The Rocky Road to Globalization

The Economist reports:  When  the economics textbooks of the future are written, America’s ban on crude-oil exports will be a fine example of the perverse effects of protectionism. Similarly, a new decision by Barack Obama’s administration to allow American firms to sell some oil to Mexico will earn an honorable footnote in the story of the ban’s demise.

Geology, engineering, economics and politics are all at stake. In the fuel-hungry 1970s, America banned crude-oil exports in an effort to stabilize domestic prices. The country’s oil refineries are still configured to deal with the heavy, sour crude oil it used to import. Now, thanks to the shale revolution, American oil imports have plunged just as production has soared. Oil from shale is another kind of crude, light and sweet. It is not ideal for America’s refineries, which must make costly tweaks to deal with it. But the ban means this oil can’t be exported, either.

That archaic rule now keeps the price of America’s domestically produced oil, signalled by the West Texas Intermediate (WTI) benchmark, at a hefty discount—currently over $5 per barrel—to the world price. That has become particularly painful since OPEC’s decision in November to stop trying to curb production, which has sent prices tumbling. American oilmen are fuming: their potential export markets are being sacrificed, they argue, to the interests of America’s petrochemical industry, which enjoys artificially cheap feedstock thanks to the ban.

Others would benefit too.  Free trade in crude would boost American output, investment, jobs, pay, profits and tax revenues—and GDP by $86 billion.  With American crude bringing prices down, most likely the cost of fuel would fall a bit—for Americans, and also for other consumers.

The administration’s decision will test this theory. Mexico’s national oil company, Pemex, has long wanted to send its heavy crude to America, and import the same number of barrels of lighter American oil.  The Commerce Department has now decided to treat Mexico as part of the domestic American market, as far as oil is concerned.

The extent of the exemption is still unclear. But this is not the first breach of the ban. The definition of what constitutes crude oil owes more to art (and bureaucratic fiat) than science. What is heavy crude?  What is light?

The ban undermines America’s moral authority at the World Trade Organisation, where the administration has berated China, for example, for imposing export bans on scarce minerals. Higher American crude-oil exports would also hurt petrostates such as Russia and Iran.

The details will still be tricky. America’s cossetted crude-oil consumers would be willing to see an end to artificially cheap raw materials in exchange for other concessions. These could include laxer environmental rules, or a change in an even more archaic law, the Jones Act, which bans foreign ships from carrying cargo between American ports. This law delights ship-owners and unions, but imposes a hefty cost on anyone wanting to send a tanker from, say, a refinery on the Gulf coast to a port in the north-east.

Such a wholesale solution to this elderly quirk in the world oil market may still be some time off. But by lowering trade barriers for Mexican oil, the Obama administration will make America richer, improve the functioning of the world oil market and highlight the potential benefits of still more dramatic reforms. 

William D. Cohan writes:  On May 27, in her first major prosecutorial act as the new U.S. attorney general, Loretta Lynch unsealed a 47-count indictment against nine FIFA officials and another five corporate executives. She was passionate about their wrongdoing.

Lost in the hoopla surrounding the event was a depressing fact. Lynch and her predecessor, Eric Holder, appear to have turned the page on a more relevant vein of wrongdoing: the profligate and dishonest behavior of Wall Street bankers, traders, and executives in the years leading up to the 2008 financial crisis. How we arrived at a place where Wall Street misdeeds go virtually unpunished while soccer executives in Switzerland get arrested is murky at best.

Since 2009, 49 financial institutions have paid various government entities and private plaintiffs nearly $190 billion in fines and settlements, according to an analysis by the investment bank Keefe, Bruyette & Woods. That may seem like a big number, but the money has come from shareholders, not individual bankers. In early 2014, just weeks after Jamie Dimon, the CEO of JPMorgan Chase, settled out of court with the Justice Department, the bank’s board of directors gave him a 74 percent raise, bringing his salary to $20 million.

