Category Archives: Finance

Should All Bankers Have Skin in the Game?

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Glenn Reynolds writes:   The financial crisis of 2008-09 is over but not gone. We passed laws and regulations that probably won’t help much. And despite a lot of harsh words aimed at Wall Street and the banks, President Obama pretty much let individual bankers escape unscathed — perhaps because Wall Street and the banks were among his biggest campaign contributors. (That phenomenon has led some to call him “President Goldman Sachs.”)

But relying on regulators to control banks and Wall Street is likely to fail anyway. Leaving aside their extensive political influence, financial types are likely to stay ahead of regulators because 1) they’re usually smarter; and 2) they understand their industry better. Plus, they can change approaches faster than regulators can amend regulations.

Even so, the apparent change in the financial community over the past few decades has been dramatic. The economic crisis brought the activities of investment bankers into the limelight, and suddenly it seemed the staid buttoned-up banker types of the popular imagination had been transformed into wild speculators risking billions on a single trade. What happened?

According to Claire Hill and Richard Painter in their new book, Better Bankers, Better Banks:Promoting Good Business through Contractual Commitment, the reason is that the billions they’re risking on a single trade aren’t their own but somebody else’s. Hill and Painter want to do something about it by requiring that financial operators have their own assets at stake.

This isn’t a new idea. Until fairly recently, big investment banks such as Goldman Sachs or Salomon Bros. operated as general partnerships. In a general partnership, the partners are liable — individually — for debts of the firm. With potentially unlimited liability if things went wrong, the partners had an incentive to be comparatively cautious. (With corporations, on the other hand, shareholders aren’t on the hook for the firm’s debts. The most they can lose is the value of their shares.) Without unlimited liability, incentives are different. As Hill and Painter note, Salomon’s culture changed very rapidly after it became a corporate entity in which the partners, now called “managing directors,” weren’t personally at risk. Within a few years it went from a staid, conservative business to the anything-goes entity described in Michael Lewis’ Liar’s Poker.

It’s easy to engage in risky schemes when success gets you a huge bonus, while failure just costs someone else some money. One solution would be to require investment banks to be organized as general partnerships.

Hill and Painter suggest “covenant banking,” in which bankers’ compensation is at risk for bad deals. Not only would they get bonuses when things go well, but they’d have to cough up past bonuses, and salary, when deals go badly for clients.

Such an approach might be required by law, but Hill and Painter think that banks might want to do it voluntarily. As a client, wouldn’t you rather deal with a banker who stands to lose money if you do? Shareholders might even demand that their companies do business with such banks, as a way of hedging against risk. Wouldn’t it be safer to do business with people whose incentives align with your goals? (I always say I’d like my life insurance company to be in charge of my health care because it would cost them a lot of money if I died; my actual health care company, on the other hand, might save money if I kicked off quickly.)

Many of our problems come from having people in charge who don’t feel the pain when their various schemes go bad. As a theme for the coming decade, we could do a lot worse than requiring skin in the game.

 Skin in the Game

Why the Russian Economy Continues to Tank?

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Bruegel writes:   The Russian economy grew rapidly between 2000 and 2007, but growth decelerated after the 2008-09 global financial crisis, and since mid-2014 Russia has moved into recession. A number of short-term factors have caused recession: lower oil prices, the conflict with Ukraine, European Union and United States sanctions against Russia and Russian counter-sanctions. However Russia’s negative output trends have deeper structural and institutional roots. They can be tracked back about a decade to when previous market-reform policies started to be reversed in favour of dirigisme, leading to further deterioration of the business and investment climate.

Russia must address its short-term problems, but in the medium-to-long term it must deal with its fundamental structural and institutional disadvantages: oil and commodity dependence and an unfriendly business and investment climate underpinned by poor governance. Compared to many other commodity producers, Russia is better placed to diversify its economy, mostly due to its excellent human capital. Ruble depreciation makes this task easier.

Recession in Russia has become a fact. Seasonally adjusted quarterly GDP peaked in the second quarter of 2014 and then started declining. In the third and fourth quarters of 2014, the pace of decline was very slow (Figure 1) and therefore growth for 2014 overall remained positive (+0.6 percent, Figure 2).

However, the first half of 2015 brought an acceleration of the negative trend. Real GDP declined by 2.2 percent in Q1 2015 and by 4.6 percent in Q2 2015, compared to the respective quarters of 2014.

Recession was no surprise.  After the global financial crisis of 2008-09 Russian growth did not resume its pre-crisis pattern. From 2010-12 growth was muted but reasonable, with annual GDP growth of 5.4 percent, 4.3 percent and 3.4 percent respectively (although from a low level in 2009). However, already in 2013 – well before the conflict with Ukraine and resulting international sanctions, and the oil-price decline – there was economic stagnation.

