Global financial crisis – Asian view

[Andrew Sheng, former chair of the Hong Kong Securities and Futures Commission,] sees the present crisis as a product of “four historical mega-trends”. The first was the post-Cold War (and post-trade liberalization) integration of the Asian labour forces into the world economy, which flooded Western markets with cheap goods and kept inflation low. The second was Japan’s 1990s’ monetary policy loosening in response to its prolonged asset bubble deflation, which took yen interest rates near zero and spawned the famous “carry trade”, a key element of subsequent bubbles elsewhere, including the mid-1990s’ East Asian financial crisis. Third was the flood of physicists and engineers (a flood swelled by the collapse of the Soviet empire) who propagated quantitative models across the West’s financial industry to assess returns, create complex derivatives and manage risk. Of course, most of these models, based on typical, bell-shaped “normal” distributions for random variables, failed to account for the “long tail, black swan risk” that destroyed Western finance. The last was the mega-trend of global deregulation, of trade, capital controls and financial regulation, which swept across Western finance and paved the way for subsequent excesses.

In essence, as Sheng puts it, “these mega-trends were four arbitrages that created converging globalization — wage arbitrage, financial arbitrage, knowledge arbitrage and regulatory arbitrage”. The mega-trends welded national markets into a networked, global financial market, but without the steadying influence of any global regulator. The “four arbitrages also led to four excesses that were the hallmark of the present crisis — excess liquidity, excess leverage, excess complexity and excess greed.” [continued…]

From Asian to global financial crisis [PDF], Andrew Sheng, Indian Council for Research on International Economic Relations, New Delhi, February 7, 2009

Decade at Bernie’s

The surge in asset values had been an illusion — but the surge in debt had been all too real.

So now we’re in trouble — deeper trouble, I think, than most people realize even now. And I’m not just talking about the dwindling band of forecasters who still insist that the economy will snap back any day now.

For this is a broad-based mess. Everyone talks about the problems of the banks, which are indeed in even worse shape than the rest of the system. But the banks aren’t the only players with too much debt and too few assets; the same description applies to the private sector as a whole.

And as the great American economist Irving Fisher pointed out in the 1930s, the things people and companies do when they realize they have too much debt tend to be self-defeating when everyone tries to do them at the same time. Attempts to sell assets and pay off debt deepen the plunge in asset prices, further reducing net worth. Attempts to save more translate into a collapse of consumer demand, deepening the economic slump.

Are policy makers ready to do what it takes to break this vicious circle? In principle, yes. Government officials understand the issue: we need to “contain what is a very damaging and potentially deflationary spiral,” says Lawrence Summers, a top Obama economic adviser.

In practice, however, the policies currently on offer don’t look adequate to the challenge. The fiscal stimulus plan, while it will certainly help, probably won’t do more than mitigate the economic side effects of debt deflation. And the much-awaited announcement of the bank rescue plan left everyone confused rather than reassured. [continued…]

Nationalize the banks! We’re all Swedes now

The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is to nationalize it.

As free-market economists teaching at a business school in the heart of the world’s financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner’s recent plan to save it has many of the right elements, it’s basically too late. [continued…]

Radical surgery is required to save this patient

Maybe the only way to avoid a truly catastrophic global depression and trade war is to nationalise every significant bank in America, Britain and the eurozone – since none could survive without government guarantees.

Many economists now take this view. The bitter disappointment over Mr Geithner’s announcement, which sent share prices on Wall Street crashing back towards the lows they hit just before Barack Obama’s election, now threatens to turn this desperation into a majority view.

I am not yet quite ready to join this growing consensus. For me, dismantling global financial capitalism and replacing it with a neo-Marxist system of capital allocation by the State is too big a mental leap. But the way things are moving, even I will soon capitulate to the inevitability of universal bank nationalisation. The reason is simple.

