“Act and learn” versus “debate and wait”
By Mohamed El-Erian and Michael Spence The opinions expressed are their own.
In formulating policy, the process and the mindset can have a significant impact on the success or failure of outcomes. How you do it can be as or more important than what you do.
In today’s western economies, this observation may go a long way in explaining why policy outcomes have consistently fallen short of what policymakers themselves have expected, let alone what is needed to address important and growing economic challenges.
Signs of disappointing policy outcomes are, unfortunately, all around us. Over the last two years, American policymakers have failed miserably to lower persistently high unemployment despite a series of stimulus measures, fiscal and monetary, conventional and unconventional. In Europe, the debt crisis has spread despite numerous summits, declarations, policy actions and political changes.
In both cases, policymakers identified and sometimes mis-identified the problems and took highly publicized steps to solve them. Considerable financial resources and political capital were deployed. The credibility of policymakers (and policymaking itself) was placed on the line. Yet to no avail. The identified problems not only persisted, they deepened. When one compares policymaking episodes around the world – successful and less so – it seems clear that there is more at play than the content of policies. The mindset of policymakers and the process of policymaking seem to also have a lot to do with the disappointing outcomes. Indeed, one often hears policymakers point to political dysfunctionality as being the major hindrance to good outcomes.
In the US, it is the highly polarized nature of the political discourse and the associated lack of a “center.” In Europe, it is the need to get universal approval from the seventeen members of the Eurozone in what is often a cumbersome process that pits European necessities and realities against national interests and individual political party posturing. As valid as the political constraints may be, we believe that there is something even more fundamental at play. It is not just about politics. In the last few years, the policy mindset has been unhelpful and, as a result, the sequencing outmoded.
Western policymakers have been hostage for too long to a cyclical mindset. Their economies have been going through structural and secular changes brought about by major re-alignments at the national, regional and global level. Repeatedly, the extent and duration of the ongoing economic changes were not sufficiently understood and embraced. As a result, economies have suffered rather than evolved.
It’s time for a wider European policy debate
By Mohamed El-Erian The opinions expressed are the author’s own.
It is safe to say that there is broad agreement on what is most desirable for solving the Irish crisis — namely a mix of domestic policies and external financing finely calibrated to enable the country to grow strongly, create jobs, stabilize the banks, and overcome large and mounting indebtedness.
Unfortunately, what is most desirable is not feasible given the path Europe is embarked on; and, to make things even more complicated, what appears feasible to Europe is not necessarily desirable. As a result, Ireland finds itself stuck in an unstable muddled-middle. It can’t get ahead of the crisis; it is far from a first best solution; and it confronts choices that are painful to implement and uncertain in outcome.
What is evolving in Ireland today resembles what was done in Greece six months ago. Expect the Irish government to commit to even greater budgetary austerity, its European neighbors and the IMF to provide massive funding, and the banks to receive liquidity, capital injections and other unconventional forms of support.
While seemingly exceptional to many, this approach constitutes the path of least resistance. In fact, it is the most feasible. But we should not confuse feasibility with desirability.
At its roots, the approach addresses liquidity but not solvency. It adds to the debt overhang rather than reducing it. And it uses the socially-painful method of income and growth compression as the principal way to promote international competitiveness over time.
It should come as no surprise that, six months after having embarked on such an approach, Greece is still in crisis mode. Risk spreads remain at elevated levels that discourage new investment. Society faces a higher-than-programmed contraction in economic growth and poorer employment prospects. The government is forced into even greater fiscal austerity. Meanwhile, private creditors have been using the exceptional support provided by the EU/ECB/IMF to exit their Greek exposures rather than co-invest with the official sector.
I respect the man’s opinion, his position allows him a great deal of insight. But exactly what would he propose to do?Please spell it out for those thickheaded politicians, who are more concerned with their own survival than the future of their respective countries. Something will have to give. A modern day financial sintflut might ensue.Poor Angela Merkel, getting bashed from all sides. God only knows what’s going on behind closed doors all over Eurpe.
from MacroScope:
Will China make the world green?
Joschka Fischer was never one to mince words when he was Germany's foreign minister in the late '90s and early noughts. So it is not overly surprising that he has painted a picture in a new post of a world with only two powers -- the United States and China -- and an ineffective and divided Europe on the sidelines.
More controversial, however, is his view that China will not only grow into the world's most important market over the coming years, but will determine what the world produces and consumes -- and that that will be green.
Fischer, who was leader of Germany's Green Party, reckons that due to its sheer size and needed GDP growth, China will have to pursue a green economy. Without that, he writes in his Project Syndicate post, China will quickly reach limits to growth with disastrous ecological and, as a result, political consequences.
This will have serious consequences on the the way the West lives.
