It is not remotely a fiscal union. There will be no joint debt issuance, no EU treasury, no shared budgets, and no fiscal transfers to regions in trouble. “The agreement hard-wires pro-cyclical fiscal austerity into the institutional framework of the eurozone, with no quid quo pro to move gradually to debt mutualisation.” said Simon Tilford from the Centre for European Reform

And furthermore:

This is not at root a debt crisis. By endorsing fiscal fetishism, EU leaders are silently colluding in the Neo-Calvinist illusion that budget excess caused the debacle. They know this to be untrue. Ireland ran surpluses for years, reducing its public debt to 12pc of GDP at one stage (Germany is 82pc). Spain ran a surplus of 2pc of GDP. Italy has long had a primary surplus.

It is a trade and capital flow crisis, a regional variant of the US-China imbalance. The damage was hidden during the boom by cheap German, Dutch, and French capital — and cheap Asian and Mid-East capital rotated through London banks — flowing into southern Europe. It was cruelly exposed as soon as creditors shut off credit.

 The German’s have created a myth of Wagnerian proportions, and turned it into another act in their morality play against profligate spenders, whether it be the US or Southern Europe. There is abolutely NO hope of a resolution until either:

1. Germany inflates
2. Counter-cyclical fiscal transfers are introduced to offset the effectively different exchange rates between regions of Europe i.e. debt mutualisation as mentioned above

I might add that even this will do nothing to solve the structural and competitive problems at the micro levels, especially in countries like Italy who simply haven’t grown in a generation.

Read the whole thing

 are cutting back, paying off the credit cards, and buying less.

Yet the solution apprently is not further QE, or fiscal expansion but,

 to increase real household income is by letting people keep more of what they earn

Sp presumably they can pay down more debt…???

I asky myself why give this women’s economic views the oxygen of publicity, but then again, on this blog that is hardly a worry )

Me and a friend went that weekend to get new computers and instinctively we went to the Apple reseller (no Apple store in those days) and bought little grey powerbooks. At the time my finance professor was an Apple nut – all his finance notes had been published on Apple hardware and software, and at a time when APPL was trading around $20, he thought they’d be a buy at just under that. That was about two years before Steve Jobs returned to the company.

The rise of Apple’s shares then has been meteoric and well documented, and in the midst of the outpouring of grief for Steve Jobs, it got me thinking about other great CEOs, especially Jack Welch of GE, who also presided over a period of stellar share price growth and was often feted as the “CEO’s CEO”.

Some important contrasts/similarities between the two:

1. Welch seemed very much old school CEO: Bottom line focused; obsessive about shareholder value (or he was then); presiding over ‘old’ industries and employing a seemingly archaic corporate structure that nevertheless worked.
2. Jobs stressed intuition and as far as finances go, he seemed to employ a “build it, and they will come” mentality.
3. Suits & Wall Street vs Turtlenecks and California.
4. Something of a cult following amongst the two companies. With Apple, despite Jobs’ charisma, I think it really was more bound up in the products. With GE it had more to do with Jack Welch (it is hard to get excited about vehicle finance or gas turbines, I admit).
5. A simple philosophy with Apple that is difficult to discredit, if only because it’s simultaneously vague and obvious. Of course we should all make great products, at a great price, that make us happy. That philosophy can live long after Jobs, and even if it isn’t as successful a company in the future, it will be hard to pin that on a failure of the existing philosophy (interestingly, I think Apple had that philosophy from the start and it clearly did change under Sculley…)
6. Jack Welch, on the other hand ended up renouncing the shareholder value philosophy that guided him during his tenure.

I doubt Apple lacked strict capital budgeting techniques but I bet they followed the philosophy; they weren’t the philosophy itself. This is precisely what I take from the above incomplete list: the need to define goals and objectives in terms of customer experience, access and then work backwards to whatever metrics are appropriate.

But isn’t that obvious?

What struck me was not really what he said – after all commencement speeches pretty much follow a typical pattern: be true to your heats; don’t compromise goals trust your gut; family is important etc. etc. In that sense Jobs’ words weren’t that original yet, nearly 20 years after graduating and hearing a similar message myself, i was hooked.

Why? Well, like with Apple’s products, it was not so much the content of the device but its appealing intuition, apparent customisation (“it does what I want it to do!”), personalisation (to wit stories from his personal life to underscore a point) and accessibility (he’s the guy that wears jeans to major corporate events and used to be a hippy).

Is that philosophy a recipe for business success, or is mere consistency of your philosophy with the corporate philosophy (even if that happens to be “evil”) what matters?