Russia was never a star reformer. Its economic transition in the 1990s was long and painful because of the complicated legacy of the Soviet system (structural distortions, macroeconomic imbalances and the absence of market institutions) and because of insufficient political support for radical, market-oriented reforms.  

Furthermore, the first years of Vladimir Putin’s presidency (2000-03) brought completion of many overdue reforms, such as land reform, simplification of the tax system (the flat 13 percent personal income tax rate), elimination of fiscal imbalances, continuing privatization, limited opening to foreign investors, deregulation and adoption of several pieces of market-oriented legislation. At that time, Russia could be considered a country that completed its basic transition agenda and managed to build a market economy based on private ownership, even if several distortions and imperfections continued to exist.

The turning point came in 2003 with politically motivated crackdown on the largest Russian private company, Yukos (its assets were subsequently taken over by the state-owned Rosneft). As result, the private sector share of GDP decreased from 70 to 65 percent between 2004 and 2005.   Depth of the Russian Recession

Russian Recession

Positive Wealth?

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At a panel moderated by the Harvard Business Review at the Washington National Cathedral, Christine Lagarde tackles inequality.

Moderator Idi Ignatius, editor of the Harvard Business Review, posed this question: “Is Christian faith incompatible with vast wealth?”

Lagarde, who grew up Catholic in France, parried the question with aplomb.
“I think it’s how you use it, what you do with it, and what purpose you give to your life as a result which really matters.”

Those words echoed her June speech before a Catholic conference in Belgium in which she asserted, “It is not immoral to enjoy one’s financial success.”
Summers, who’s Jewish, drew laughs when he observed, “I hope this is the last time I’m asked to opine on Christian morality,” then agreed with Lagarde:

The discussion of public morality, sustainable economic growth and government policies that encourage redistribution of wealth included themes touched on by Pope Francis during his apostolic visit to the United States in September.

The pope, in fact, was the only religious leader quoted during the evening. Ignatius referred to the pope’s speech in Bolivia July 8: “Let us say ‘no’ to an economy of exclusion and inequality, where money rules, rather than service. That economy kills. That economy excludes. That economy destroys Mother Earth.”

The Rev. Gary Hall, dean of the cathedral, reached back farther in his introduction to the program, quoting from the pope’s apostolic exhortation of 2013, in which he called capitalism “a new tyranny” and called on political leaders to address income inequality.

Lagarde avoided specific observations on the morality of income inequality. “As far as the IMF is concerned,” she said, “we’re not taking a political stand; we’re not taking an ideological stand.”  Instead, she said, “we have to ask ourselves, is that good for financial stability? Is that good for sustainable growth?”
She concluded that “excessive inequality is not good for sustainable growth,” adding, “We need to have a moral compass” in government economic policies.

Inequality

Larry Summers Has Trouble Getting Thru the Eye of a Needle

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Larry Summers lobbying for a position in a potential Clinton administration and Christine Lagarde, the real deal among women in finance, address a camel passing through the eye of a needle.

The usually loquacious former U.S. Treasury Secretary Larry Summers is rarely a man at a loss for words, especially on economic matters. But he was stumped at a recent event—at least for a moment.

The Harvard University economist was asked to expound on Matthew 19:24, the Bible passage that says it’s harder for a rich man to enter heaven than a camel to pass through the eye of a needle.

In the airy halls of the National Cathedral, Mr. Summers and International Monetary Fund Managing Director Christine Lagarde this week were exploring “Capitalism and Morality: The Inequality Challenge” with Adi Ignatius, the editor-in-chief of Harvard Business Review.

Mr. Ignatius asked the two economic policy leaders whether the Christian faith is compatible with having vast wealth.

Ms. Lagarde quickly tapped her catechism of old, pointing to the “parable of the talents,” a biblical lesson on the use of personal resources. “It’s how you use it, what you do with it, and what purpose you give to your life as a result which really matters,” the head of the world’s emergency lender said.

All eyes in the cathedral turned to the man who had largely dominated the panel discussion for the previous hour. Mr. Summers had adopted a puzzled pose not too dissimilar from Rodin’s “The Thinker.”

“I really don’t know what to say,” he said.

“I’ve been on a lot of panels in my life–a lot of panels–and I have to say as a Jewish economics professor, this is the first occasion, and I frankly hope the last, on which I have been asked to opine on Christian morality.”