After the savings-and-loan crisis of the 1980s, more than 1,000 bankers were jailed.
The more meaningful number is how many Wall Street executives have gone to jail for playing a part in the crisis. That number is one. (Kareem Serageldin, a senior trader at Credit Suisse, is serving a 30-month sentence for inflating the value of mortgage bonds in his trading portfolio, allowing them to appear more valuable than they really were.)

Do:Wall Street bankers make it their daily business to figure out ways to abide by the letter of the law while violating its spirit. Much of the behavior that led to the crisis involved recklessness and poor judgment, not fraud.

Any narrative of how we got to this point has to start with the so-called Holder Doctrine, a June 1999 memorandum written by the then–deputy attorney general warning of the dangers of prosecuting big banks—a variant of the “too big to fail” argument that has since become so familiar.

A serious national investigation of the practices of Wall Street’s pre-crash mortgage-banking activities did not begin in earnest until mid-2012—at least five years after the worst of the bad behavior had occurred—following President Obama’s call to action in the State of the Union address that January and the issuance of subpoenas to Wall Street’s biggest banks. The five-year statute of limitations for ordinary criminal fraud charges had passed while the Justice Department dithered, but civil prosecution of banks and individual bankers, which has a 10-year statute of limitations under a particular banking law, was still a possibility. Holder gave his various U.S. attorneys around the country responsibility for investigating.

In November 2013, as part of a deal that kept Wagner’s complaint from becoming public—and the specifics of Fleischmann’s revelations from being widely disseminated—JPMorgan Chase agreed to a $13 billion settlement with various federal and state agencies, then the largest of its kind. Holder heralded the settlement as an important moment of accountability for Wall Street. But extracting large settlements paid with shareholders’ money is not the same as bringing alleged wrongdoers to justice.

The Justice Department reached agreements with other Wall Street banks, among them Citigroup and Bank of America, using a similar playbook.

In February, shortly before Lynch succeeded him, Holder gave federal attorneys and their staffs a deadline: they had 90 days to bring any new prosecutions against individual bankers, traders, or executives on Wall Street before probes against them would be closed. That deadline came and went in May.

Daniel Atlmann writes: The People’s Bank of China, led by Governor Zhou Xiaochuan, has been slowly liberalizing currency and capital markets for several years now. Last week, though, it made a monetary policy move that surprised people around the world. A week later, those same people can’t seem to agree on what it means.

The central bank has long allowed the exchange rate of the dollar and the renminbi, China’s currency, to move within a band that has gotten slightly wider from year to year, until reaching its current range of 2 percent on either side of a fixed opening rate. Every morning when trading began, the midpoint of the new band would be similar to the closing rate from the previous day.

Some China hands pointed out that Beijing has been trying to gussy up the renminbi in advance of the International Monetary Fund’s (IMF) decision in November on whether to include the yuan in the basket that forms its own distinct currency, the Special Drawing Right. Inclusion would make little difference to China’s economy in itself, but it would be a stamp of approval that the renminbi was on its way to being “convertible” — freely usable and tradable around the world.

The only way to know the Chinese central bank’s true intentions is to find out exactly what it was up to last week. If the bank was injecting renminbi into the market in order to increase its supply, then the fall in the exchange rate was probably deliberate. But if the bank was sucking renminbi out of the market all along in order to support the currency — and then stopped last week — then the dip was just the currency finding its fair value. In that case, any boost for exporters was just a convenient bonus.

Pundits can claim all the expertise they want, but the answer still has to come from the mouth of a Chinese central bank official. And the bank is sticking with the market forces story. Bank officials say the currency isn’t undervalued and is unlikely to drop further.

This episode is likely to be a footnote in Chinese economic history. The overall trends are more liberalization of currency and capital flows, and more focus on domestic demand rather than exports.

Still plenty of people are still betting on short-term currency moves, and stock markets around the world are reacting to the prospect of more globally competitive Chinese exports.