Consider the transition from the traditional automobile to electric transport. Despite European illusions to the contrary, this will be decided in China, not in the West. All that will be decided by the West’s globally dominant automobile industry is whether it will adapt and have a chance to survive or go the way of other old Western industries: to the developing world.
This is not the usual view of China. Many greens have long feared the impact of a huge leap in Chinese growth on the global environment -- refrigerators in a billion homes, cars in a billion garages etc.
Islamophobia and a German central banker
How do you reconcile the traditions of many Muslim immigrants with the freedoms and values of 21st century Western Europe?
It’s a question that has led to periodic outbursts of vigorous debate from France to Holland and Switzerland. In Germany, the discussion has been relatively subdued. Until now.
Why? A passage in a book considered so unsettling that its author, Thilo Sarrazin, was forced to resign from the board of Germany’s central bank this month, provides part of the answer.
Criticism of Islam and Muslim immigrants, he writes, is wrongly seen to “equal Islamophobia which equals racism which equals anti-Semitism which equals right-wing radicalism which equals national socialism (Nazism).” In a country deeply ashamed of its 1933-1945 Nazi past, that’s enough to mute debate.
Sarrazin’s book, “Deutschland schafft sich ab” (Germany abolishes itself), came under withering assault from Germany’s political and intellectual elite even before its publication and (judging from some of the comments) even before many of the critics waded through its 461 dense, statistics-laden pages.
It is not an anti-immigration, anti-Islam tirade, it is an argument against a combination of flawed immigration and social welfare policies that, according to Sarrazin, have tended to attract a sizeable number of immigrants more interested in living off generous government handouts than in finding a place in the labour market, climbing up the economic ladder and integrating into German society.
Immigrants from Muslim parts of former Yugoslavia, from Arab and North African countries and from Turkey (the largest group) “are the core of the integration problem,” Sarrazin writes, citing dismal statistics on scholastic achievement, unemployment, dependence on welfare payments, crime and reluctance to learn German, an essential step towards integration. In contrast, immigrants from Asia or India were doing particularly well in integrating and in making economic progress.
We don’t want to have our freedoms taken and live in the middle ages with Sharia law. The more you know about Islam the more you can see it’s not compatible with freedom and democracy. Learn more at The Center for the Study of Political Islam and citizenwarrior.com. Or better yet read “An Abridged Koran” it’s about 200 pages or so.
Sunny side up: why eggs are safer in Europe
The following is a guest post by Bonnie Azab Powell, co-founder of the food-politics blog The Ethicurean who started the Bay Area’s first Community-Supported Agriculture program for meat, BAMCSA, in 2006. She now manages the CSA programs for Clark Summit and Soul Food farms. She eats two runny eggs nearly every day. The opinions expressed are her own.
Reading about the recall of 550 million possibly salmonella-tainted U.S. eggs, laid and packed in just a handful of massive Iowa factories made me think about the egg aisle of a Sainsbury’s supermarket I visited in England, near Brighton, two years ago.
I was so struck by the store signage, which read not only “Organic” and “Free Range” — familiar terms — but also “Barn” and “Caged,” that I took several pictures with my iPhone. My English host practically had to drag me away from reading all the explanatory text included on the cartons: barn eggs are “laid by hens free to nest, perch, and roam in spacious barns,” while “Woodland organic free-range” eggs are “from hens free to roam in a natural environment with trees.”
Not only are the cartons informatively labeled, each egg is stamped with a simple code that tells what kind of system produced it.
It sounded so … pleasant. I didn’t see how anyone with a heart could pass over these visions of happy nesting, perching, tree-scratching chickens – despite being more expensive — for the grim “from caged hens.” And yet as I watched, plenty of shoppers opted to save the pound or more per dozen.
In Europe, the philosophy is “Buyer Be Aware.” But in the U.S., it’s “Buyer Beware.” American food labels have loads of nutritional information, but little that you can trust to tell you how it was produced.
Looking out for the little chicks
Using ionizing radiation to preserve certain food stuffs are permitted in both EU and the US. In both EU and US radiated food has to be labeled.
Radiation of food in the EU may only be authorized if:
there is a reasonable technological need;
it presents no health hazard;
it is of benefit to the consumers;
it is not used as a substitute for hygiene and health practices or for good manufacturing or agricultural practice;
Any food irradiated as such or containing irradiated food ingredients has to be labelled
A favourable opinion of the Scientific Committee on Food (SCF) is needed to place a specific food item on the EU-wide list of products authorised for irradiation.
To claim that EU rely on radiation for preservation of food is exaggerated.
A painful holiday’s end for Europe
Europe’s long summer holiday still has a week to run but this year’s reentry will bring with it evidence that very little progress has been made on the issues that threaten to rend the currency union and upend the global economy.
