At the Ends of the World: Projects at Remote Locations. By Fabio Teixeira de Melo, PMP
PMI eNews, Nov 06, 2009
We have all heard that the world is getting smaller and smaller. However, some projects challenge that view: namely, those performed at remote locations.
For project management, a remote location is a place where:
Access to resources is more difficult; Both public and private sectors have less presence, or no presence at all; Local communities have little connection with the “civilized world.” Successfully executing a project at these locations requires a specific approach for some of the unique challenges you’ll face. Here are a few suggestions:
Logistics:
You should creatively explore what alternatives are available for supplying materials and consumables, and know the risk for each one. You have to consider natural factors, such as flood and dry seasons and their impact in site access, as well as frozen, blocked and / or dangerous access roads.
Consulting local communities is vital for gaining knowledge on alternatives, potential risks and contingency plans. Keep in mind that it is not only about bringing equipment in: it is about feeding and supporting your site team.
Communication:
Communication depends heavily on wireless phone and internet access. These options facilitate working at remote locations, but they do not always function properly. Between thunderstorms, heavy rain, energy shutdowns and frozen equipment, many things can go wrong.
Communicating through traditional, hard-copy mail is safe and reliable, but takes more time. Consider adding redundancy—exchanging data electronically but also sending hard copies through traditional mail—to the communications management plan, logistics plan and schedule. It can make the difference between taking advantage of wireless communication and suffering from the lack of it.
Local Community:
With very few exceptions, remote locations are inhabited, usually by poor and unassisted communities living in a subsistence economy. They often lack proper authorities, which is an invitation to the actions of drug producers, smugglers and others who interact with the local community. You should consider them as a part of it – in fact, sometimes they even act as the “local authority.”
Base your approach on the core values of respect and honesty. Show interest for the community and try to build trust without interfering in their relationship with potential outlaw groups. For those groups, try to negotiate your relationship in the basis of non-interference, but consider their presence in your risk management: it’s not unheard of for project managers to be kidnapped by local gangs or terror groups.
Social Responsibility:
Your project will probably impact the local community. Hiring its people is a good way to inject money to the local economy, but you have to be cautious as to how many people will be employed and what jobs they will take.
Resist the temptation to hire everybody, since they will have to continue to live after you demobilize. If you train them to work on your project—for example, to operate your bulldozers—when you finish they either will be unemployed or will have to leave the region in search for a job.
Instead, give them insight and training on how to improve and market what they currently produce for their living. Help them get more productive and organized. Your project will certainly bring them closer to “civilization,” and you should help them make that encounter more of an opportunity than a risk.
When you plan for a project at a remote location, don’t associate the challenge with logistics only. Remember that the communications and stakeholder management for these projects have particular requirements, which, if not properly performed, can be as harmful to your project as a natural disaster.
Fabio Teixeira de Melo, PMP, is a Site Manager working for Odebrecht, a Brazilian multinational construction company with projects in over 20 countries. An LI ’04 graduate with more than 15 years of experience in construction project planning and management, he was founder and first President of PMI Pernambuco – Brazil Chapter; participated in the elaboration of the Construction Extension to the PMBOK® Guide, served a 5-year term as DPC SIG Latin America Chair and contributed with articles for the SIG’s newsletter. You can contact him writing a comment to this post.
Saturday, November 7, 2009
A ground-breaking study shows that New York City's calorie labeling law is ineffective
After Calorie Warnings, Diners Order More Calories. By ALLYSIA FINLEY
A ground-breaking study shows that New York City's calorie labeling law is ineffective.
WSJ, Nov 06, 2009
Before food czars get any more punch-happy on their own Kool-Aid, they need to be purged of the illusion that their laws are actually working. Last month, New York University and Yale medical professors published a ground-breaking study, which shows that New York City's law requiring fast food chains to post calories on their menus doesn't reduce their customers' caloric intake.
Lawmakers everywhere should take note. Efforts to require fast food restaurants to post nutritional information on their menus have been gaining ground across the country. Sixteen municipalities including California, Seattle, and Portland have passed laws similar to NYC's, and the Menu Education and Labeling Act, which would impose labeling regulations nationwide, is pending in Congress. The bill would extend the Nutrition Labeling and Education Act of 1990, which requires food manufacturers to include nutritional information on their packaging, to restaurants. We all know how effective that law was. Since 1990, obesity has more than doubled.
