As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."
Saturday, September 26, 2009
Movement By Inches On The Green Economy At The G-20
These international conferences rarely produce anything of value beyond some communique. In Pittsburgh at the G-20, leaders of the major nations congratulated themselves on saving the global economy and committed themselves to regulatory reform by 2012, with crackdowns on derivatives and banker pay and capital requirements. All of that's somewhat nebulous, however, and will be determined by national legislatures. I'm more interested in two measures. One is the pledge to phase out subsidies for fossil fuels. Again this is easier said than done, but it's good to put the nations of the world on the record, that artificially keeping polluting industries afloat is antithetical to the need to reduce greenhouse gases.
World leaders gathered in Pittsburgh for the Group of 20 summit agreed Friday afternoon to phase out fossil fuel subsidies over time, approving language that does not outline a specific timetable for the phaseout and makes clear that poorer citizens may still receive help in paying their energy bills.
But the wording of the statement, championed by the Obama administration, signals the world's most influential nations are taking an initial, tentative step away from the fossil fuels that power their economies.
"We commit to rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption," the statement said. "As we do that, we recognize the importance of providing those in need with essential energy services, including through the use of targeted cash transfers and other appropriate mechanisms. This reform will not apply to our support for clean energy, renewables and technologies that dramatically reduce greenhouse gas emissions."
The other somewhat important announcement was the acknowledgement that the G-20 should be the key international economic conference going forward, rather than the more exclusive Group of 8. This gives emerging nations like China, India and Brazil more say in the global economic future.
The G20 Summit has wrapped up with a final communiqué (French? I knew it!). Kevin Drum sees little change from the draft communiqué. Basically, the big news is $1.1 trillion dollars in guarantees to the IMF and the World Bank standing in for global stimulus, as well as a load of new regulations of the global financial system.
The Group of 20 also agreed on new global rules to cap the pay and bonuses of bankers, as well as a common approach to dealing with the toxic assets on the balance sheets of the world’s banks. That is an issue that has bedeviled the Obama administration and other governments [...]
A financial stability board with enhanced authorities will also be created to provide an early warning mechanism to alert nations of systemic risks to the international economy, the communiqué said.
“Together these steps give us confidence that world economy can return to trend growth,” Mr. Brown said.
The announcements came after negotiators from the United States and Europe worked frantically to hash out an agreement on new regulations, a day after France and Germany signaled a rift over the level of scrutiny that regulators should have over hedge funds and other global financial institutions.
While the United States was determined to resist European efforts to create regulatory authorities with crossborder authority, officials said the two sides worked out policies on transparency and early risk warnings for banks that would placate France and Germany.
“There’s not going to be a ceding of sovereignty to a global regulator,” said a White House official, who spoke on condition of anonymity because the negotiations were confidential.
France other Europeans countries also pressed China to accept action against tax havens, a step it has resisted because of the possible consequences for its coastal banking centers, Hong Kong and Macao.
“I think we’re going to see an agreement,” said Stephen Timms, the financial secretary to the Treasury. “I am expecting sanctions against tax havens. We want that pressure to be maintained.”
There's also some namby-pamby language about "naming and shaming" countries that erect trade barriers, but the truth is that every developed country does it, and the playing field is never level.
I actually do appreciate this statement from the President, signaling that the US cannot carry the consumption growth of the global economy any more.
Such resistance may not have mattered as much in the past. In previous downturns -- including the Asian crisis in the late 1990s -- the United States was by and large the driving force of global recoveries. But in the wake of the current crisis, Obama said, Washington will have to deal with "our long-term fiscal position" and the notoriously low consumer savings rates that for years drove Americans further into debt even as U.S. imports soared.
This time, he said, the rest of the world cannot depend on the "United States being a voracious consumer market."
"Those are all issues that we have to deal with internally, which means that if there's going to be renewed growth, it cannot just be the United States as the engine," he said during a news conference with British Prime Minister Gordon Brown. "Everybody is going to have to pick up the pace."
For too long we have used cheap credit and a culture of consumption to drive growth, and that's just not sustainable any more. Our citizens are drowning in debt and can't buy all of China's crap. I don't want to see a zero-growth economy - with population growth you consign large chunks of the world to endless poverty and starvation - but the burden must be shared and the go-go consumption just has to end.