Bill Emmott writes:  Something has gone badly wrong in the emerging economies that were supposed to be shaping, even dominating, the future of the world. The search for culprits is under way: commodity prices, fracking, US interest rates, El Nino, China, these and others lead the field. But the answer is simpler and more traditional. It is politics.

Look at Brazil. There an economy once tipped for ever-lasting boom has barely grown for more than two years, and is currently shrinking. Falling prices for its commodity exports haven’t helped, but Brazil’s economy was supposed to be about far more than just harvests and extractive industries.

Or look at Indonesia. That economy is still expanding, but at a rate – 4.7% annually in the latest quarter – that is disappointing in terms both of previous expectations and of population growth. The same can be said of Turkey, where growth has sagged to 2.3% in the latest quarter – which at least beats population growth but is meager compared with the country’s go-go years of 2010 and 2011, when it expanded by 9%. Or South Africa, where economic progress has constantly been too slow, whether in boom years for gold and other resources or busts, to make any real dent in poverty levels.

Then there is China itself, whose slowdown is everybody else’s favorite explanation for their own sluggishness. There, private economists are back enjoying their favorite pastime during periods of economic stress, namely trying to construct their own indices for GDP growth as at such times they do not believe the official statistics. Officially, Chinese growth is rock-steady at 7% per year, which happens to be the government’s declared target, but private economists’ estimates mostly range between 4% and 6%.  Slowdown in Emerging Economies

Yanis Varoufakis writes: Greece’s public debt has been put back on Europe’s agenda. Indeed, this was perhaps the Greek government’s main achievement during its agonizing five-month standoff with its creditors.

What does all of this mean for the eurozone as a whole.

The eurozone is unique among currency areas: Its central bank lacks a state to support its decisions, while its member states lack a central bank to support them in difficult times. Europe’s leaders have tried to fill this institutional lacuna with complex, non-credible rules that often fail to bind, and that, despite this failure, end up suffocating member states in need.

The problem with debt restructuring in the eurozone is that it is essential and, at the same time, inconsistent with the implicit constitution underpinning the monetary union. When economics clashes with an institution’s rules, policymakers must either find creative ways to amend the rules or watch their creation collapse.

The ECB could announce tomorrow morning that, henceforth, it will undertake a debt-conversion program for any member state that wishes to participate. The ECB will service (as opposed to purchase) a portion of every maturing government bond corresponding to the percentage of the member state’s public debt that is allowed by the Maastricht rules. Thus, in the case of member states with debt-to-GDP ratios of, say, 120% and 90%, the ECB would service, respectively, 50% and 66.7% of every maturing government bond.

To fund these redemptions on behalf of some member states, the ECB would issue bonds in its own name, guaranteed solely by the ECB, but repaid, in full, by the member state. Upon the issue of such an ECB bond, the ECB would simultaneously open a debit account for the member state on whose behalf it issued the bond.

The member state would then be legally obliged to make deposits into that account to cover the ECB bonds’ coupons and principal. Moreover, the member state’s liability to the ECB would enjoy super-seniority status and be insured by the European Stability Mechanism against the risk of a hard default.

Such a debt-conversion program would offer five benefits. For starters, it would involve no debt monetization. Thus, it would run no risk of inflating asset price bubbles.

Second, the program would cause a large drop in the eurozone’s aggregate interest payments.

Third, Germany’s long-term interest rates would be unaffected, because Germany would neither be guaranteeing the debt-conversion scheme nor backing the ECB’s bond issues.

Fourth, the spirit of the Maastricht rule on public debt would be reinforced, and moral hazard would be reduced.

Finally, GDP-indexed bonds and other tools for dealing sensibly with unsustainable debt could be applied exclusively to member states’ debt not covered by the program and in line with international best practices for sovereign-debt management.

There are ways in which debt could be sensibly restructured without any cost to taxpayers and in a manner that brings Europeans closer together. Taking the step proposes here  would help to heal Europe’s wounds and clear the ground for the debate that the European Union needs about the kind of political union that Europeans deserve.