I remember thinking that, if Hayek were right, I should live to see Norway and the Netherlands at least halfway to tyranny. It seemed implausible then and it seems embarrassing today.

The proposition is, of course, the theory of Comparative Advantage; economics’ most elegant model whose engagingly simple mathematics blend seamlessly to a moral argument for freedom, free trade and globalisation. If the theory were a sport, journalists would call it “Total Economics” and ruminate wistfully about how they don’t have Theories like that any more. It IS the jewel in the crown so it’s no surprise that economists unite against the Barbarian horde to protect this Citadel of their profession. And no surprise that even the most minimal departures in public invite accusations of heresy.

Dani Rodrik of Harvard University plays Luther and questions whether the reality of free trade can really be as beautiful as theory would have us believe. In his latest book he champions a “second-best” approach to globalisation to present an argument for a feasible free trade model that allows efficiency gains without the subordinating national politics. Given the stakes he also challenges his colleagues to come clean about the complexity of the theory. It is an important book, made more relevant in the light of continuing high unemployment in the US and the ongoing debate about offshoring jobs.

The theory of comparative advantage imparts a Zen-like profundity to those that (finally) get it yet even seasoned professionals call fall prey to its apparent impossibility. It is worth stating the simple model here:

even if a country is less productive than other countries in producing every single product that it produces, it would still have a lower cost of production in at least one of those products, and could profitably export that product in sufficient amounts to pay for its imports of other products

Did you find “stubborn popular prejudices”, as Krugman called them, taking over? You are not alone. But we know Comparative Advantage to be impeccably logical, so any persuasive argument to NOT have free trade seems impossible, yet Rodrik draws on history and empirical work to dissect previous eras of apparent “free-trade” showing how protectionism was rife; efficiency gains occurred and trade was the servant of national politics. Moreover he asserts that a “hyperglobalisation” as preferred by some, is flawed because the institutions that make the case for free trade within national borders logical, simply don’t exist at a global level. The point being that such hyperglobalisation is likely to fall into this governance gap creating a trilemma: we must choose between two of national democratic politics, hyperglobalisation or nation states.

Rodrik makes his own position clear: global governance is myth, and models like the Eurozone expose the problems of achieving such integration when countries share a common heritage. So if we still want hyperglobalisation and nation states to exist, then we have to subordinate national politics in the pursuit of the global interest. The Gold Standard era is consistent with such a position but Rodrik argues that its demise showed again how national priorities will trump attempts at global governance. The solution, he argues, is a Bretton Woods compromise, that preserves local democracies and nation states, whilst leaving plenty of room for non-absolute form of trade.

The design of Bretton Woods and GATT in fact, clearly illustrates his point. Bretton Woods bought much needed international stability and cooperation yet gave countries breathing room and encouraged trade as economies grew in response to their specific local environment. Yet even Bretton Woods collapsed when US national interests took precedence over international objectives. Similarly GATT at the outset never had the objective of forcing free trade, but gave countries local policy space to develop their own versions of capitalism; hyperglobalisation took a back seat. As GATT gave way to the WTO, and especially the elimination of capital controls, hot money flows created havoc, the ultimate result of which was to force the medicine of the Washington Consensus onto countries, subordinating local policies and preferences. Rodrik further argues that other WTO initiatives such as global intellectual property agreements also suffer from a one size fits all approach, and in particular protect developed nations at the expense of others.

Students familiar with Ricardo’s formulation, or Martyn’s analogy of trade being akin to technological progress will question whether trade liberalization is really to blame and if it is, then whether textbook policies such as compensation and non-restrictive measures might be better than protectionism. Rodrik also champions the traditional model also but shows how it is incomplete. Bringing a magnifying glass to the fine print, he explains how there is nothing in the theory that guarantees that, in the long-run, the necessary redistribution that is the hand-maiden of free trade will leave us all better off; some calculations suggest that for an extra dollar of efficiency gain from trade, there are $51 of redistribution. And as Rodrik explains, this is partly because we have almost free trade now and quite possible we’re into diminishing marginal returns (in the analogy with technology, that part is often missed out). Pushing further for ever more miniscule gains risks political and economic disruption that could portend, ironically, greater protectionism. Everywhere we turn, the trilemma rears its head.

And the case for some protectionism is apparently supported by the historical experiences of Taiwan, South Korea, India, Japan under the Meiji, as well as China. In these instances, an active government policy to develop a capability base sowed the seeds of future success. In the absence of these policies, Rodrik argues, their experiences may have been more like commodity exporters, focused on their comparative advantage but exposed to price swings and lacking an incentive to diversify the economy beyond commodities.