I introduced a bill - the 'Pay for Performance Act' - to put an end to this theft. It's on the House floor today. It bans unreasonable and excessive pay to employees of financial institutions that are running on taxpayer money. The bill is based on two simple concepts. One, no one has the right to get rich off taxpayer money. And two, no one should get rich off abject failure. If the government owns a chunk of a bank, that bank must pay its employees reasonably, and all bonuses must be performance-based.
But first, let's be clear about what has happened. The government owns stakes in many companies through the TARP program, and Congress tried to put executive compensation restrictions on those companies. Big banks, though, were able to carve out an exception for any contract signed before February. AIG executives drove a truck through that exception and stuffed their pockets with our money. This bill closes that loophole [...]
Everyone agrees that Congress must act to reign in these excesses. These bad banks have come close to destroying our economy. They did so to enrich the small group of employees who made horrible, and in some cases, illegal bets. Calling these bad banks "casinos" is a disservice to casinos, who must actually by law hold money to back all the bets they've taken in. Calling these con artists "bank robbers" is a disservice to bank robbers, who can only steal as much money as the bank holds at the time, without tapping into taxpayer funds, too.
It's time for action, and Congress is acting.
Jane Hamsher has the rundown of the conservative howling on the floor of the House. I believe there's a case to be made that the government shouldn't be setting compensation targets for private firms. But the sad truth is that none of these firms are private anymore. Many are almost completely reliant on public money, and so long as the government is a top shareholder, they ought to be able to set the rules to protect their investment.
London is overrun with protesters right now, with thousands of people demanding a change to the rules of global laissez-faire capitalism which have nearly destroyed this economy, and Republicans can go ahead and stick their fingers in their ears and choose not to hear it. I would not advise the Obama Administration to do the same, however. And there are some very disturbing signs. Picking as number two at Treasury the guy who wrote the law deregulating the banks, for example. And putting the taxpayer on the hook for several trillions of dollars solely to save the financial system, often in total secrecy, too. Joseph Stiglitz' op-ed today gets right to the point:
Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency [...]
Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).
What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.
So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.
But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder.
Even if this thing works in the short term, we will have lost because the behemoth of the financial sector will be restored to its former glory. The need is to restructure and re-balance the economy.
...Grayson's bill, the Pay For Performance Act, passed the House by a vote of 247-171. Check out Grayson's floor speech. "We should not be paying arsonists to put out his own fire." Nice.
On the eve of the G20 summit. McClatchy looks at whether Europe will embrace the President the way they did during the campaign.
Obama leaves on Tuesday on a whirlwind eight-day tour. He remains enormously popular in Europe, and the throngs that greeted him last summer as a candidate are likely to grow. With first lady Michelle Obama along, Obama's debut on the world stage as president already is inspiring anticipation of the kind of rock-star reception that greeted John and Jackie Kennedy on their first trip a first couple to Europe in 1961.
Yet Obama also heads into his first overseas trip with grand goals _ looking to forge a coordinated global response to the Great Recession, hoping Europe will send more of its sons and daughters to help in an escalating war in Afghanistan, and seeking to restore international cooperation that he thinks suffered in the Bush years.
That will be a tough sell. Publicly, European and world leaders will embrace Obama. But privately, they likely will say no to some of his requests, most notably sending combat troops to Afghanistan, or simply avoid the subject.
Certainly that's the case with regard to global stimulus, which the Obama Administration has pushed but which has caused such pushback that the US has backed off. Europe appears to prefer increased regulation of financial markets and to resist the United States trying to encourage additional spending. The Guardian writes that Europe has won the debate:
European leaders, led by Germany's chancellor, Angela Merkel, come to the crucial Docklands summit on Thursday believing they are winning or have won the argument about how to tackle casino capitalism.
The case pushed by Merkel repeatedly in recent weeks, and echoed by France and the European commission, is that there is no point now in more tax cuts and deficit spending to boost demand since it is not yet clear whether the huge fiscal stimuli packages already launched are actually going to work.
