Archive for January, 2010

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on financial security

Sunday, January 31st, 2010

[M]y father worked for a bank, the Hongkong and Shanghai Banking Corporation, … in Asia, except for a two-year spell in Hamburg where I was born. ….

He came to hate his job but he stayed at it for 30 years. …. He made the bargain many people make, of trading their days for financial security. The happy ending was supposed to come when he took early retirement, aged 53. He was ready to live on the proceeds of the generous bank pension scheme he had helped to set up. Instead, with horrible suddenness, he died of a heart attack, aged 57. That taught me more than any words ever could about the need to live for today, and about the profound truth of Seamus Heaney’s elegy to Robert Lowell: “The way we are living/ timorous or bold,/ will have been our life.”

It would be too glib, not a hundred per cent true, to say that my father’s career as a banker was what made me a writer. But it would be slightly true, and it was certainly the case that his work as a banker made me see that the trade-offs people make between their work and their lives are often badly skewed. Security is a complicated idea, and one with an immense potential to trap us – that was one lesson I learnt from my father.

John Lanchester, “Can money set you free?”. Financial Times, 30 January 2010.

An ungated version of this column is available here or here.

The essay is interesting throughout. Here is another excerpt:

[T]he arrival of the e-book could make the book business resemble the music business, if customers believe that books should be free. That would be the end of the world for serious writers, who are not performers and who can’t earn a living giving concerts and selling T-shirts. Nobody knows how this is going to play out.

Journalist John Lanchester (1962-) lives in London. He is author of three novels and a memoir (Family Romance, 2007). His latest book is about the financial crisis. In the UK it is titled Whoops!: Why Everyone Owes Everyone and No One Can Pay (Allen Lane, 2010), and in the US  I.O.U.: Why Everyone Owes Everyone and No One Can Pay (Simon & Schuster, 2010).

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Paul Volcker on ‘too big to fail’

Sunday, January 31st, 2010

Central banks and governments have extended the “safety net” of deposit insurance and lender of last resort facilities “to support investment banks, mortgage providers and the world’s largest insurance company”. These non-banks receive massive taxpayer support, but most escape the tight regulation and supervision to which commercial banks are subject.

Adam Smith more than 200 years ago advocated keeping banks small. Then an individual failure would not be so destructive for the economy. That approach does not really seem feasible in today’s world, not given the size of businesses, the substantial investment required in technology and the national and international reach required.

Instead, governments have long provided commercial banks with the public “safety net.” The implied moral hazard has been balanced by close regulation and supervision. Improved capital requirements and leverage restrictions are now also under consideration in international forums as a key element of reform. …

[As for other capital market institutions, few are] “too big” or “too interconnected” to fail. In fact, sizable numbers … fail or voluntarily cease business in troubled times with no adverse consequences for the viability of markets.

What we do need is protection against the outliers. There are a limited number of investment banks (or perhaps insurance companies or other firms) the failure of which would be so disturbing as to raise concern about a broader market disruption. In such cases, authority by a relevant supervisory agency to limit their capital and leverage would be important, as the president has proposed.

Paul Volcker, “How to Reform Our Financial System”, New York Times, 31 January 2010.

Paul Volcker (1927-) chaired the Federal Reserve under Presidents Jimmy Carter and Ronald Reagan and is now chairman of President Obama’s Economic Recovery Advisory Board. He is providing sensible advice, with international relevance. Government leaders and central bankers everywhere should take note.

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lessons from Canada’s financial sector

Saturday, January 30th, 2010

[A]s the world struggles to figure out what went wrong in 2007 and 2008, not much international attention is being devoted to figuring out what went right in Canada. Canada is the only G7 country to survive the financial crisis without a state bail-out for its financial sector. Two of the world’s 15 most highly valued financial institutions – a list dominated by China – are Canadian and a recent World Economic Forum report rated the Canadian banking system the world’s soundest ….

[So, what explains Canada's success?]

The first argument you are likely to hear when you start asking what made Canada different is cultural. Depending on your degree of fondness for Canucks, this thesis comes down to the notion that Canadians are either too nice or too dull to indulge in the no-holds-barred, plundering capitalism that created such a spectacular boom, and eventual bust, in more aggressive societies.

Chrystia Freeland, “What Toronto can teach New York and London”, Financial Times, 30 January 2010.