Published online in the journal Health Affairs, the NYU and Yale study is noteworthy because it considers the practical significance of food labeling laws. The researchers examined 1,100 restaurant receipts from McDonald's, Wendy's, Burger King and KFC franchises in low income, high-minority neighborhoods where obesity is most prevalent. They found that the poor fast-food customers that the law intended to help weren't affected.
Only half of the customers said they noticed the caloric information, and only about 15% said they used the information. But the researchers' most striking finding was that customers actually ordered more caloric items after the law went into effect than before, despite the fact that nine out of ten customers who reported using the information said they made healthier choices as a result of the law. This disconnect can partly be explained by response bias in which people tell surveyors what they think the surveyors want to hear.
But the problem may also be more complex. It's possible that people who are less educated may actually think they are eating more healthily than they are notwithstanding the calorie numbers staring them in the face. Calories as a measure of food intake (or more precisely, energy consumption and output) may be as foreign to them as the metric system is to many Americans.
The poor are also extremely price sensitive---especially in a bad economy. Give them the choice between a $2 double quarter pounder with cheese and a $5 chicken salad, and they'll make an economically rational decision and order the $2 burger. And with the extra three bucks saved, they'll order a side of fries and a Coke. Why should they care how many calories they're eating if they're getting good value?
Under pressure to subvert the NYU and Yale study, the New York City Health Department last week came out with its own report, which it nicely packaged in a press release and power point presentation (evidently, the Department didn't want to confuse the media with an actual scientific study). Though the Department's results are equivocal, New York City lawmakers are using the data to argue the efficacy of the law.
The Department is boasting that 56% of customers saw the caloric information and that 15% said they used it. But these figures demonstrate the law's failure---not success. Despite the fact that people were readily presented with the nutritional information, 85% of them ignored it.
The lawmakers who enacted the calorie posting regulations succumbed to the fallacy that everyone thinks like them. They probably reasoned that because they would make healthier choices if presented with nutritional information, everyone else would as well. But maybe what consumers actually want is a delicious meal at a low price.
While information is important, even fully informed people won't always act as lawmakers think they should, especially if it's economically irrational. Any public health legislation won't significantly change people's behavior unless it 1) provides proper incentives for people to put their long-term well-being above temporary gratification and 2) takes into account the economic rationality of people's behavior.
Unfortunately, many lawmakers refuse to swallow this inconvenient truth, preferring the taste of their Kool-Aid.
Ms. Finley is Assistant Editor of OpinionJournal.com
A ground-breaking study shows that New York City's calorie labeling law is ineffective.
WSJ, Nov 06, 2009
Before food czars get any more punch-happy on their own Kool-Aid, they need to be purged of the illusion that their laws are actually working. Last month, New York University and Yale medical professors published a ground-breaking study, which shows that New York City's law requiring fast food chains to post calories on their menus doesn't reduce their customers' caloric intake.
Lawmakers everywhere should take note. Efforts to require fast food restaurants to post nutritional information on their menus have been gaining ground across the country. Sixteen municipalities including California, Seattle, and Portland have passed laws similar to NYC's, and the Menu Education and Labeling Act, which would impose labeling regulations nationwide, is pending in Congress. The bill would extend the Nutrition Labeling and Education Act of 1990, which requires food manufacturers to include nutritional information on their packaging, to restaurants. We all know how effective that law was. Since 1990, obesity has more than doubled.
Published online in the journal Health Affairs, the NYU and Yale study is noteworthy because it considers the practical significance of food labeling laws. The researchers examined 1,100 restaurant receipts from McDonald's, Wendy's, Burger King and KFC franchises in low income, high-minority neighborhoods where obesity is most prevalent. They found that the poor fast-food customers that the law intended to help weren't affected.
Only half of the customers said they noticed the caloric information, and only about 15% said they used the information. But the researchers' most striking finding was that customers actually ordered more caloric items after the law went into effect than before, despite the fact that nine out of ten customers who reported using the information said they made healthier choices as a result of the law. This disconnect can partly be explained by response bias in which people tell surveyors what they think the surveyors want to hear.
But the problem may also be more complex. It's possible that people who are less educated may actually think they are eating more healthily than they are notwithstanding the calorie numbers staring them in the face. Calories as a measure of food intake (or more precisely, energy consumption and output) may be as foreign to them as the metric system is to many Americans.