Rather, the Europeans argue, the focus should be on fixing a European and global system that is broke – through a new supervisory and regulatory regime. This option, Merkel declared at the weekend, offers the best chance of avoiding similar crises erupting once a decade, as has been the cycle since the 1980s.
While this is a noble goal, the problem is that the "regulatory reform" elements of the G20 communique look toothless - additional boards and structures composed of the same people who missed this crisis. One point of concurrence could spell the end of offshore tax havens, althought the changes could also be cosmetic. In short, the G20 could result in nothing done on the fiscal and monetary levels, and nothing of substance on the regulatory level. Simon Johnson suggests how Obama can salvage the summit, but only on the issue of funding and staffing for the IMF.
The larger issue is the lack of coordinated action among the world in addressing a truly global crisis. America's tarnished reputation through the Bush era has lessened the influence on these matters, as Paul Krugman notes:
The details of our current crisis are very different, but the need for cooperation is no less. President Obama got it exactly right last week when he declared: “All of us are going to have to take steps in order to lift the economy. We don’t want a situation in which some countries are making extraordinary efforts and other countries aren’t.”
Yet that is exactly the situation we’re in. I don’t believe that even America’s economic efforts are adequate, but they’re far more than most other wealthy countries have been willing to undertake. And by rights this week’s G-20 summit ought to be an occasion for Mr. Obama to chide and chivy European leaders, in particular, into pulling their weight.
But these days foreign leaders are in no mood to be lectured by American officials, even when — as in this case — the Americans are right.
The financial crisis has had many costs. And one of those costs is the damage to America’s reputation, an asset we’ve lost just when we, and the world, need it most.
The summit begins on Wednesday, April Fool's Day. Stay tuned.
Barack Obama's op-ed on the G20 Summit has a global audience for a reason: there has been a lot of wrangling between member nations about how to best tackle the global economic crisis. America has called for additional stimulus while Europe in particular wants increased regulation of the financial sector. I think Obama mainly asks for a both/and approach here rather than either/or.
My message is clear: The United States is ready to lead, and we call on our partners to join us with a sense of urgency and common purpose. Much good work has been done, but much more remains. Our leadership is grounded in a simple premise: We will act boldly to lift the American economy out of crisis and reform our regulatory structure, and these actions will be strengthened by complementary action abroad. Through our example, the United States can promote a global recovery and build confidence around the world; and if the London summit helps galvanize collective action, we can forge a secure recovery, and future crises can be averted.
Our efforts must begin with swift action to stimulate growth. Already, the United States has passed the American Recovery and Reinvestment Act -- the most dramatic effort to jump-start job creation and lay a foundation for growth in a generation. Other members of the G-20 have pursued fiscal stimulus as well, and these efforts should be robust and sustained until demand is restored. As we go forward, we should embrace a collective commitment to encourage open trade and investment, while resisting the protectionism that would deepen this crisis [...]
While these actions can help get us out of crisis, we cannot settle for a return to the status quo. We must put an end to the reckless speculation and spending beyond our means; to the bad credit, over-leveraged banks and absence of oversight that condemns us to bubbles that inevitably bust. Only coordinated international action can prevent the irresponsible risk-taking that caused this crisis. That is why I am committed to seizing this opportunity to advance comprehensive reforms of our regulatory and supervisory framework.
All of our financial institutions -- on Wall Street and around the globe -- need strong oversight and common- sense rules. All markets should have standards for stability and a mechanism for disclosure. A strong framework of capital requirements should protect against future crises. We must crack down on offshore tax havens and money laundering. Rigorous transparency and accountability must check abuse, and the days of out-of-control compensation must end. Instead of patchwork efforts that enable a race to the bottom, we must provide the clear incentives for good behavior that foster a race to the top.
Generally speaking, we actually do have to deal with all these things at once, not just because of the political concerns (no better time for reform than in the midst of the crisis, etc.), but to insure against the very real prospect of moral hazard or the desire for personal greed to supersede a return to stability for the greater economy.
However, I'm concerned that the only people playing 8-dimensional chess with respect to this are the Chinese:
China will propose the new world 'currency' with reserve status, in fact a basket of major currencies as defined by the IMF Special Drawing Rights, at the G20 meeting on April 2.
