The Paradox of the “Great Moderation”
In the Financial Development Index and Report, recently published by the World Economic Forum, Nouriel Roubini notes that,
Financial crises are pervasive phenomena both among advanced and emerging market economies. Moreover, in spite of the “great moderation” (a sustained period of high growth and low inflation) of the last two decades, financial crises have become more frequent and more virulent rather than less frequent and less severe. Paradoxically, such great moderation may have triggered asset and credit bubbles. Indeed, with low inflation, sustained growth, and lower nominal and real interest rates, given the loose monetary and credit conditions and the ability of borrowers to lever up again, the possibility of asset bubbles and credit booms has increased.
Shafts of Light
From the blog of Hayder Al-Khoei — grandson of Grand Ayatollah Abdul-Qasim Al-Khoei — I found this post on hearing the music of Lebanese singer Nancy Ajram in what was the heartland of Sadrist Iraq really affecting:
Things just arn’t the same as they were in Kufa. When the US and Iraqi armies battled Moqtada’s army in 2004 most of the people that wandered the streets of Kufa were militiamen. Even in times of peace this town was a bastion for the Mehdi Army. Historically, Kufa has always been the heart of the Sadrists in southern Iraq.
The local police were either sympathetic to the Sadrists, indifferent when it came to their crimes or Sadrists themselves. In many instances the police would man checkpoints together with the militia. If the Sadrists needed police cars or equipment they would either steal them from the police or be given them by the police. Anyone wearing jeans, having the wrong haircut or playing music loud from their cars would be humiliated, taken out of their cars and beaten with sticks in the middle of the street.Those days are long gone. Now commandos and Rapid Intervention Forces patrol the streets alongside the police, there is no room for the Sadrists to breathe. Yesterday we had to drive over a mile to find a space to park alongside the river bank. The river was lined with families and teenagers laughing, enjoying dinner, drinking tea, playing backgammon or smoking sheesha. Every few minutes a car would drive past with Arabic music on full volume blaring out of the windows and there was not a single Sadrist there to shut them up. Some of the older men even encourage the teenagers, with beads swinging in their hands they shout “hele, hele” as they hear the sweet voice of Nancy Ajram.
Al-Khoei’s pleasure at the relaxed atmosphere in Kufa reflects the broader improvements in security that led Stephen Biddle, Michael E. O’Hanlon, and Kenneth M. Pollackto proppose, in a recent article in Foreign Affairs, a strategy for troop withdrawal from Iraq that doesn’t come at the cost of stability.
Stormcrow Economics
With so much to blog about at the moment, I don’t know where to begin. However, I couldn’t let this one slip past without a link. The New York Times has just profiled (the indispensible) RGE Monitor’s Nouriel Roubini. Roubini, a notorious pessimist, is now, much like The Black Swan author and career contrarian Nassim Nicholas Taleb, lauded where he was once obscure for predicting to a large degree the current financial crisis. The NYT calls him “Dr Doom”, but Roubini is more like Hyman Minsky or Keynes, an economist trying to understand what happens when the past doesn’t resemble the future. His diagnosis of the current crisis draws on his work with emerging market financial crises in the ’90s. The common denominator Roubini identified was large current account deficits, financed by “borrowing from abroad in ways that exposed them to the national equivalent of bank runs”. Roubini has watched with trepidation the same dynamic at work in the US for the last few years — a position that he ironically describes as more realist than pessimist, because “things are turning out even worse than I initially predicted.”
For the US though, the future Roubini sees is undeniably bleak,
“Reckless people have deluded themselves that this was a subprime crisis,” he told me. “But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.” All of these forms of debt, he argues, suffer from some or all of the same traits that first surfaced in the housing market: shoddy underwriting, securitization, negligence on the part of the credit-rating agencies and lax government oversight. “We have a subprime financial system,” he said, “not a subprime mortgage market.”
Roubini argues that most of the losses from this bad debt have yet to be written off, and the toll from bad commercial real estate loans alone may help send hundreds of local banks into the arms of the Federal Deposit Insurance Corporation. “A good third of the regional banks won’t make it,” he predicted. In turn, these bailouts will add hundreds of billions of dollars to an already gargantuan federal debt, and someone, somewhere, is going to have to finance that debt, along with all the other debt accumulated by consumers and corporations. “Our biggest financiers are China, Russia and the gulf states,” Roubini noted. “These are rivals, not allies.”
The United States, Roubini went on, will likely muddle through the crisis but will emerge from it a different nation, with a different place in the world. “Once you run current-account deficits, you depend on the kindness of strangers,” he said, pausing to let out a resigned sigh. “This might be the beginning of the end of the American empire.”
Solzhenitsyn
“Not everything has a name. Some things lead us into a realm beyond words.”