The poor are also extremely price sensitive---especially in a bad economy. Give them the choice between a $2 double quarter pounder with cheese and a $5 chicken salad, and they'll make an economically rational decision and order the $2 burger. And with the extra three bucks saved, they'll order a side of fries and a Coke. Why should they care how many calories they're eating if they're getting good value?
Under pressure to subvert the NYU and Yale study, the New York City Health Department last week came out with its own report, which it nicely packaged in a press release and power point presentation (evidently, the Department didn't want to confuse the media with an actual scientific study). Though the Department's results are equivocal, New York City lawmakers are using the data to argue the efficacy of the law.
The Department is boasting that 56% of customers saw the caloric information and that 15% said they used it. But these figures demonstrate the law's failure---not success. Despite the fact that people were readily presented with the nutritional information, 85% of them ignored it.
The lawmakers who enacted the calorie posting regulations succumbed to the fallacy that everyone thinks like them. They probably reasoned that because they would make healthier choices if presented with nutritional information, everyone else would as well. But maybe what consumers actually want is a delicious meal at a low price.
While information is important, even fully informed people won't always act as lawmakers think they should, especially if it's economically irrational. Any public health legislation won't significantly change people's behavior unless it 1) provides proper incentives for people to put their long-term well-being above temporary gratification and 2) takes into account the economic rationality of people's behavior.
Unfortunately, many lawmakers refuse to swallow this inconvenient truth, preferring the taste of their Kool-Aid.
Ms. Finley is Assistant Editor of OpinionJournal.com
Wednesday, November 4, 2009
When Regulators Fail - 'Systemic risk' is not only for banks
When Regulators Fail. WSJ Editorial
'Systemic risk' is not only for banks.
WSJ, Nov 04, 2009
Financial Services Authority chief Adair Turner has finally stopped attacking bankers for their paychecks and started talking about the real issue—what to do about the banks deemed too-big-to-fail. Unfortunately, he's still worrying too much about how to prevent failure and not enough about how to facilitate it.
In his speech Monday to an international group of central and private bankers, Lord Turner identified three possible approaches to the problem:
• Make failure less likely by increasing capital requirements;
• Make banks smaller or less "systemic" by either narrowing what they can do or making them less interconnected;
• Or, finally, make failure easier by developing bankruptcy procedures or other "resolution" mechanisms for large financial institutions.
Of these, the last is the most important for reducing the moral hazard that did so much to contribute to the financial panic, as Bank of England Governor Mervyn King has persuasively argued. Even before the panic, systemically important banks enjoyed considerable advantages over their less "important" rivals, and many of these advantages were created by or made more acute by government regulation and rules.
As Lord Turner noted Monday, the Basel II standards on bank capital actually allowed large financial firms to hold less capital than their smaller brethren, on the theory that large meant diversified and sophisticated and so less risky. Looking back, this was clearly a crazy policy—but it's worth recalling that it was propagated by the same luminaries who are now proposing to prevent the next crisis by tinkering with the regime that contributed to the last one. At a minimum, this should be an occasion of some humility from the wise men of bank regulation.
We now know that this presumption of safety in size was false. We also know that the costs of being wrong about such things—both for the public fisc and the real economy as a whole—are much greater than was commonly assumed before the panic.
So the price that large banks pay for the privileges of size should be a great deal higher than it was before. Whether banks benefit from the explicit guarantees of deposit insurance or the implicit protection of being too-big-to-fail, or both, governments have a right to demand that banks not ride free on the backs of taxpayers.
But whether it's less leverage, more capital, or restrictions on banking activities, no one should be under any illusion that the same people who failed to detect the last bubble and crash will be able to design a system capable of catching the next one in time. The relative risks of being too lax or too restrictive may be hard to gauge, but either way the odds of getting it wrong are substantial if not overwhelming.
This is why putting the risk of failure back into the system should be the sine qua non of any effort at reform. If regulators around the world get nothing else right, the final backstop has to be bankruptcy and/or dissolution for firms that have earned it.
So it's too bad Lord Turner spent precious little time on this particular question, preferring to ruminate on the relative merits of really narrow banking vs. moderately narrow banking, and how to make capital requirements more countercyclical.
We understand that regulators find it uncomfortable to ponder what should happen when all their best laid plans fail. The bankruptcy of a systemically important bank is, necessarily, also a failure of the regulators who were overseeing it.
'Systemic risk' is not only for banks.