As the Governor of the Bank of England explained yesterday, neither zero interest rates nor tax cuts can revive economic activity if the credit system remains paralysed. Our politicians and bankers face a simple choice: either normal private banking services are restored quickly or governments take direct control. [continued…]

Editor’s Comment — New York Senator Charles Schumer said yesterday: “I would not be for nationalizing. I think government’s not good at making these decisions as to who gets loans and how this happens.” By implication, he’s suggesting — as no doubt his most generous constituents would wish — the task of running the banks should be left in the talented hands of the very same individuals who helped steer us into this global economic crisis. Are we supposed to think that the bankers are simply the victims of rotten luck?

Embedded in the to-nationalize-or-not-to-nationalize ideological debate is the widely unquestioned assumption that opportunities for fabulous personal enrichment necessarily serve as lures for talent.

For some reason, in spite of abundant evidence to the contrary, we are supposed to believe that talent and greed work hand in hand.

But even a cursory examination of the psychology of greed should make it obvious that greed constrains intelligence. Greed focuses on the personal at the expense of the collective. It looks for quick rewards, short-cuts and easy gratification. Its fixation on the end becomes the justification for all means. Its blinkered perceptions discern linear cause and effect much more readily than complexity.

Whether the banking system is nationalized is ultimately secondary to whether it operates under the stewardship of those who are most talented at making it work. The idea that bankers should have fewer opportunities to enrich themselves, far from being a disincentive to necessary talent, might serve as a vital mechanism for screening out those whose only talent seems to have been the eagerness with which they lined their own pockets.

Pakistan and Taliban appear near deal

Government officials and Taliban militants appeared to be near a deal Sunday on the violent Swat region of northern Pakistan, where the militants declared a unilateral 10-day cease-fire and the government indicated it was willing to accept the imposition of Islamic law.

Any formal truce would be a major concession by the government, which, despite a military operation in Swat involving 12,000 Pakistani Army troops, has been losing ground to a Taliban force of about 3,000 fighters. The militants have kept a stranglehold on the area for months, killing local police officers and officials and punishing residents who do not adhere to strict Islamic tenets.

High-level talks on Taliban demands for Shariah law in Swat and the surrounding region were to continue on Monday in Islamabad, Pakistan, involving President Asif Ali Zardari; the army chief, Gen. Ashfaq Parvez Kayani; and senior local officials. But on Sunday, a prominent regional official, Mian Iftikhar Hussain, said that there was already an agreement in principle. [continued…]

Pakistan seethes after killer drone disclosure

U.S. drones unleashed another attack on Pakistani militants Saturday — reportedly killing more than 30 people in the process. It’s the fifth attack this year and the second since Barack Obama took office, less than a month ago. But what everyone in Pakistan wants to know is: Was the attack launched from inside Pakistan itself?

On Thursday, U.S. Senator Diane Feinstein caused an international uproar, when she told an intelligence committee hearing that “as I understand it, these [drones] are flown out of a Pakistani base.”

Up until then, Islamabad had allegedly kept up a kind of “don’t ask, don’t tell” policy towards the robotic strikes, which are deeply unpopular among the Pakistani public. Officials would denounce the drones in the press — and then sneak peeks at the robo-planes’ video feeds. [continued…]

Not even the Afghans know how to fix it

No one is sure about anything in Afghanistan these days. In contrast to other hot spots where I’ve worked — Iraq, Bosnia and Kosovo — the debate in Afghanistan is not only over what to do, but whether to do anything at all.

The breadth of disagreement is startling: Some say that nation-building is a mistake; others believe that it is the only way to defeat the Taliban-led insurgency. One U.S. official told me that we should stop trying to push democratic institutions on a country with such a strong tribal culture, while an equally savvy Afghan American insisted just the opposite. Women’s rights activists begged for our support, saying that they feared for their lives, but tribal leaders demanded that they be left alone to deal with their women as they see fit. “We are tribal people, and we don’t need your women’s programs,” one declared. Unlike Iraqis and Bosnians, Afghans can’t even agree on whether ethnic divisions still exist in their country or whether they are the invention of ferangi — meddlesome foreigners.