And this is Rodrik’s key point, that globalization, if it is like a technology, is surely to leverage capabilities across national borders. The seductive charm of arguing that Portugal’s climate requires it to grow grapes doesn’t speak to the nuance that making wine and port requires a level of technical and management ability that the comparative advantage of ‘climate’ on its own won’t deliver.

Many will be irked by Rodrik’s views as they imply benign, forward thinking technocrats not just in pursuit of the public interest, but capable of implementing it. Japan, China and Taiwan may have achieved stellar success, but their interventionist approach certainly didn’t guarantee it. Indeed China’s pathway to economic liberalism seems to have been dependent on a state-led catastrophe of earlier years. And that is a paradox not addressed adequately here: poor countries are poor not, primarily because they are forced to open their borders and compete with developed nations, but because they have poor institutions and feckless Governments. Rodrik would prefer to keep borders partly closed so the country can learn and develop capabilities that can be traded. But the sucker punch is that this requires a Government interested in this objective in the first place. Countries heavily reliant on commodity exports for example tend to be autocratic where revenues are seized by despots. It is hard to conclude that allowing these nations greater domestic policy space will advance development more than a more open trade policy.

But to unpick Rodrik’s argument with an extreme example would also be a demonstration of faith over reality. The point at which we become wedded to globalization because it IS a Creed, not a theory.

Ultimately the greater paradox is why the beauty of the market system and trade shouldn’t apply to capitalism itself? To argue otherwise is to argue that we know precisely what works in each and every situation. Therefore implementing forms of capitalism that respond to local cultures and traditions, whilst encouraging further integration in an evolutionary manner, is superior to, as Rodrik puts it, opening the window without a mosquito screen in place.

Perhaps then we need to stop and ask if, for example, modest infant industry protection really is a slippery slope to Smoot-Hawley. Perhaps we need to read the small print on the theory and ask if the necessary pre-conditions are in place. And perhaps measures like tariffs should be seen as the last transaction cost to be overcome, after countries have solved issues of intra-national labour mobility and institutional development that can at least give them the platform to compete globally when tariffs are reduced. But we also need to ask if the Governments we are protecting are in a position to do the right thing and to what extent we will countenance abject national policy failures that leave millions destitute and subjugated, or, in developed countries, play to the hands of powerful interests.

Rodrik presents a nuanced argument for globalisation in a political framework that lays bare the stark choices we must make. As a serious trade theorist sympathetic to globalisation in general, but also a pragmatist driven by evidence, his view deserves to be taken seriously.

Given the fumes some convervatives have been sniffing over the last few years, I wouldn’t rule it out.

A small canon would have been even better. Would the canon ball have escaped the Moon’s pull just enough to start orbiting it?

The world is a shifting landscape of invisible solutions to problems such as how to adapt to climate change or quell an insurgency. But rather than follow a leader through this turbulent world, Harford suggests we should attempt multiple solutions, ensuring we’re responsive to feedback, and vigilant and responsive to the inevitable change.

Harford draws on real life examples and academic research to illustrate how the evolutionary framework of ‘variation – selection – adaptation’ works in a variety of settings. He describes the American experience in Iraq – sections that read like Tom Clancy – to highlight how the insurgency was overcome in almost accidental fashion, but was started when soldiers close to the ground experimented in real time, monitored their progress and adjusted their actions accordingly. In contrast the Orwellian Donald Rumsfeld, is the planner personified; his focus on centralizing information and automating decision is fantastically at odds with his presumed belief as to how markets should operate. Indeed one of the strengths of this book is to show that the distinction between ‘market’ versus ‘Government’ solutions is misplaced; Regardless of which entity solves a problem, we should instead focus on how it is solved.

Naturally the ground-breaking work in experimental development economics features prominently, though I wasn’t entirely convinced by his dismissal of the moral cost of denying one group a valuable intervention because in the long-run, all could be better off. In this situation, subjects in the long-run may indeed be dead. The counterpoint of course, in this setting or any other, is to make failure survivable.

It is the dispersal of information that makes experimentation better than planning. In that respect Harford’s thesis is Hayekian but he isn’t a market fundamentalist. Indeed as the examples from Iraq, global warming and financial regulation illustrate, existing planners can harness these ideas. Indeed early in the book Harford suggests that Soviet Russia’s failure was not so much the lack of a profit motive, but an inability to tolerate different approaches to the same problem (I wonder how he’d view the search mechanisms in the US Affordable Care Act as means to reduce health care costs). The importance of appropriate information in the search process is underlined with a discussion on early warning systems in finance and (in a stroke of coincidence) nuclear power plants.