WSJ, Nov 04, 2009
Financial Services Authority chief Adair Turner has finally stopped attacking bankers for their paychecks and started talking about the real issue—what to do about the banks deemed too-big-to-fail. Unfortunately, he's still worrying too much about how to prevent failure and not enough about how to facilitate it.
In his speech Monday to an international group of central and private bankers, Lord Turner identified three possible approaches to the problem:
• Make failure less likely by increasing capital requirements;
• Make banks smaller or less "systemic" by either narrowing what they can do or making them less interconnected;
• Or, finally, make failure easier by developing bankruptcy procedures or other "resolution" mechanisms for large financial institutions.
Of these, the last is the most important for reducing the moral hazard that did so much to contribute to the financial panic, as Bank of England Governor Mervyn King has persuasively argued. Even before the panic, systemically important banks enjoyed considerable advantages over their less "important" rivals, and many of these advantages were created by or made more acute by government regulation and rules.
As Lord Turner noted Monday, the Basel II standards on bank capital actually allowed large financial firms to hold less capital than their smaller brethren, on the theory that large meant diversified and sophisticated and so less risky. Looking back, this was clearly a crazy policy—but it's worth recalling that it was propagated by the same luminaries who are now proposing to prevent the next crisis by tinkering with the regime that contributed to the last one. At a minimum, this should be an occasion of some humility from the wise men of bank regulation.
We now know that this presumption of safety in size was false. We also know that the costs of being wrong about such things—both for the public fisc and the real economy as a whole—are much greater than was commonly assumed before the panic.
So the price that large banks pay for the privileges of size should be a great deal higher than it was before. Whether banks benefit from the explicit guarantees of deposit insurance or the implicit protection of being too-big-to-fail, or both, governments have a right to demand that banks not ride free on the backs of taxpayers.
But whether it's less leverage, more capital, or restrictions on banking activities, no one should be under any illusion that the same people who failed to detect the last bubble and crash will be able to design a system capable of catching the next one in time. The relative risks of being too lax or too restrictive may be hard to gauge, but either way the odds of getting it wrong are substantial if not overwhelming.
This is why putting the risk of failure back into the system should be the sine qua non of any effort at reform. If regulators around the world get nothing else right, the final backstop has to be bankruptcy and/or dissolution for firms that have earned it.
So it's too bad Lord Turner spent precious little time on this particular question, preferring to ruminate on the relative merits of really narrow banking vs. moderately narrow banking, and how to make capital requirements more countercyclical.
We understand that regulators find it uncomfortable to ponder what should happen when all their best laid plans fail. The bankruptcy of a systemically important bank is, necessarily, also a failure of the regulators who were overseeing it.
Tuesday, November 3, 2009
Implementing US Gov't Wildlife Surveillance Project to Detect and Predict Emerging Infectious Diseases
Implementing USAID Wildlife Surveillance Project to Detect and Predict Emerging Infectious Diseases
USAID, November 3, 2009
[There is a collection of articles on this. This is one of them, titled Implementing USAID Wildlife Surveillance Project to Detect and PREDICT Emerging Infectious Diseases, using Predict as an acronym. Other articles are here and here]
Washington, D.C. - The United States Agency for International Development (USAID) Bureau for Global Health is pleased to announce a partnership with UC Davis to monitor for and increase the local capacity in "geographic hot spots" to identify the emergence of new infectious diseases in high-risk wildlife such as bats, rodents, and non-human primates that could pose a major threat to human health. UC Davis leads a coalition of leading experts in wildlife surveillance including Wildlife Conservation Society, Wildlife Trust, The Smithsonian Institute, and Global Viral Forecasting, Inc. This is a five-year cooperative agreement with a ceiling of $75 million.
This project, named PREDICT, is part of the USAID Emerging Pandemic Threats Program - a specialized set of projects that build on the successes of the Agency's 30 years of work in disease surveillance, training and outbreak response. PREDICT will focus on expanding USAID's current monitoring of wild birds for H5N1 influenza to more broadly address the role played by wildlife in spreading of new disease threats.
PREDICT will be active in global hot spots where important wildlife hosts species have significant interaction with domestic animals and high-density human populations. In these regions, the team will focus on detecting disease-causing organisms in wildlife before they lead to human infection or death. Among the 1,461 pathogens recognized to cause diseases in humans, at least 60 percent are of animal origin. Predicting where these new diseases may emerge , and detecting viruses and other pathogens before they spread to people, holds the greatest potential to prevent new pandemics.