Another explanation the columnist offers is that Canada did not join the deregulation bandwagon, but for reasons that may ultimately be cultural. Although “some of Canada’s bankers sang along with this deregulatory chorus”, they did not try very hard to “persuade the government to loosen up”. I am normally suspicious of appeal to cultural differences as an explanation for differences in behaviour, but there may be something to this argument. Canadians are, after all, small ‘c’ conservatives, and famously boring!

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Medicare for all

Friday, January 29th, 2010

A letter to the editor in today’s New York Times:

President Obama’s State of the Union address had a high point when he pledged that anyone with a “better approach that will bring down premiums, bring down the deficit, cover the uninsured, strengthen Medicare for seniors, and stop insurance company abuses, let me know.”

Thank you, Mr. President. The answer is the reform supported by 65 percent of the public and even 59 percent of physicians. It’s remarkably simple, and the nation has already had 44 years of successful experience with it in financing health care for our elderly and the totally disabled.

It is, of course, Medicare-for-all, single-payer, not-for-profit national health insurance. Its superiority lies in excluding profit-seeking insurance companies and Big Pharma from controlling and undermining our health system. This is your answer, Mr. President.

Quentin Young, Chicago, Jan. 28, 2010

This proposal amounts to adopting Canada’s health insurance scheme. The writer is a medical doctor and national coordinator of Physicians for a National Health Program.

Posted in Health Economics | 1 Comment »

retirement pensions for Chinese migrants

Thursday, January 28th, 2010

In the early 2000s, several provinces and cities such as Guangdong, Beijing, Shanghai, and Xiamen started to set up limited social security schemes to cover rural migrant labour. By the end of 2005, about 14 million, out of more than 100 million rural migrant workers, had joined some form of pension schemes…. [A]ll the pension schemes are not potable, and given the high mobility and turnover of migrants in work, one wonders if any migrant will ever be eligible to collect the benefits when they get old.

(All the schemes require migrant workers to have worked for 15 years in a specific city to be eligible for pension.)

Kam Wing Chan, “Internal Labour Migration in China: Trends, Geographical Distribution And Policies”, United Nations Expert Group Meeting, New York, January 2008.

Kam Wing Chan is Professor of Geography at the University of Washington and author of Cities with Invisible Walls: Reinterpreting Urbanization in Post-1949 China (Oxford University Press, 1994).

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a universal age pension for Sri Lanka?

Wednesday, January 27th, 2010

I will take steps to grant a pension to persons over 65 years of age.

Mahinda Rajapaksa, “Manifesto: A bright future”, Sri Lanka Daily News, 12 January 2010.

President Mahinda Rajapaksa has won re-election, defeating his main rival, former military chief Sarath Fonseka. Will he keep his promise of providing a pension to every Sri Lankan from the age of 65? His Election Manifesto provides no details. How large will the pension be? Will it be universal – payable to everyone – or means-tested? Stay tuned.

HT to Charles Knox for the pointer.

For information on the feasibility of such a pension, see L. Willmore and S. Kidd, Tackling Poverty in Old Age: A Universal Pension for Sri Lanka, HelpAge International, London, 2008. Posted at www.ssrn.com.

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Posted in Pensions, Universal Transfers | 1 Comment »

European and US voters

Wednesday, January 27th, 2010

Today European political parties seek office by emphasising their competence rather than their beliefs. In the largest European countries the principal parties resemble each other more than they resemble ostensible counterparts in other states. They are more French, German or British than they are left or right. Britain’s Labour government is more admiring of free markets and globalisation than France’s conservative president and his ministers. ….

Even if economic issues are more central to politics than ever before, argument today is less about the nature of economic systems than about the relative abilities of different politicians to administer a system on whose basic structure all are in agreement. In both Europe and the US, party identities are not now principally defined by economic differences but by questions that always crossed class lines and economic interests – nationalism and cultural identity, social liberalism versus social authoritarianism, and religious affiliation – a list to which we might now add environmental awareness. In the US, more individualist than consensual Europe, these issues arouse passions of an intensity hardly experienced on this side of the Atlantic.

John Kay, “How political ideology found a new world”, Financial Times, 27 January 2010.

The US electorate is without doubt more passionate than that of Europe. It is not by accident that “the president of the US is the most electric political figure of his generation, while the president of Europe is Herman van Rompuy”. “The rise of Sarah Palin”, writes John Kay, “is incomprehensible to most Europeans, not just because they cannot imagine why anyone would vote for her, but because no political figure could arouse that kind of response in Europe”. I would add, thankfully for the Europeans, whose great leaders of the past aroused passions but also produced much pain and suffering.