All this confusion over such fundamental questions vastly complicates Washington’s efforts at developing an effective policy toward Afghanistan. [continued…]

Is the U.S. repeating Soviet mistakes in Afghanistan?

Twenty years to the day after the last Soviet soldier left Afghanistan, Dastagir Arizad ticked off grievances against President Hamid Karzai and the United States that are disturbingly reminiscent of Moscow’s humiliating defeat.

“Day by day, we see the Karzai government failing. The Americans are also failing,” said Arizad, 40, as he huddled against the cold in the stall where he sells ropes and plastic hoses. “People are not feeling safe. Their lives are not secure. Their daughters are not safe. Their land is not secure. The Karzai government is corrupt.”

“The problems we are having are made by the Americans. The Americans should review their policies,” he said Saturday. “They should not support the people who are in power.” [continued…]

The war in Iraq isn’t over. The main events may not even have happened yet.

In October 2008, as I was finishing my latest book on the Iraq war, I visited the Roman Forum during a stop in Italy. I sat on a stone wall on the south side of the Capitoline Hill and studied the two triumphal arches at either end of the Forum, both commemorating Roman wars in the Middle East.

To the south, the Arch of Titus, completed in 81 A.D., honors victories in Egypt and Jerusalem. To the north, the Arch of Septimius Severus, built 122 years later, celebrates triumphant campaigns in Mesopotamia. The structures brought home a sad realization: It’s simply unrealistic to believe that the U.S. military will be able to pull out of the Middle East.

It was a week when U.S. forces had engaged in combat in Syria, Iraq, Afghanistan and Pakistan — a string of countries stretching from the Mediterranean Sea to the Indian Ocean — following in the footsteps of Alexander the Great, the Romans and the British. For thousands of years, it has been the fate of the West’s great powers to become involved in the region’s politics. Since the Suez Crisis of 1956, when British and French influence suffered a major reduction, it has been the United States’ turn to take the lead there. And sitting on that wall, it struck me that the more we talk about getting out of the Middle East, the more deeply we seem to become engaged in it. [continued…]

How America can turn China green

Gao Guangsheng has an odd sense of timing. In late October, as the global financial system was collapsing around him, he put the United States, Europe and Japan on notice that they would be getting a bill for a hundred years of pumping the climate full of carbon dioxide. The idea wasn’t entirely new—the big industrial powers had been vilified before for despoiling the planet on their way to wealth and modernization, while asking China, India and other poor nations to do the right thing. But the demand took on an entirely new characater coming from Gao, Beijing’s climate czar. It didn’t hurt that he was able to deliver a precise figure: 1 percent of GDP, which comes to more than $350 billion a year.

Western leaders handled Gao’s statement as you might have expected in the middle of an economic crisis: they ignored it. Over the next few months, however, that tactic will be difficult to sustain. As climate talks begin to build toward a climax in Copenhagen in December, when a follow-on to the Kyoto Protocol is due to be drawn up, Gao’s challenge stands as a gaping rift. It’s the same rift that kept China, India and other relatively poor nations out of Kyoto and gave President George W. Bush an excuse to withdraw, putting climate-change policy on hold for the past eight years. The issue looms large over Hillary Clinton’s first trip this week to Beijing as newly minted secretary of state. The longer the issue remains unresolved, the greater the chance that Copenhagen will end in a similar stalemate—and this time there’ll be no George Bush to blame. [continued…]

The old carrots and sticks won’t break the US standoff with Iran

When it comes to Iran, hawks, realists and doves in Washington agree on one point: the Bush Administration’s policy on Iran’s nuclear programme was an abject failure. Its efforts to halt Tehran’s uranium-enrichment activity by brandishing the “stick” of economic sanctions and the threat of military action, while dangling the “carrots” of economic incentives, saw Iran move from experimenting with a few dozen centrifuges for enriching uranium in 2004, to some 6,000 centrifuges now producing nuclear fuel at Natanz. Mr Bush vowed to prevent Iran from “mastering the technology” necessary to produce weapons-grade nuclear material, but that’s exactly what Iran managed to achieve.