Arvind Subramanian writes:  Greece was offered two stark choices: Leave the eurozone without financing, or remain and receive support at the price of further austerity.

The benefits of Grexit would have included a massive devaluation, which would have restored some dynamism to what was once a fast-growing economy. But the costs were terrifying. The government would have had to default, the banks would have been ruined, and both would have struggled for years to regain the trust of financial markets. As a result, interest rates would have remained high for a long time to come, impeding efforts to restore growth. Is it any wonder that the Greek government shrank from this horror and chose the “safe” option of austerity?

The IMF could have offered the third option of an orderly exit. Greece should have been told that it could reap the benefits of devaluation, while the international community would act to minimize the attendant costs.

The  IMF would have needed to offer generous financing, covering the country’s import requirements for, say, two years while providing the liquidity to manage the transition to a new currency. Of course, this would have increased the IMF’s already-large exposure to Greece; but this would have been a worthwhile trade-off, because it would have served a strategy that would have had a much better chance of success.

The reason why an assisted Grexit was never offered seems clear: Greece’s European creditors were vehemently opposed to the idea. But it is not clear that the IMF should have placed great weight on these concerns.

Ccreditor countries have been concerned about the financial costs to member governments that have lent to Greece. But Latin America in the 1980s showed that creditor countries stand a better chance of being repaid (in expected-value terms) when the debtor countries are actually able to grow.

From an Asian perspective, by defying its European shareholders, the IMF would have gone a long way toward heralding the emergence of a new institution: a truly International Monetary Fund, in place of today’s Euro-Atlantic Monetary Fund.

All is not lost. If the current strategy fails, the third option of assisted Grexit remains available. The IMF should plan for it. The Greek people deserve some real choices in the near future.

IMF chief Christine Lagarde on Friday welcomed Europe’s decision to agree a new 86-billion-euro bailout for Greece, but warned that Athens’ debt is still too high.

“I remain firmly of the view that Greece’s debt has become unsustainable and that Greece cannot restore debt sustainability solely through actions on its own,” she said.

And, while Lagarde called the agreement hammered out in Brussels “a very important step forward,” she warned it was too soon to say whether the IMF would provide funds to take part in the bailout.

“We look forward to working closely with Greece and its European partners in the coming months to put in place all the elements needed for me to recommend to the fund’s executive board to consider further financial support for Greece,” she said.

For this to be the case, she said, Greece’s European creditors would themselves have to provide “significant debt relief, well beyond what has been considered so far.”

Elliot Wilson write: In a factory building wind turbines in China, workers have been given the day off.  The factory, has not run at close to full capacity for a year. 

The company’s woes are a microcosm of the daunting challenges that face China’s stuttering economy, the world’s second largest after the United States. This week China devalued its currency by 3.6 per cent in a dramatic bid to encourage exports.  Even the threat of a significant slowdown in China’s economy could be enough to send the rest of the world tumbling back into recession. 

From the polluted central metropolis of Zhengzhou, to Shenyang in the rustbelt northeast, the overwhelming sense is one of pessimism and urban decay. Idle cranes and vacant building sites dot the landscape. The ghost towns of legend — such as Ordos City in Inner Mongolia — are all too real, and remain a silent, cautionary reminder of the perils of engineered growth. 

Over the past year, every key indicator has begun pointing to bad times ahead. Electricity consumption, usually the most reliable single gauge of economic health in the mainland, expanded at the slowest rate in three decades in the year to June. Because of falling Chinese industrial demand, global commodity prices have slumped, threatening growth in producer countries from Australia to Zambia. Chinese house prices have stagnated, while the last time rail-freight volumes were higher than the year before was last September. Last week brought yet more bad news, with exports sliding 8.3 per cent in July from last year’s figures, imports falling for the ninth month in a row, and data pointing to further weakness in industrial output, capital investment and retail spending. China’s Slowdown