Despite waving the stress-test magic wand over its banks in late July the same problems continue to grow unchecked: a euro zone periphery that can’t compete, may not be able to pay its debts and so may bring down with them the very banks that have been pronounced healthy.
While the German economy is growing at a rate not seen since the Berlin Wall came down, things are a good bit worse in Ireland, Portugal, Spain, Italy and especially Greece, all of which face some combination of an austerity-induced recession and debts public and private which which threaten their banking systems, local governments and Treasuries.
Investors have looked at this on the one hand and on the other a $1 trillion bailout, a pliant International Monetary Fund and the results of the stress tests and have voted with their feet: average spreads between German and peripheral country bonds are back in territory last seen in June and heading north. Ten-year Greek bonds now yield 861 basis points more than German issues, or about where they were in May when we were all debating the chances of the euro surviving in its current form.
Irish bonds too have underperformed alarmingly as austerity without debt rescheduling does what austerity without debt rescheduling does: kills growth and kills the prices of assets the debts are secured upon, leaving the country less able to service its debts and more likely to default even harder. Yes, defaults are like sneezes; some are polite and soft and some splatter everyone in the room.
A number of interlocking stories show that, while European central bankers are talking a firm game about upgrading growth forecasts on the back of German exports, their actions show continued very strong concern.
First comes news on Monday that Anglo Irish Bank has transferred a new batch of impaired loans to the state-run bad bank National Asset Management Agency at just 38.1 percent of their face value, a price lower than the last transfer and one that, while it may prove optimistic, even at this level implies a weakening asset market and a growing and perhaps ultimately un-meetable bill for the government. Remember, the more money Ireland needs from the center, the less there is available to meet the growing needs of Greece and Spain.
Europe’s speculator full Employment Act
Far from setting a trap for the “wolfpack,” Europe’s $1 trillion bailout package amounts to a full employment act for speculators, or should that be the reality-based community, for the foreseeable future.
Hoping to tame markets it accused of “wolfpack behavior,” the European Union on Monday unveiled a 750 billion euro package intended to avert a rolling sovereign debt crisis that has engulfed Greece and threatens to spread widely among the weaker euro zone countries.
The package can’t be blamed for being too simple: it contains loans from the International Monetary Fund, an EU emergency fund and euro zone governments, as well as an interesting undertaking by the European Central Bank to buy bonds in order to restore liquidity to supposedly poorly functioning parts of the bond market. In a move straight out of a Russian fairy tale, Spain and Italy, to name just two, are pledging money towards a package that may well be used to bail themselves out. Maybe they should have put up even more money.
Once again, those in power look at a solvency issue and pronounce gravely that is a matter of mere liquidity.
Well, it isn’t.
That move worked, at least for the time being, when the United States bailed out its banks, but the U.S. was able to create easy conditions in which its banks could earn their way out of the hole. Rather than create easy conditions, this bailout imposes tougher ones. Greece, Spain and Portugal will face even greater austerity as a result of budget cuts, austerity that will make it even tougher for them to earn their way out.
The plan was greeted with joy on financial markets, with bonds and stocks rallying sharply, but the rally had the feel not of speculators heading for the hills but of children learning how to push their parents’ buttons more effectively.
PIIGS will face a tough time, but the stronger EU countries may face a difficult choice between keeping the union, growth, and the welfare state.
Europe shambles as Greek fire spreads
Europe desperately needs to get out in front of its solvency problem, Greek edition; not because it is right, not even because it will work in the long term, but to stem rapid and costly contagion through financial markets to other weak links in the euro zone, not least to banks.
Whether euro zone institutions will have the agility and resolve to quickly put in place out-sized measures for Greece is doubtful.
That Greece on Wednesday was paying more than 20 percent, or about double the rate of Hugo Chavez’s Venezuela, to borrow money for two years showed that investors were expecting either a default or very large burden sharing by existing creditors, and possibly a, by definition, disorderly exit from the euro by Greece. Spain joined the list of sovereign downgrades, as Standard & Poor’s cut its rating a notch to AA, a day after the debt rating agency slashed Greece to junk status and cut Portugal to AA.
The moves prompted rapid widening of Spanish and Portuguese debt, and hit financial markets world-wide. Investors, lulled by an apparently miraculous government-underwritten escape from the banking crisis, and aware of how badly things would go if Greece were not bailed out, had been operating on a cheerful if lazy assumption that this crisis too would be made to disappear, because the alternative is too horrible.
Month has followed month, meeting has piled upon meeting and even with broad consensus there is still huge lack of clarity about who in the European Union is going to do what exactly to whom.