A few more “umms” later, however, Mr. Summers was able to regain his composure and his words. He proceeded to walk the congregation through Henry Ford’s revolution of the U.S. economic geography, iPad education, higher taxation on the wealthy and philanthropy.

Entrepreneur Alert: Opportunities in the Opening the World

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New countries in the international decision-making mix will impact entrepreneurial opportunities across the globe.

Anne-Marie Slaughter writes:  Extending the list of countries involved in international policy meetings is crucial.  The other countries have plenty of motivation – and plenty to offer.

India – as well as Pakistan – has a great deal to gain from strengthening Southwest Asian trade, energy, and investment ties. Since the signing of the Iran nuclear deal, India has been contemplating renewing the plan for an Iran-Pakistan-India gas pipeline, with the participation of China and Russia. But that will be impossible without a settlement in Syria and a decision by Iran to stop supporting Hezbollah.

India has a strong relationship with Iran, underpinned by long-standing cultural, social, political, and economic ties, with India now funding an overhaul of the Iranian port of Chabahar, which will give it direct access to Afghanistan. This places India in a strong position to push Iran to put pressure on Assad. Likewise, India can leverage its relationship with Russia – it remains a major importer of Russian arms – to help drive progress.

Japan’s potential contribution also involves Iran, with which Japan has lately been pursuing a closer relationship – not least because Japan needs Iranian oil and gas. Earlier this month in Tehran, the Japanese and Iranian foreign ministers agreed to begin negotiations on a bilateral investment treaty. Japan also wants to speed up implementation of the Iran nuclear deal, so that it can take advantage of the business opportunities that will result when economic sanctions on the Islamic Republic are lifted.

But if Iran is truly to rejoin the international community, it must play a constructive role in its region. Japan, which now aspires to enhance its own role on the world stage, must not shy away from making that clear. A bonus here is that Japanese and Indian interest in the Syrian peace process could spur China to play an active role in reaching, rather than blocking, a solution.

Brazil, despite confronting plenty of domestic problems right now, is also in a position to help. Not only does it have substantial ties with Russia; it is also linked to Turkey, exemplified by the two countries’ 2010 effort to broker a deal with Iran over its nuclear program.

Moreover, in 2011, Brazil put forward a concept paper at the UN outlining how countries seeking to implement the “responsibility to protect” doctrine should behave. With the Syrian government – through its murder of tens of thousands of civilians with barrel bombs and poison gas – having more than fulfilled the criteria for triggering the international community’s obligation to intervene, Brazil could suggest what an intervention that reflected the principle of “responsibility while protecting” might look like.

Finally, Egypt – a perennial candidate for a permanent or rotating African seat in a reformed Security Council – has important relationships throughout the region, particularly with Saudi Arabia and other Gulf countries that are directly supporting some Syrian opposition groups. The government of Egyptian President Abdel Fattah el-Sisi, who has emphasized the need for a comprehensive political settlement, is tacitly supporting Assad, but is also deeply concerned about the Islamic State. Egyptian diplomats are thus excellent candidates to exert pressure for compromise.

Greeting Iran

 

China Ends One-Child Policy

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China has decided to end its decades-long one-child policy.  How will this impact women’s careers?  The one-child policy is often cited as a reason that women are equal to men in China’s financial industry.

Couples will now be allowed to have two children, it said, citing a statement from the Communist Party.

The controversial policy was introduced nationally in 1979, to slow the population growth rate.

It is estimated to have prevented about 400 million births. However concerns at China’s ageing population led to pressure for change.

Couples who violated the one-child policy faced a variety of punishments, from fines and the loss of employment to forced abortions.

Over time, the policy has been relaxed in some provinces, as demographers and sociologists raised concerns about rising social costs and falling worker numbers.

The Communist Party began formally relaxing national rules two years ago, allowing couples in which at least one of the pair is an only child to have a second child.

  • Introduced in 1979, the policy meant that many Chinese citizens – around a third, China claimed in 2007 – could not have a second child without incurring a fine
  • In rural areas, families were allowed to have two children if the first was a girl
  • Other exceptions included ethnic minorities and – since 2013 – couples where at least one was a single child
  • Campaigners say the policy led to forced abortions, female infanticide, and the under-reporting of female births
  • It was also implicated as a cause of China’s gender imbalance

The decision to allow families to have two children was designed “to improve the balanced development of population” and to deal with an aging population.  Currently about 30% of China’s population is over the age of 50.

Correspondents say that despite the relaxation of the rules, many couples may opt to only have one child, as one-child families have become the social norm.

“As long as the quotas and system of surveillance remains, women still do not enjoy reproductive rights,” Maya Wang of Human Rights Watch told AFP.