PREDICT will be led by Dr. Stephen S. Morse of Columbia University Mailman School of Public Health, a leading emerging disease authority. Other key staff include Dr. Jonna Mazet, the project's Deputy Director; Dr. William Karesh, Senior Technical Advisor; Dr. Peter Daszak, Technical Expert; and Dr. Nathan Wolfe, Technical Expert.
USAID, November 3, 2009
[There is a collection of articles on this. This is one of them, titled Implementing USAID Wildlife Surveillance Project to Detect and PREDICT Emerging Infectious Diseases, using Predict as an acronym. Other articles are here and here]
Washington, D.C. - The United States Agency for International Development (USAID) Bureau for Global Health is pleased to announce a partnership with UC Davis to monitor for and increase the local capacity in "geographic hot spots" to identify the emergence of new infectious diseases in high-risk wildlife such as bats, rodents, and non-human primates that could pose a major threat to human health. UC Davis leads a coalition of leading experts in wildlife surveillance including Wildlife Conservation Society, Wildlife Trust, The Smithsonian Institute, and Global Viral Forecasting, Inc. This is a five-year cooperative agreement with a ceiling of $75 million.
This project, named PREDICT, is part of the USAID Emerging Pandemic Threats Program - a specialized set of projects that build on the successes of the Agency's 30 years of work in disease surveillance, training and outbreak response. PREDICT will focus on expanding USAID's current monitoring of wild birds for H5N1 influenza to more broadly address the role played by wildlife in spreading of new disease threats.
PREDICT will be active in global hot spots where important wildlife hosts species have significant interaction with domestic animals and high-density human populations. In these regions, the team will focus on detecting disease-causing organisms in wildlife before they lead to human infection or death. Among the 1,461 pathogens recognized to cause diseases in humans, at least 60 percent are of animal origin. Predicting where these new diseases may emerge , and detecting viruses and other pathogens before they spread to people, holds the greatest potential to prevent new pandemics.
PREDICT will be led by Dr. Stephen S. Morse of Columbia University Mailman School of Public Health, a leading emerging disease authority. Other key staff include Dr. Jonna Mazet, the project's Deputy Director; Dr. William Karesh, Senior Technical Advisor; Dr. Peter Daszak, Technical Expert; and Dr. Nathan Wolfe, Technical Expert.
America's Natural Gas Revolution - A 'shale gale' of unconventional and abundant U.S. gas is transforming the energy market
America's Natural Gas Revolution. By DANIEL YERGIN AND ROBERT INESON
A 'shale gale' of unconventional and abundant U.S. gas is transforming the energy market.
The biggest energy innovation of the decade is natural gas—more specifically what is called "unconventional" natural gas. Some call it a revolution.
Yet the natural gas revolution has unfolded with no great fanfare, no grand opening ceremony, no ribbon cutting. It just crept up. In 1990, unconventional gas—from shales, coal-bed methane and so-called "tight" formations—was about 10% of total U.S. production. Today it is around 40%, and growing fast, with shale gas by far the biggest part.
The potential of this "shale gale" only really became clear around 2007. In Washington, D.C., the discovery has come later—only in the last few months. Yet it is already changing the national energy dialogue and overall energy outlook in the U.S.—and could change the global natural gas balance.
From the time of the California energy crisis at the beginning of this decade, it appeared that the U.S. was headed for an extended period of tight supplies, even shortages, of natural gas.
While gas has many favorable attributes—as a clean, relatively low-carbon fuel—abundance did not appear to be one of them. Prices had gone up, but increased drilling failed to bring forth additional supplies. The U.S., it seemed, was destined to become much more integrated into the global gas market, with increasing imports of liquefied natural gas (LNG).
But a few companies were trying to solve a perennial problem: how to liberate shale gas—the plentiful natural gas supplies locked away in the impermeable shale. The experimental lab was a sprawling area called the Barnett Shale in the environs of Fort Worth, Texas.
The companies were experimenting with two technologies. One was horizontal drilling. Instead of merely drilling straight down into the resource, horizontal wells go sideways after a certain depth, opening up a much larger area of the resource-bearing formation.
The other technology is known as hydraulic fracturing, or "fraccing." Here, the producer injects a mixture of water and sand at high pressure to create multiple fractures throughout the rock, liberating the trapped gas to flow into the well.