It has, frankly, become surreal. German Chancellor Angela Merkel opined on Wednesday that, “We are on a good path now,” while in the next breath saying “I think the handling of the Greece case shows that everyone knows we cannot allow the same situation with countries as with Lehman Brothers.”
Everyone may well know it, but not everyone, including many politicians in Germany, are acting that way and dropping the L-word without already having a massive, credible plan to brandish is foolish in the extreme.
I agree with the other posts. Slave labor is essential to the US economy. Illegal immigrants are vital. Nothing makes me happier than to see people living in abject poverty and working for less than slave labor wages. Especially on construction sights, where legal immigrants and citizens could make a living wage hanging sheet rock or laboring. No, no…it is much more beneficial to pay people $250 per week for 80 hours of work. They are never late to the job when they are living in their van in the parking lot. Yeah illegal immigration!
Embrace reality, not fight speculation
Stock up on canned goods, the authorities appear to be opening a new front in the War Against Speculation; this time taking aim at the people who might profit from Greece and its European partners’ woes.
Just days after the U.S. Securities and Exchange Commission voted new limits on short selling, Germany is investigating the credit default swap trading of speculators to try to prevent them from profiting from any bailout of Greece.
“It would be bad if it were to emerge after a rescue that the money had gone into the pockets of speculators,” a source with knowledge of the efforts told Reuters.
“The result of the ‘Greek tragedy’ is that the political environment has become such that the Credit Default Swap (debt insurance) problem has come to the fore.”
French Economy Minister Christine Lagarde on Sunday said that derivative trades on sovereign debt should be tightly regulated, limited or even banned.
That’s right, apparently there is a big problem out there and it is that greedy speculators are betting that governments that look like they will have difficulties paying their debts might, well, have difficulties paying their debts. Even worse, some are betting that since there is no tenable alternative to Greece being bailed out that it will be, well, bailed out.
I’m not sure if this is a war against speculation, against lese majeste or just against reality.
Here in the UK, we were on the receiving end of a “speculative attack” in the early 1990′s. We’re still here! There are even some who think it was one of the best things that happened to us. And the money that George Soros made on Black Wednesday ended up, in part, endowing charitable and academic institutions in Easter Europe….
Who wins in U.S. vs Europe contest?
In these days of renewed gloom about the future of Europe, a quick test is in order. Who has the world’s biggest economy? A) The United States B) China/Asia C) Europe? Who has the most Fortune 500 companies? A) The United States B) China C) Europe. Who attracts most U.S. investment? A) Europe B) China C) Asia.
The correct answer in each case is Europe, short for the 27-member European Union (EU), a region with 500 million citizens. They produce an economy almost as large as the United States and China combined but have, so far, largely failed to make much of a dent in American perceptions that theirs is a collection of cradle-to-grave nanny states doomed to be left behind in a 21st century that will belong to China.
That China will rise to be a superpower in this century, overtaking the United States in terms of gross domestic product by 2035, is becoming conventional wisdom. But those who subscribe to that theory might do well to remember the fate of similar long-range forecasts in the past. At the turn of the 20th century, for example, eminent strategists predicted that Argentina would be a world power within 20 years. In the late 1980s, Japan was seen as the next global leader.
The latest pessimistic utterances about Europe were sparked by a debt crisis in Greece which raised concern over the health of the euro, the common currency of 16 EU members. Plus U.S. President Barack Obama’s decision to stay away from a U.S.-EU summit scheduled for May in Madrid, with a new EU leadership structure that should have made it easier to answer then U.S. Secretary of State Henry Kissinger’s famous question: “Who do I call when I want to talk to Europe?”
There are still several numbers to call in the complex set-up, giving fresh reasons to fret to those crystal-gazers who see the future dominated by the United States and China, the so-called G-2.
Pundits who see the European way of doing things as a model for the United States (and others) to follow are few and far between, not least, says one of them, Steven Hill, because most Americans are blissfully unaware of European achievements and, as he puts it, “reluctant to look elsewhere because ‘we are the best.’”
As foreigners traveling through the United States occasionally note, the phrases “we are the best” and “America is No.1″ are often uttered with deep conviction by citizens who have never set foot outside their country and therefore lack a direct way of comparison. (They are in the majority: only one in five Americans has a passport).
EU has today also the largest military by Libon treaty and the most dangerous weapon on Earth set on french SSBN:The M51.
the authors seem to suggest that “act and learn” can replace cycles as “western policy makers are hostage to a cyclical mindset”. Our entire existence is based on cycles from seasons to birth-death we existence in a universe of cycles thus trying to ignore or remove cycles would be futile. The problems in the US, Europe and Japan start with a credit-based monetary system and old demographics. We can create a new monetary system not based on credit and debt but we cannot as easily change the demographics of these advanced economies. All of this has to play out and it will be a long and painful decade.