The announcement comes on the final day of a summit of the Chinese Communist Party’s policy-making Central Committee, known as the fifth plenum.

The party is also set to announce growth targets and its next five year plan.

China's One Child Policy

Entrepreneur Alert: Saving Syria and Diversity

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Barbara Slaver writes:   Outgoing UN High Commissioner for Refugees Antonio Guterres made an impassioned plea Oct. 27 for a political resolution to the Syrian civil war that includes key stakeholders Russia and Iran, and he expressed fears about the imminent disappearance of most Christians from the Middle East.

Guterres — a former Portuguese prime minister — also harshly criticized the European Union for its failure to respond effectively to the exodus of asylum seekers, primarily from Syria.

Noting that the EU countries have a total population of 550 million and that those seeking refuge there this year number about 700,000, Guterres said, “We are talking of a problem that could be managed … but what happened was total chaos.” Europe, he said, “has to [get] its act together.”

 

 

Guterres also called for countries around the world to accept more Syrian refugees, noting that Brazil has recently offered to take 20,000.

 

Guterres criticized the notion that terrorists could take advantage of the refugee resettlement process to infiltrate the United States. “The most stupid thing would be to apply for resettlement in the US,” he said, given the level of scrutiny and background checks.

As for Europe, Guterres said would-be terrorists “will fly … they will come in a much more comfortable way” rather than risk their lives in the hands of human smugglers on rubber dinghies and on long treks through the European countryside.   Ethnic Cleansing in the Middle East

The Last Christian

Horn of Africa Drying?

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A new study finds that the Horn of Africa has become progressively drier over the past century and that it is drying at a rate that is both unusual in the context of the past 2,000 years and in step with human-influenced warming. The study also projects that the drying will continue as the region gets warmer. If the researchers are right, the trend could exacerbate tensions in one of the most unstable regions in the world.

“Right now, aid groups are expecting a wetter, greener future for the Horn of Africa, but our findings show that the exact opposite is occurring. The region is drying and will continue to do so with rising carbon emissions,” said study coauthor Peter deMenocal, who heads the Center for Climate and Life at Columbia University’s Lamont-Doherty Earth Observatory.

The study used a sediment core that deMenocal and his colleagues extracted from the pirate-ridden Gulf of Aden. They used the core to infer past changes in temperature and aridity. By pairing the paleoclimate record from the core with 20th century observations, the researchers determined that drying will probably continue across Somalia, Djibouti and Ethiopia. That contradicts more optimistic models that have suggested future warming might bring rainier weather patterns that could benefit the region.

Global-scale models used to predict future changes under global warming suggest that the region should become wetter, primarily during the “short rains” season from September to November. But the new study suggests that those gains may be offset by declining rainfall during the “long rains” season from March to May, on which the region’s rain-fed agriculture relies.)

The outcome has serious implications for a region that has been racked with political instability and violence as it has dried. The Horn of Africa has suffered deadly droughts every few years in recent decades, and with them humanitarian crises as famine and violence spread. It has also become one of the most unstable regions in the world. In Somalia, as the political situation deteriorated amid droughts of the 1980s and `90s, hundreds of thousands of refugees fled the country, and pirates began raiding ships off the coast.

That sediment core, which dates back about 40,000 years, has already provided new insights into Africa’s climate. In a 2013 study analyzing parts of the core, Tierney and deMenocal showed that the Sahara, which once bloomed with regular rainfall, suddenly dried out over the span of a century or two, during a warm period some 5,000 years ago—not more gradually, as many researchers had assumed. It provided evidence that climate shifts can happen quite suddenly, even if the forces driving them are gradual.

The new study uses isotopes from leaf waxes found in the sediment sample to compare rates of drying over the past 2,000 years. Plants reflect the environment that sustains them. When the climate is drier, leaf waxes are more enriched with deuterium, or heavy hydrogen isotopes; leaf waxes from wetter climates reflect the more abundant rainfall through the presence of the normal hydrogen isotopes. The researchers found an increasing shift toward heavy hydrogen in the last century as the climate, which had experienced a wet period during the Little Ice Age (1450—1850 AD), dried out.

The findings suggest that climate modeling, frequently done at a global scale, would benefit from region-specific studies with higher resolution results in high-impact areas such as the Horn of Africa,

Horn of Africa Drying

 

Refugees, Turkey and the EU

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Turkey is often the refugees gateway to the EU.  How is this being negotiated by EU leaders?

Durukan Kuzu writes:  The EU has struck a deal with Turkey designed to stem the flow of Syrian refugees into Europe. It offers Turkey a multi-billion euro aid package to handle refugees and take back refugees who entered the EU from Turkish territory, eventually giving them a legal right to settle and work.

