Sunday, January 29, 2012

Le Monde: European Austerity Deemed Ineffective

Both Rationale and Effectiveness Put in Doubt
A January 2012  article printed in Le Monde deems austerity to be ineffective. While German Chancellor Angela Merkel has presented the current budgetary arrangements as a way to emerge from the crisis, many voices across Europe are starting to loudly disagree. 

Among other sources, the article quotes American economist Joseph Stiglitz on the matter. "The adjustment policies in the U.S. and Europe will not solve the economic crisis. The budget deficit is not responsible for the crisis, on the contrary, the crisis that has caused the budget deficit." This was said by Stiglitz at an economics conference in Argentina last month. 

While it's true that placing blame more accurately does not necessarily lead to an effective solution, a correct view of the situation does help put the current economic situation into perspective. 

The article also quotes Andrew Grjebine, the director of the Sciences-Po Centre d'Etudes et des Recherches Internationales (CERI-Sciences-Po), who called a European recovery based solely on the pillar austerity both unsustainable and flat out destructive. The key, Grjebine says is not to reduce the level of growth in order to pay down the debt. That simply leads to a viscous circle which is difficult to emerge from. This is especially so in the case of countries who currently need strong economic growth, such as Spain and Portugal.  

Along the same lines, in his recent NY times op-ed US economist Paul Krugman recommends simply trying to outgrow the debt by employing how growth policies in order to ensure that the GDP grows faster than the debt. 

Another truth which may ultimately emerge is that the international attempt to force austerity on countries who already have desperate economic situations will simply lead to mass protests and possibly even widespread violence. Let us not forget that the fall of Ben Ali began as a protest against unemployment.
About the Author:
Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands. 

Sunday, January 22, 2012

Swiss Senate: NO to Strict Intellectual Property Law

Senate Report: Leave Swiss Copyright Laws Alone

A 2011 Swiss Senate study on the effect of downloading and file-sharing recommends maintaining current Swiss intellectual property laws. Under the current law, downloading is legal.  The study, undertaken by the Swiss Federal Department of Justice and Police, concluded that the overall effect of downloading on consumer behavior is to change consumption patterns away from albums and DVD purchases 

The Underlying Economics
The study finds no negative impact on cultural and intellectual creation. In fact, a 2009 study carried out in the UK found the effects of file-sharing to be that of an increase of revenues to creators of art and intellectual property, as well as a reduction of revenue to the record labels. 

According Swedish MEP Christian Engström, this should come as no surprise. While the core economic function of the artists is to create artistic, that of record labels is to distribute said content. Because file-sharing is a more efficient distribution method for artistic content, it should come as no surprise that the distribution industry would begin to decline, along Shumpeterian lines. This is a concept which many economists feel simply cannot be effectively legislated against, certainly not without doing more harm than good.  

SOPA and the Role of Intellectual property
The concept of intellectual property rights can be seen as an umbrella concept for several different rights. On one hand, there is the right to take credit for creation of the intellectual work or product. Then, there is the right to claim a commercial monopoly on duplication of the product or work, for profit.

Lastly and most controversial, there is the right a monopoly on performance or expression of the intellectual product. -and to prevent others from doing so- The last one has proven controversial because it essentially means that the dissemination and the viral spread of culture and research must be slowed down, in order that financial profit accumulates to the party holding the monopoly right. 

All else aside, intellectual property rights are monopoly rights and their debate should be treated as such. They exist ostensibly on a temporary basis and meant to serve as an incentive for intellectual creativity. While many economists are deeply suspicious of any argument for a monopoly, most are willing to put up with a limited amount of necessary evil of distortion of the market-place in order to incentivize R&D. What most economists are suspicious of is the expansion of such distortion, where it already exists.  

SOPA is a highly controversial bill which entered the the House of Representatives in February 2012. The bill ostensibly sought to defend the intellectual property rights for holders of copyrighted material, at the expense of individual freedom of communication on the internet. No surprisingly, the bill was mostly backed by the distribution industry, who at present time makes the majority of the revenue from the copyrighted content. Their stake is under threat from efficient competition. Their defense is to use hostile language about theft and piracy as a shallow attempt to frame the debate as anything but a debate about monopoly power or a competition between distribution systems. 

This debate should be seen for what it is. This is an attempt by special interests to seek the artificial creation and expansion of a monopoly, at the expense of both freedom and creative output. The public doesn't need this and the artists don't need it either. The word "piracy" is mere smoke screen.

The Senate Study
The Senate report report provides an overview of the current situation. Up to one third of those over 15 years in Switzerland downloading free music, movies and games. Nevertheless, the share of disposable income spent by consumers and consumers in this area remains stable. Thus, users and users sharing sites continue to spend on the entertainment industry. The overall effect of downloading is that expenditures on CD and DVDs are being displace by increased expenditures on merchandise, movie tickets, and concert tickets. Total entertainment expenditure has remained roughly the same according to the report. (FR) (DE)
The Swiss Conseil Fédéral is the upper chamber of the Swiss Legislature. It serves as both the main federal body and the Swiss Head of State. It has seven members, each representing one canton and heading one of the seven federal executive departments.   