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Obama moves to the right

Tuesday, January 26th, 2010

A spending freeze? That’s the brilliant response of the Obama team to their first serious political setback? ….

Just like that, Obama has embraced and validated the Republican world-view — and more specifically, he has embraced the policy ideas of the man he defeated in 2008.

Paul Krugman, “Obama Liquidates Himself”, The Conscience of a Liberal, 26 January 2010.

President Obama, in his State of the Union address tomorrow, is expected to call for a three-year freeze in spending on many domestic programmes, and for limiting increases to inflation in subsequent years, to show that he is serious about reducing the budget deficit.

I never did see much difference between McCain and Obama, at least in terms of political views. Their respective VPs, however, were very different.

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name change after 90 years of publication

Tuesday, January 26th, 2010

Is nothing sacred in our internet age? “The Beaver”, a Canadian magazine launched by the Hudson’s Bay Company in 1920, is changing its name to “Canada’s History”. Why? Because web filters at schools and homes often block access to the magazine. In 1920, the name was chosen to celebrate the 250th anniversary of the Hudson’s Bay Company and the fur trade that led to the early exploration of Canada. The term “beaver” has since become slang for women’s genitals, so the current issue – February/March 2010 – will be the last with the name “The Beaver”.

For more information, see Ian Austen, “Web Filters Cause Name Change for a Magazine”, New York Times, 25 January 2010.

The magazine is now published by Canada’s History Society, and its new name is “Canada’s History”.

TheBeaver

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a solution to the eurozone crisis

Monday, January 25th, 2010

Greece, Portugal, Spain and Italy suffer from high unemployment and severe fiscal problems, but remain trapped in fixed exchange rates of the eurozone. Two British professors have a simple solution: retain the euro for all external payments, but issue non-convertible local currency to be used for all domestic financial transactions except taxes, which would be paid in euros. The result will be a sharp increase in government holdings of euros, and a scarcity of euros in the private sector – hence devaluation of the newly minted local currency. This will produce a reduction (in euros) of wages and prices, boosting competitiveness.


Greece and Portugal have two severe economic problems. These are, first, a fiscal position, deficit and debt ratio verging on the unsustainable, and, second, a serious lack of competitiveness (a real exchange rate which is much too high). Italy and Spain may also soon face a similar precarious situation. These countries’ membership of the eurozone constrains the solution to this joint problem. ….

[T]he road of devaluation that was chosen by the UK to fight the crisis is unavailable in a common currency area. …. So what is to be done? ….

When a subordinate state in a federal monetary union has severe fiscal problems and runs out of money, what does it do? It issues IOUs. …. For example, in Portugal, we could coin a phrase and call such IOUs escudo. Essentially the government passes a decree that states that such escudo IOUs would be acceptable for all internal payments, except tax payments, between Portuguese residents, but not for any external payments between Portuguese residents and foreign residents. All public sector and private sector wage payments shift on to an escudo basis as do interest payments by a Portuguese resident to another resident. Portuguese residents’ deposits and borrowing with Portuguese banks shift to an escudo basis; others remain in euros. ….

All external monetary relationships, including interest payments, remain unchanged. Internally all price/wage relativities, tax rates, etc, remain unchanged. What changes is the relativity between internal and external payments, (all tourist payments remain in euros). Portuguese wages and costs fall relative to their prior level ….

Charles Goodhart and Dimitrios Tsomocos, “The Californian solution for the Club Med”, Financial Times, 25 January 2010.

Charles Goodhart and Dimitrios Tsomocos teach finance at LSE and Oxford University, respectively.

Update: On thinking about this proposal, I came to realize that I do not see how residents could be required to pay taxes in euros – unless the taxes are calculated at the prevaling euro/escudo rate of exchange, which makes pointless the requirement they be paid in euros.

Suppose the escudo/euro exchange rate shoots up from 1:1 to 2:1. VAT (value-added tax) and income taxes would effectively be doubled; a 20% VAT would become a 40% VAT and a 15% income tax rate would become 30%. Ouch!

If citizens are being paid in ‘funny money’, they should also be allowed to pay taxes in funny money. With this change, the scheme would be technically feasible. Whether it would also be politically feasible is another matter.

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