President Barack Obama, by contrast, promises to use “tough, direct diplomacy” with Tehran, and his administration is currently reviewing its Iran policy. Mr Obama says that the US will talk to Iran if it “unclenches its fist”. President Mahmoud Ahmadinejad says Tehran will oblige, but only in “an atmosphere of fairness and mutual respect”.

A willingness to dispense with his predecessor’s preconditions for talking directly to Iran won’t necessarily increase Mr Obama’s chances of success. The stalemate is not a result of inadequate direct communication; it’s based on an irreconcilable difference between the bottom lines adopted by the two sides, until now, on the question of uranium-enrichment. [continued…]

Saudi king overhauls leadership

King Abdullah bin Abdul Aziz of Saudi Arabia initiated an extensive overhaul of his country’s leadership yesterday, announcing new appointments to top political, religious and military posts, all apparently aimed at reinforcing the monarch’s reformist agenda.

The king replaced four cabinet ministers, the country’s most senior judge, the head of the religious police and the top official of the Saudi Arabian Monetary Agency (SAMA). For the first time, he named a woman as a deputy minister.

He also ordered a reorganisation of the Grand Ulema Council, the Muslim nation’s top religious body, so that its scholars represent different branches of Sunni Islam.

In the past, the Ulema Council members all “held the same views and belonged to the same school of jurisprudence”, said Mshari al Zaydi, a columnist at Asharq Al Awsat newspaper who specialises in Islamic issues. Now, “there is representation from the Maliki, Hanafi and Shafi’i [legal] schools in the council”. [continued…]

Saudi king appoints first female minister

King Abdullah of Saudi Arabia has appointed the first female minister in the kingdom’s history.

He also sought to identify himself with his country’s reformers by sacking two notorious hardliners at the weekend.

Any changes in high level appointments are exceptionally rare in Saudi Arabia where the foreign minister, Prince Saud al-Faisal, has been in office since 1975, and the defence minister, Crown Prince Sultan, has held his job since 1964. [continued…]

Former Gitmo guard tells all

Army Private Brandon Neely served as a prison guard at Guantánamo in the first years the facility was in operation. With the Bush Administration, and thus the threat of retaliation against him, now gone, Neely decided to step forward and tell his story. “The stuff I did and the stuff I saw was just wrong,” he told the Associated Press. Neely describes the arrival of detainees in full sensory-deprivation garb, he details their sexual abuse by medical personnel, torture by other medical personnel, brutal beatings out of frustration, fear, and retribution, the first hunger strike and its causes, torturous shackling, positional torture, interference with religious practices and beliefs, verbal abuse, restriction of recreation, the behavior of mentally ill detainees, an isolation regime that was put in place for child-detainees, and his conversations with prisoners David Hicks and Rhuhel Ahmed. It makes for fascinating reading.

Neely’s comprehensive account runs to roughly 15,000 words. It was compiled by law students at the University of California at Davis and can be accessed here. Three things struck me in reading through the account.

First, Neely and other guards had been trained to the U.S. military’s traditional application of the Geneva Convention rules. They were put under great pressure to get rough with the prisoners and to violate the standards they learned. This placed the prison guards under unjustifiable mental stress and anxiety, and, as any person familiar with the vast psychological literature in the area (think of the Stanford Prison Experiment, for instance) would have anticipated produced abuses. Neely discusses at some length the notion of IRF (initial reaction force), a technique devised to brutalize or physically beat a detainee under the pretense that he required being physically subdued. The IRF approach was devised to use a perceived legal loophole in the prohibition on torture. Neely’s testimony makes clear that IRF was understood by everyone, including the prison guards who applied it, as a subterfuge for beating and mistreating prisoners—and that it had nothing to do with the need to preserve discipline and order in the prison. [continued…]

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