Thursday, January 19, 2012

PES: European Ratings Illegitimate

European Socialists Dismiss Rating Agencies
"A dozen anonymous analysts with no shred of legitimacy and a proven track record of gross inefficiency, effectively decided on Friday to make life much harder for millions of Europeans" declaed Sergei Stanishev, president of the Party of European Socialists (PES). "This is an international scam that has to stop."

Recent events have seen ratings agencies issue downgrades to 16 of the 17 Eurozone members, including Germany and France, in addition to a downgrade of the European Financial Stability Facility (EFSF), ostensibly because last Friday's downgrade of France and Austria mean that there were now insufficient AAA-rated guarantors for the efsf to have the top-rating, risk-pooling possibilities aside.

Effects of a Ratings Downgrade
The de-facto effect of a ratings downgrade amounts to increased borrowing costs. This happens via loss of investor demand for the debt instrument in question.In fact, since institutional investors  are obliged specific risk/return characteristics to meet their fiduciary stndards and banks are obliged to specific capital requirements to counterbalance their positions just to meet the Basel rules, the process is fairly automated.

In the case of a sovereign ratings downgrade, it means that a country's government -as well as the citizens and taxpayers- face increased borrowing costs. This can make a huge difference when it comes to hard budgetary line-items such as healthcare, education, and national defense. This is the reason that the recent behavior of ratings agencies with regards to the EU and its member naionts has been an issue of such serious concern. What's worse, is that corporate debt from a country is ALWAYS rated less safe than sovereign debt, meaning that there are secondary effects in the private debt markets. 

Is it Legit?
Principly, the concern is that these higher costs are being imposed due largely to political bias on the part of the rating agencies and associated parties. In fact, during the 1990s, it emerged that right-wing Canadian sources were attempting to pressure Moody's ratings analysts to downgrade Canadian sovereign debt. This was ultimately done in order to help find a justification for the Liberal party's budget slashing agenda in 1993. 

A further point to consider, is the role of CRAs during the sub-prime mortage derivate story in the mid-2000s. At that time, rating agencies were handing out AAA ratings to issues of junk-debt. In exchange, the three main ratings agencies made massive revenues, as the issuing partie who paid the ratings agencies compensated well for free AAA ratings. Officially, it was all disguised as "consulting fees". Since this behavior came to light, leading to an explicit ban on such practices in the US in the 2009 Dodd-Frank Act, the ratings agencies have been looking for opportunities to send the message that they have stopped given away high ratings and intend for their ratings to actually be taken seriously. What better target than sovereign debt then. After all, states DO NOT pay for the services of the rating agencies, so there so is no incentive to give away ratings. 

EU Legislative Efforts
The European Parliament is currently examining proposals for more effective regulation of CRAs and the PES intends to announce a major campaign to regulate the CRA issue next week.


Saturday, January 14, 2012

The EU Financial Volatility Tax

The European Financial Transaction Tax (FTT) has gained traction within the European Union. Last fall, the measure won support in both European Commission and the European Parliament. The legislation was argued in the Economic and Monetary Affairs Committee, where it won support from MEPs from a wide plethora of parties. Despite passing the parliament, the FTT has gotten bogged down in the European Council. The purposes of the financial transaction tax are two-fold:

1: Financial Market Stability
A small financial transaction tax serves to moderate volatility in the financial markets. Because the size of the tax should be very small –pennies per share– the amount of the tax becomes negligible to the small investor. This is especially true for the smallest investors, who face large brokerage fees far outweighing  the proposed tax, and for whom brokers might even leave transactions costs un-altered. Institutional investors such as pension funds and oil fund, whose main wealth management strategies focus on shareholder activism, as well as long-term buy-and hold strategies, will also barely be affected. Passively managed portfolios will also remain virtually unaffected.

Hedge funds, large speculators, and other highly-leveraged players meanwhile, would be more seriously affected by this measure due to the size and frequency to which they change their financial positions. While these are parties the main contributors to volatility, their contribution to growth is somewhat questionable compared to more conservative investors. The slowing of their speculator activity is projected to contribute a great deal of overall stability in the market.

The proposed legislation, supported by S&D, the European Parliament’s Social-Democrat alliance aims to set the tax rate at 0.05% of the transaction.

2: Revenue
Given the sheer amount of financial transactions, even a somewhat reduced financial transaction volume would give rise to massive revenues. A further positive aspect of FTT revenues is their progressive nature, given that the burden of this tax would fall mainly on the wealthy and on wealthiest players in the financial industry. Given that we are in a period which is known for sovereign debt uncertainties, this might serve to alleviate budgetary problems across the OECD.