Aleksandr Isayevich Solzhenitsyn, December 11, 1918 – August 3, 2008
“Markets in Everything”: An Unsavoury Trade
In an emotionally sensible yet nevertheless strategically foolish decision, Israel has handed over Samir Kuntar, four other Lebanese militants captured in the 2006 war, and the bodies of 200 Lebanese and Palestinian fighters. In exchange it receives the bodies of Ehud Goldwasser and Eldad Regev, the soldiers captured by Hezbollah on the eve of the war, and a report on the status of the missing navigator, Ron Arad.
I won’t link to many articles covering the details of this lop-sided deal. However, there were a couple of things that stood out in amongst the flurry of newspaper ink. Amal Saad-Ghorayeb wrote a very perceptive piece in openDemocracy:
[T]he very nature of the current exchange, as well as its strategic implications, renders it a zero-sum game in which Israel loses and Hizbollah again emerges triumphant. In implementing it, Israel will effectively fulfil the Hizbollah leader Hassan Nasrallah’s “truthful promise” to secure the release of Lebanese prisoners held by Israel (the original aim of the operation Hizbollah carried out on 12 July 2006 when it abducted two Israeli soldiers on the Israel-Lebanon border) and reconfirm his oft-repeated slogan: “just as I always used to promise you victory, now I promise you victory once again”. The overall impact will be to give these popular catchphrases the appearance of strategic foresights….
If the deal’s substance is hard enough for Israel, its strategic implications are also a major cause of concern, on four grounds.
First, the prisoner-exchange constitutes a tacit admission of Israel’s responsibility for the July-August 2006 war, which wreaked mass destruction on Lebanon and resulted in the deaths of over 1,200 (mainly civilian) Lebanese….
Second, the exchange-deal – as well as establishing Israel’s responsibility for the 2006 war – confirms the Winograd commission’s assessment of Israel’s defeat in it. Its formidable military machine failed then both to eliminate Hizbollah’s military capacity and to win the unconditional release of its two prisoners….
Third, in agreeing to the deal Israel cannot seek solace in the fact that it is submitting to the will of the international community or the diktat of international law. The prisoner-exchange will be conducted under the auspices of the United Nations; but it bears recalling that United States Security Council Resolution 1701 (which ended the war on 14 August 2006) – while appealing for an “urgent settling” of the issue of the Lebanese prisoners – adopted Israel’s idiom by stipulating the “unconditional release of the abducted Israeli soldiers” (rather than calling for a swap). In this manner, Hizbollah appears to have succeeded in defying not only Israel, but the will of the international community as well.
Fourth, by recognising Hizbollah rather than the Lebanese government as its negotiating partner, Israel has inadvertently undermined the latter and thus further exacerbated its own position. Hizbollah’s own response to criticism within Lebanon of its priority in this respect (such as from the politician Amin Gemayel) has always been that no Lebanese government has ever sought the release of Lebanese prisoners through diplomatic means; a case in point is the current government of Fouad Siniora, which has not used the diplomatic leverage it enjoys with the United States and Europe to resolve the prisoner issue. The result is that Hizbollah emerges as the force in Lebanon that can deliver, thereby perpetuating an important political dynamic - of the non-state actor which functions as the de facto state versus the state non-actor which merely enjoys the status of de jure state.
This distinction in part answers the question raised by a leading member of Lebanon’s governing 14 March faction, the Druze leader Walid Jumblatt,: “how is it that some of us [in Lebanon] have the right to conduct negotiations for the return of prisoners, to conduct negotiations with Israel”, while the state – if it engages in similar negotiations – is “accused of collaborating with the enemy”? The key point is that the Lebanese de jure state, without a defensive strategy or policy, lacks the power (vis-à-vis its enemies) and the moral authority (over a significant segment of Lebanon’s population) to negotiate deals of this kind, least of all with a foe as militarily superior and popularly anathematised as Israel. If the Lebanese state, in its current capacity, were to negotiate directly or indirectly with Israel, it would be the result of US-Israeli pressure to do so; whereas groups like Hizbollah and Hamas are engaged in such negotiations because they have forced Israel to submit to them.
The Guardian (H/T The Angry Arab — great to see him refer to The Guardian as “white supremecist”!) carried an interview with Samir Kuntar where he disputes the Israeli narrative. Predictably, the PFLP fighters were trying only to take Danny Haran hostage, and even told him (in Arabic) to leave his daughter behind. Equally predictably, returning fire from Israeli police probably killed Danny and his four year old daughter. Except,
Samir Qantar’s version of the events of April 22, which have been articulated here in his voice for the first time, is different from that of the security service personnel and Israeli civilians who were present.
And,
During his trial Qantar denied responsibility for the murder of the Haran family, despite the evidence of the pathologist, which proved that Einat Haran was killed by the force of a blunt instrument – most likely a rifle butt. The pathologist’s report also showed that Einat’s brain tissue was found on Qantar’s rifle.