It will take a few years until a full fledged SDR based system will become functional. The U.S. and the UK will likely fight against this. The Euro based countries will mostly be indifferent. For China this is now a major official policy goal. With BRIC pressing for a new reserve system and support from others medium weight countries like South Korea and South Africa the new initiative has a lot of momentum.
So far the U.S. could borrow cheaply and pay back less in real value than the original loan. That privilege is now going away. The trillions the U.S. currently needs to borrow from abroad will have to be payed back in full. That is a major change in its global power status and will seriously decrease its influence in international policy questions.
Russia appears to be on board with this, which would tip it in the direction of China. It doesn't seem like hyperbole to call this the end of American empire. And you know, we screwed the pooch so we lost the right to lead the world, in many respect. However, I find it always worthwhile to fear second-rate powers with lots and lots of guns. Steve Hynd has more.
I covered a bit of this in last night's week in review, but the World Bank's report that the world will experience negative economic growth in 2009 for the first time since WWII is very discouraging news. I don't know if I agree with the framing of this Washington Post story - this was as much a problem of sovereign wealth funds and international banks BUYING junk mortgage-backed securities as it was the lending frenzy in the US and the distribution of the mortgage-backed securities themselves - but the implications of this negative growth are severe.
The World Bank also cautioned that the cost of helping poorer nations in crisis would exceed the current financial resources of multilateral lenders. Such aid could prove critical to political stability as concerns mount over unrest in poorer nations, particularly in Eastern Europe, generated by their sharp reversal of fortunes as private investment evaporates and global trade collapses.
In its report, released ahead of a major summit of finance ministers in London this week, the World Bank called on developed nations struggling with their own economic routs to dedicate 0.7 percent of the money they spend on stimulus programs toward a new Vulnerability Fund to help developing countries.
The report predicted that the global economy will shrink this year for the first time since the 1940s, reducing earlier estimates that emerging markets would propel the world to positive growth even as the United States, Europe and Japan tanked. The dire prediction underscored what many are calling a mounting crisis within a crisis, as the downturn that started in the wealthy nations of the West washes over developing countries through a pullback in investment, trade and credit. Despite the United States' position as the epicenter of the crisis, investors are flocking to U.S. Treasury bills and the dollar, squeezing developing nations out of global credit markets.
Certainly the idea of a global stimulus is one that the US is pushing. There are very real, frightening national security implications to developing nations collapsing, and it's important to deal with that shortfall in demand instead of isolating regulatory reform (which is also needed) at the G20. Even while the US stimulus looks to be coming in low, it's relatively high compared to most other developing nations. The more that there is a unified global stimulus, the less leakage from one country to the next (which is the concern with the US, say, stimulating the Chinese economy through the consumer purchase of a lot of their goods) and the better for global trade, which has absolutely cratered. Larry Summers actually talked about this today in the Financial Times.
Barack Obama’s top economic adviser has urged world leaders to pump more public money into the economy in a co-ordinated effort to boost demand and lift the world out of recession.
In an interview with the Financial Times, Lawrence Summers said the urgent need for a short-term increase in spending by governments temporarily overrode the longer-term goal of tackling the global imbalances many economists believe caused the financial crisis.
The US administration had no choice but to take strong public action to “save the market system from its own excesses”, he said.
His comments, ahead of next month’s crunch G20 summit in London, make it clear that the US administration wants industrialised nations to share responsibility for engineering a global demand-led recovery and does not believe this burden should fall on China alone.
“The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now,” said Mr Summers.
“There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.”
That's the only way out of this crisis, which is why Republican calls for a spending freeze are so absurd. Still, it's important to recognize that even a global demand surge up to the levels of the United States would probably not be sufficient to stem the tide of downturn. Paul Krugman notes today that policymakers are behind the curve:
To see how bad the numbers are, consider this: The administration’s budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February — and it’s rising fast [...]
So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed.
But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.
O.K., that’s a warning, not a prediction. But economic policy is falling behind the curve, and there’s a real, growing danger that it will never catch up.
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