Nevertheless, the revenue-gathering effectiveness of this tax is a somewhat complex matter, and there are administrative challenges. In 2011, the IMF conducted a study on the administrative feasibility of the FTT. It concluded that while exchange-traded financial instruments can be taxed relatively easily, there lies some difficulty in the taxation of OTC products and derivatives, leading to some level of product substitution. Nevertheless, the study finds that these difficulties are not wholly insurmountable. Revenue maximization however should only be seen as a secondary objective of the FTT, after stability has been financial market stability taken into consideration.

Austrian WIFO Study on FTT Feasibility
The Austrian Institute for Economic Research (WIFO), a Vienna-based think-tank has undertaken a feasibility study on the FTT. It asks whether the volume of transaction is sufficiently large to justify such a tax. It also examines the effect on speculators versus the effect on real investment.

The study finds a remarkable discrepancy between the levels of financial transactions and the levels of the "underlying" transactions in the "real world". The volume of currency transactions is found to be nearly 70 times larger than trade of goods and services. Moreover, the transaction volume of interest rate securities is even several hundred times greater than overall investment. Moreover, said discrepancy has increased dramatically since the 1990s.

IMF Study on FTT
Last year, the IMF published two studies on the feasibility of the FTT. In Brondolo 2011, the administrative feasibility of the FTT is analyzed by the IMF. It examines the various ways in which an FTT could be structured, as well as the possible obstacles.

While financial product substitution may become an issue and OTC markets are somewhat more difficult to tax, the FTT can nevertheless be feasibly instituted in a coherent fashion.
About the Authors:
The Austrian Institute for Economic Research – WIFO was founded by Friedrich August von Hayek and Ludwig von Mises in 1927. Its brief is to analyse economic developments in Austria and internationally, thereby contributing to the establishment of a sound basis for economic policy and entrepreneurial decision-making.

The IMF is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

Sunday, January 8, 2012

Lord Skidelsky Goes Viral

What Have we Learned From the Crisis?

A lecture about the crisis has begun to circulate on the internet. Filmed in 2010, the video is of a lecture at the OECD by one of the UK's most renowned economists. 

Robert Skidelsky, lifelong peer in the in British House of Lords, emeritus professor of Economics of Warwick, and award-winning biographer of J.M. Keynes discusses lessons and recommendations resulting from the crisis. Central to his argument: Labor should not pay for the sins of the financial sector. This is especially true considering that the sovereign debt problems began by bailing out the banks....and considering the fact that the bankers themselves are not actually being made to suffer the consequences of their recklessness.   

"Policy is now geared to prevent any substantial increase in employment for years ahead". I for one agree that this is NOT the way forward.

As a politician ,Skidelsky has begun to emerge as a leading British voice in opposition to the tide of austerity cuts by the UK and many other G20 nations which is currently taking hold. So far, Skidelsky has not been shy about expressing his point of view in London, Paris, and Brussels. 

As for the rest of us, we would do well to listen to the point of view of a scholar who happens to be expert on the great depression to see us through the current debacle, since the similarities between the two are evident. 

About the Speaker:
Robert Alexander, Barron of Skidelsky is an emeritus professor of economics at Warwick and a member of the House of Lords in the UK. He was elected a Fellow of the British Academy in 1994 and has published an award-winning three-volume biography on J.M. Keynes. 

Thursday, January 5, 2012

Richard Cordray and the Bureau of Consumer Financial Protection

A Solid Foundation

NY Times Article: 

On January 4, 2012, US president Obama appointed Richard Cordray to head the Bureau of Consumer Financial Protection in a semi-recess appointment. While the way in which the appointment was undertaken was quite controversial given prior opposition to his appointment by senate republicans, the real news, what’s really remarkable, is what the agency stands for and hopes to achieve, as well as the fact the United States has allowed this agency to be without a director so long.

The BCFP is an agency which was launched in 2011 as a financial regulatory watchdog agency. While the agency’s official function is ostensibly to write and enforce bank regulations, the BCFP will also regulate non-bank financial institutions. The agency’s mission also includes the conduct of stress-testing and the handling of consumer complaints vis-à-vis fraudulent lending and financial practices.

Another remarkable aspect of the agency is its link to the Federal Reserve. Although its expenses are funded by the Federal Reserve, its operation is wholly independent. Nevertheless, Republican complaints that the BCFP is a cabal of unaccountable bureaucrats ring hollow in light of the fact that the agency answers to two committees of Congress, one from the House of Representatives and one from the Senate, as well as to the president of the United States. Furthermore, it must be said that its mission is try to bring order and accountability to the unaccountable and opaque private financial market which has developed in the US in the past few decades.

This Agency has indeed gone on too long without a director, due solely to the opposition and filibustering tactics of a minority in the US Senate, who ultimately do not have the financial market stability and transparency nor the concerns of the consumers in the financial markets at heart.

The BCFP has the potential to be a friend to both the typical American credit consumer and to the overall stability of our financial system, and it needs a capable and tough director. 
Richard Cordray is the director of the United States Consumer Financial Protection Bureau. He was appointed by President Obama on January 4, 2012. Prior to that, he served as the Attorney General of Ohio.