The book is unbalanced in part. The detail on Iraq is in contrast to the brief discussion of competitions v patents and Romer’s charter cities, for example. But this doesn’t detract from the overall conclusion. Pleasingly he doesn’t overdo the analogies from evolution to economics, so the book avoids the glib chatter of management books. No doubt an influence from John Kay.

Adapt is, what John Kay himself would call, a Big Business Book, yet it could be Bigger. Specifically, if the need to experiment is greater today the surely this is because knowledge has become more disaggregated and specialization has increased. The economy wide implications of this are enormous, particularly for wage earners. And whilst Marxist Alienation need not be an immediate threat, there is clearly a human dimension to this issue.

Despite this shortcoming, Adapt is a compelling and complex argument. Not simply stated as markets better, Government worse. By teasing out the mechanisms underlying problem solving he shows we all have the power to experiment and thus solve some of the most pressing issues of our time.

The financial storm will be remembered not only for the colossal damage it caused, but also as the first such crisis of the modern information age. Consequently there has been no shortage of timely analysis. But the torrent of blogs, comments and opinion has seemed at times an unsightly rush to gawp over the wreckage of discarded debris from this whirlwind. Blame has been attributed to bonuses; regulation; quantitative finance and conflicted ratings agencies to name a few.

Andrew Milne’s contribution to the debate is clear, insightful, contrarian and unapologetically positive, and stands above many similar books because it marries rigour with accessibility. Written for the intelligent layperson, Milne manages to explain with clarity the workings of structured products and the financial architecture itself.

Milne prefers to locate the epicentre of the catastrophe in the maturity mismatch resulting from banks funding long-term assets with short-term money rather than a classic credit bubble. Having set out his view early, he does an excellent job of clarifying why the maturity mismatch was of fundamental importance and why it existed in the first place.

Early sections of the book describe the basic ABS/MBS structures. Milne’s view of these as useful funding devices is a useful counterpoint to those who argue for the abandonment of these products altogether. However, the story gets suitably gothic when investment banks sought opportunities to earn transaction income from trading in these products rather than merely structuring them for commercial banks. The success of the investment banks’ strategy required a continuous source of high yielding product and when safe mortgages had been exhausted, banks created out of the structured products themselves, ever more opaque, risky but seemingly AAA rated products.

Milne correctly identifies the opacity, conflicts, remuneration and plethora of other causes as proximate explanations, subordinate to the ultimate cause: banks funding these ‘profitable’ trading opportunities using short-term funds. The foundations of this strategy require unstinting trust in the inter-bank market because these products are used as collateral in, for instance, the repo market. Once losses in the sub-prime market emerged, there were two direct effects: falls in value of the assets, leading to withdrawal of funding and a breakdown of trust as bankers questioned whether these products were indeed as safe as, well, houses.

Here Milne departs from many others and whilst acknowledging that many of the complex products are poor, their apparent values today are so far from reality that it is evident fear has pervaded the entire banking system. Fear and trust are recurrent themes.

This is not just a presentation of theory however. Milne provides context in the form of a short summary of some notable 20^th Century banking crises and in a later section of the book explains how a storm became a Deluge, linking events across the globe into a coherent narrative supporting his thesis. A chapter on six specific corporate failures adds some big-picture analysis in contrast to the anatomical dissection of structured products that is well handled in early chapters.

In later chapters Milne outlines the remedies taken as well as a helpful overview of how Central Banks actually work. Inevitably this section is likely to need revisiting as policy plays out but this is no criticism. Nor indeed should one assume the absence of any mention of the fiscal stimulus is an oversight. Although given the book is for the layreader, perhaps some analysis of the link between the financial and real economy is necessary given Milne’s call for ‘at whatever cost’ rescue of the banking system that may jar with popular convention.

True to his contrarian form, Milne confronts the view that banks should become utilities, and most interestingly, floats the idea that investment managers and their industry should put dedicated focus to understanding asset quality rather than profitability of banks, correctly surmising that the drive to hit quarterly targets is partly to blame for investment banks’ pursuit for yield.

The Fall of the House of Credit is a horrific story and even practitioners will be overwhelmed by the catastrophe that plays out in these pages. His view of the banking system as not entirely rotten may not please everyone, but his calls for massive and coordinated action deserve to be taken seriously.