In return, the halted talks on advancing Turkey’s EU membership bid will be jump-started, and the EU will accelerate visa-free access for Turks who want to visit the Schengen area.

The deal certainly looks like a win-win scenario for president Recep Tayyip Erdoğan and his ever-pragmatic counterparts in Europe. Many of them fervently blocked Turkey’s accession to the EU only a few years ago after deciding Turkey’s human rights record was not befitting an EU member state. Now, with the prospect of relief from the refugee crisis, those concerns seem to have been shelved.

For the Turkish government, the deal is a chance to regain popularity, having faced significant criticism over its handling of the October 10 suicide bombing in Ankara that killed at least 99 people. With just weeks to go before a national election, the appeal is obvious.

If the looser visa regulations are realised, Turkey will effectively be buying its way into the EU. That would probably swing the election for Erdoğan’s party, the AKP.

While the deal offers a certain amount of respite for Europe, it’s highly unlikely the money on offer will be enough to make it feasible for Turkey to take hundreds of thousands more refugees. Worse still, making it legal for millions of Syrians to settle and work in Turkey might only create further turmoil.

As a route into Europe, Turkey is a particularly important player in the migration crisis. try.  Turkey has opened its borders and granted Syrians free health services and permission to stay for unlimited duration. The trouble is, they are desperate to leave.

Life is also difficult for them because of their legal status. Turkey is a signatory to theGeneva convention but has maintained what is called a geographical limitation, which grants asylum rights only to Europeans.

Syrians are allowed to stay in Turkey for an unlimited time – but as as guests, not as refugees. They don’t have guaranteed rights to social security, health services, education or employment. All this is currently offered to them as a gesture of goodwill on a temporary basis, but this state of uncertainty drives them to seek asylum in Europe. Most Syrians know they cannot go home but they don’t want to be a guest in Turkey for the rest of their lives.

Millions of homeless Syrians in Turkey work illegally for below minimum wage and without any social security, driving Turks out of the labour market. In early 2015, Turkey decided to issue temporary work permits to some of its Syrian refugees to clamp down on black market employment but most don’t have their passports to present to officials so they cannot be given a temporary residency permit. Those who do not hold a residency permit cannot apply for a work permit either.

Turkey is already suffering from a rising unemployment rate, and Turks are not happy about losing their jobs to Syrians.  Many Turks apparently believe that Syrians who originally escaped from the Assad regime are actually quite sympathetic towards Erdoğan. Popular anger at the Turkish president is only increasing, and could have implications for his supporters – or even people perceived to support him.

The EU is effectively backing the AKP government, despite previously accusing it of violating the most fundamental human rights. As such, the EU countries should not be surprised if they soon have to cope with hundreds of thousands more illegal refugees trying to leave Turkey. These might even be Turks and Kurds escaping the authoritarian rule of the AKP government. European countries might be enthusiastic about sending Syrians to Turkey, but are they ready for millions of Turks to head in their direction as a result?

Syrian Refugees

Cut Imports of Cheap Chinese Goods. Cut CO2 Emissions?

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The Rocky road to globalization

China relies on coal for much of its power, goods produced there can have a dirtier carbon footprint than those produced elsewhere.

Christopher Intagliata writes: China emits over a quarter of the world’s carbon–some 10 billion tons. That’s twice what we pump out here in the U.S. But before the finger-wagging begins, consider that a quarter of China’s CO2 emissions come from making exports–in other words, stuff for countries like us. “So we’re talking about five to six percent of global emissions are in these goods being exported from China. And that may not sound like a lot, but five or six percent of 35 billion tons is a lot of CO2.”

Steve Davis is a climate energy scientist at the University of California Irvine. He and his colleagues wanted to see whether outsourcing manufacturing to China–which happens to be good for our wallets–is also good for the planet.

Because China is so reliant on coal for their energy, and because also they use less advanced technologies and processes in some cases, there’s a lot more CO2 being produced than if those same goods were made in developed countries.” And that’s especially true in certain areas of China, like the provinces of Yunnan or Guizhou. “For every dollar of stuff being exported from those provinces, you’re getting vastly more CO2.”

China does plan to launch a cap-and-trade system in 2017, which might iron out some of these regional inefficiencies. But the real issue–is our consumer culture. “At the end of the day, consumption in and of itself is driving a lot of the problems we’re having environmentally. Both climate change and others.” So we could either buy less–which seems unlikely–or, to avoid stuff with a dirty carbon past, this might just be one more motive to go local.

CO2 Emissions