and at the risk of defaming Wikipedia’s accuracy, I seriously doubt some of those figures. The only way they can even remotely come close to reality is if they are not including indirect government involvement – for instance knowing where the government ends and the IRGC and clerics start in Iran is a toughie.

Apart from NZ and possibly Japan, I can’t imagine living in any of the countries over 40%. Taiwan is very nice and so is Korea. Turkey used to be very nice but i would be concerned about the direction it is taking.

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Why Europe’s crisis can’t be averted

Felix Salmon
Jan 26, 2012 11:59 UTC

I got a glimpse this morning of what Lance Knobel calls Davos’s “class distinctions, even if you have a white badge” — I was invited to a breakfast meeting under the auspices of something called the Industry Partnership Meeting for Financial Services. Which reminds me of that great line from In the Loop :

What you have to do is you’ve got to look for the ten dullest-named committees happening out of the executive branch. Because Linton is not going to call it “The Big Horrible War Committee”. He’s gonna hide it behind a name like “Diverse Strategy”, something so dull you’re just gonna want to self-harm.

This morning’s breakfast appears nowhere on the official Davos program, but because it was an exclusive by-invitation-only event, it managed to become by far the most high-powered session I’ve yet seen, with a large number of shiny-hologram badges and more big-name economists and central bank governors than you’d think possible. They came because this really was an interactive session, where they can talk in a serious and structured way with each other at a very high level.

This being the WEF, there was lip service paid towards the idea that a group of smart and powerful people, if you get them all in the same room, could come up with ways for the international community to improve the state of the world. But the actual participants didn’t show any sign of believing that: they were insightful with respect to diagnosing the state of the world, tentative in proposing solutions, and downright skeptical when it came to handicapping the likelihood that any of those solutions might actually be implemented.

And indeed there was a strong strain of thought which basically said that we already have the optimal level of international cooperation, and that more would not necessarily be better. Consider the two major currencies of the world: while the euro/dollar exchange rate has certainly been volatile over the course of the crisis years, it hasn’t moved as much in total as it did before the crisis, and there’s no sense at all in which we have had a currency crisis. To a very large degree, this is a function of successful international cooperation: the world’s major central banks all talk to each other regularly, and when they needed to do so they quietly and efficiently opened up unlimited swap facilities with each other. Those swap facilities didn’t cost money, in terms of government budgets, but they were an incredibly effective crisis-fighting tool.

eurusd2.tiff

Effectively, the unlimited swap lines have solved most of the global liquidity problems, and have prevented the otherwise very scary prospect that a liquidity run could become a self-fulfilling insolvency process. But that of course doesn’t mean that the world’s economies are all solvent. And so the question then arises: if you want to attack solvency rather than liquidity, is international cooperation (i.e., giving the IMF a massive fiscal bazooka) the best way to do so? And the answer there seems to be no. The biggest solvency problems are the problems within the Eurozone, and it is ultimately Europe’s job to get the necessary cash together if it wants to avert a series of fiscal crises.

Germany and other big northern European countries are running very large trade surpluses: they can remit cash to the periphery if they have the political will to do so. And if they don’t have the political will to do so, there’s no way in which the US, China, and the rest of the world can or should step in to try to save the likes of Greece and Portugal.

This kind of thinking is very much in line with the realism, or fatalism, which I’ve seen a lot of in Davos this year. If you control your own currency — if you’re the US, or China — then ultimately you control your own fate, and you only have yourself to blame if you go belly-up or suffer a major crisis. Certainly the rest of the world won’t come to your rescue. That’s one reason why China has such enormous foreign reserves: it needs them as insurance against a crisis. And it also explains why the yuan is not convertible, and there’s a waiting list of 800 companies who want to go public on Chinese stock exchanges but aren’t being allowed to do so: the Chinese government is keeping tight control of its economy and the way that its companies are financed, because once you lose that control, it’s impossible to regain.

In Europe, of course, the politics of transfer payments are much more fraught — and also much harder to understand. One very senior economist told me as we exited the meeting this morning that he too was decidedly unclear on the details of how TARGET2 works, even though he’s meant to be an expert on such things and he knew that it was crucially important. Similarly, while it’s surely very germane and important that the Bundesbank has more reserves than the ECB, what that means in practice is not at all obvious.

Politically, we still seem to be very far away from a fiscal solution to Europe’s problems, and the baseline scenario has to be that we’re not going to get one — ever. The result is likely to be a series of countries exiting the euro, and/or the “East Germanification” of much of Europe’s periphery: flows of money and human capital away from countries like Greece and Portugal, and towards the more prosperous countries with healthy economies and substantial trade surpluses. Essentially, those countries would become holiday resorts for the north, with all the real economic activity being concentrated in more prosperous nations. If you’re a smart young Spaniard, it’s much more attractive to seek your fortune in the UK than it is to take your chances in a deflating country with a stratospheric youth-unemployment rate.

Certainly there seems to be no belief at all, even among the well-intentioned technocrats at Davos, that coordinated international action will or should solve this particular crisis. And the inevitable conclusion is that the crisis is not going to be averted: it’s only going to get worse. It’s a very scary prospect — but one which it’s very important for global elites to come to terms with. And that’s exactly what they’re doing in Davos this week.

COMMENT

Enough with this misery. Europe has probably turned the corner. Fiscal consolidation is now well underway. See the IMF’s latest report on global fiscal developments:

http://youtu.be/M6HX8A5bfbY

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