Occupation is good for you: US troop presence & economic growth
Given that the US is in the midst of a deeply unpopular occupation in the Middle East, in a new paper on SSRN, economists Garett Jones and Tim Kane ask a question conspicuous by its absence in the contemporary debate: “Is the presence of American forces in a foreign nation a help or hindrance to that occupied country’s development?”
The authors consider development, economic history and institutional economics literature, which suggest that security — as in the monopolisation of the use of force — is a precondition of growth. For instance, in Douglass North et al’s model (already covered in an earlier post) of social order development, the organisation of the state moves in linear fashion from a primitive, small band type order, through a limited access order or “natural state”, wherein an elite monopolises the use of force and limits access to power through patronage networks, to an open access order, where access to power is democratic and theoretically evenly distributed across society. According to this model, solving the question of violence is the first and possibly most important problem facing a society. Without monopolisation and the resulting high barriers to entry, activity in the markets for violence is likely to be extensive, and as a consequence actual economic activity is likely to be limited.
There are, then, theoretical reasons for believing that “troop presence”, broadly defined as a functioning security force, be it foreign or local, will be positively correlated with economic growth. Certainly, it is unlikely that chaotic and violent hollowed-out states will produce successful and dynamic economies.
Garett and Kane suggest that US troop presence might positively impact growth along three dimensions: improved security, the diffusion of improved technologies and institutions, and the increased aggregate demand effect of large numbers of relatively wealthy US soldiers. In fact they find that “countries hosting large numbers of U.S. troops experience large and persistent increases in their long-run growth rate.” In addition, they also show that “when a country hosts U.S. military troops, the quality of economic policy and economic institutions in that country generally improves.” The results indicate that “on average, an increase in troop levels of an order of magnitude is associated with a 0.3% higher long-term growth rate of per capita gross domestic product (GDP).”
Furthermore, these results are not simply driven by the experiences of Germany, Japan and South Korea. The authors note that
countries that ranked 11th through 20th in troop deployments (a group that includes Turkey, Iceland, and Morocco) grew twice as quickly as the fifty countries with the lowest troop deployment levels. Thus the positive unconditional correlation between troop levels and growth is not driven by a few observations.
Re-visiting the Climate Change Apocalypse
Via Freakonomics, a new paper on climate change. Melissa Dell, Benjamin F. Jones, and Benjamin A. Olken examine historical data of the effects of climate change (meaning higher temperatures) on economic growth and come to conclusions that may, or may not, surprise you. Their findings are threefold:
- Higher temperatures effect economic growth, not just output.
- Higher temperatures have a range of effects, including reduced agricultural and industrial output, aggregate investment and political instability.
- Higher temperatures only effect poor countries; in rich countries climate change has had little discernable impact historically.
This reinforces what I feel intuitively: that climate change is not the problem per se, the real problem is poverty and its interaction with higher temperatures. Therefore, policies that stymie growth in order to mitigate the effects of climate change or prevent further climate change must be approached with care. In fact, based on the evidence Dell et al. have produced, out of the three possible broad responses to climate change — mitigation, adaption and sustainable economic development — sustainable economic development looks the wisest by far.
Cartographies of Conflict
Via MESH, two fascinating maps of geopolitical hot zones. The first is from Heartland: Eurasian Review of Geopolitics, and is a map of the troubled borderland between Afghanistan and Pakistan, which shows jihadist flows, sites of conflict and contested tribal areas.
The second is from Lebanon-Support, and indentifies vulnerable areas and “flash-points” within Lebanon. The map itself is a kind of palimsest, where a series of layers (political, confessional, security and economic) are drawn over the terrain of Lebanon.
Click on the thumbnails to view the images.
Recommended Reading: Dysfunctional Global Economy Edition
VoxEU launches a free book compiling all of its columns on the subprime crisis. Extensive in scope and filled with contributions from economists like Stephen G. Cecchetti, Willem Buiter, Charles Wyplosz and Marco Onado. A must read: The First Global Financial Crisis of the 21st Century.
Essential macro forecasting from Nouriel Roubini’s Global Economonitor. Referencing a recent paper, Roubini predicts, and lists ten reasons for, the downfall of the Bretton Woods 2 system. Will the Bretton Woods 2 (BW2) Regime Collapse Like the Original Bretton Woods Regime Did? The Coming End Game of BW2.
From The Guardian, news of a secret World Bank report, according to which biofuels have pushed up global food prices by some 75%. The WSJ Environmental Capital blog puts this hard to believe figure in some kind of context, then demolishes it. Turns out that the “secret report” was nothing more than an unpublished exploratory working paper, which, due to the interest generated from The Guardian “leak”, will be published by the World Bank at the end of the week with a much more reasonable figure for biofuel influence.
Doug Noland of Prudent Bear — after his invaluable weekly “credit bubble bulletin” round up — explains in Starbucks, the “Core,” and Conventional Mortgages why the closures of 600 Starbucks coffee shops in the US is emblematic of the troubles facing corporations after the credit boom has bust and the era of easy money has come to an end.