The critical but little-recognized breakthrough was early in this decade—finding a way to meld together these two increasingly complex technologies to finally crack the shale rock, and thus crack the code for a major new resource. It was not a single eureka moment, but rather the result of incremental experimentation and technical skill. The success freed the gas to flow in greater volumes and at a much lower unit cost than previously thought possible.
In the last few years, the revolution has spread into other shale plays, from Louisiana and Arkansas to Pennsylvania and New York State, and British Columbia as well.
The supply impact has been dramatic. In the lower 48, states thought to be in decline as a natural gas source, production surged an astonishing 15% from the beginning of 2007 to mid-2008. This increase is more than most other countries produce in total.
Equally dramatic is the effect on U.S. reserves. Proven reserves have risen to 245 trillion cubic feet (Tcf) in 2008 from 177 Tcf in 2000, despite having produced nearly 165 Tcf during those years. The recent increase in estimated U.S. gas reserves by the Potential Gas Committee, representing both academic and industry experts, is in itself equivalent to more than half of the total proved reserves of Qatar, the new LNG powerhouse. With more drilling experience, U.S. estimates are likely to rise dramatically in the next few years. At current levels of demand, the U.S. has about 90 years of proven and potential supply—a number that is bound to go up as more and more shale gas is found.
To have the resource base suddenly expand by this much is a game changer. But what is getting changed?
It transforms the debate over generating electricity. The U.S. electric power industry faces very big questions about fuel choice and what kind of new generating capacity to build. In the face of new climate regulations, the increased availability of gas will likely lead to more natural gas consumption in electric power because of gas's relatively lower CO2 emissions. Natural gas power plants can also be built more quickly than coal-fired plants.
Some areas like Pennsylvania and New York, traditionally importers of the bulk of their energy from elsewhere, will instead become energy producers. It could also mean that more buses and truck fleets will be converted to natural gas. Energy-intensive manufacturing companies, which have been moving overseas in search of cheaper energy in order to remain globally competitive, may now stay home.
But these industrial users and the utilities with their long investment horizons—both of which have been whipsawed by recurrent cycles of shortage and surplus in natural gas over several decades—are inherently skeptical and will require further confirmation of a sustained shale gale before committing.
More abundant gas will have another, not so well recognized effect—facilitating renewable development. Sources like wind and solar are "intermittent." When the wind doesn't blow and the sun doesn't shine, something has to pick up the slack, and that something is likely to be natural-gas fired electric generation. This need will become more acute as the mandates for renewable electric power grow.
So far only one serious obstacle to development of shale resources across the U.S. has appeared—water. The most visible concern is the fear in some quarters that hydrocarbons or chemicals used in fraccing might flow into aquifers that supply drinking water. However, in most instances, the gas-bearing and water-bearing layers are widely separated by thousands of vertical feet, as well as by rock, with the gas being much deeper.
Therefore, the hydraulic fracturing of gas shales is unlikely to contaminate drinking water. The risks of contamination from surface handling of wastes, common to all industrial processes, requires continued care. While fraccing uses a good deal of water, it is actually less water-intensive than many other types of energy production.
Unconventional natural gas has already had a global impact. With the U.S. market now oversupplied, and storage filled to the brim, there's been much less room for LNG. As a result more LNG is going into Europe, leading to lower spot prices and talk of modifying long-term contracts.
But is unconventional natural gas going to go global? Preliminary estimates suggest that shale gas resources around the world could be equivalent to or even greater than current proven natural gas reserves. Perhaps much greater. But here in the U.S., our independent oil and gas sector, open markets and private ownership of mineral rights facilitated development. Elsewhere development will require negotiations with governments, and potentially complex regulatory processes. Existing long-term contracts, common in much of the natural gas industry outside the U.S., could be another obstacle. Extensive new networks of pipelines and infrastructure will have to be built. And many parts of the world still have ample conventional gas to develop first.
Yet interest and activity are picking up smartly outside North America. A shale gas revolution in Europe and Asia would change the competitive dynamics of the globalized gas market, altering economic calculations and international politics.
This new innovation will take time to establish its global credentials. The U.S. is really only beginning to grapple with the significance. It may be half a decade before the strength of the unconventional gas revolution outside North America can be properly assessed. But what has begun as the shale gale in the U.S. could end up being an increasingly powerful wind that blows through the world economy.
Mr. Yergin, author of the Pulitzer Prize-winning "The Prize: The Epic Quest for Oil, Money, & Power" (Free Press, new edition, 2009) is chairman of IHS CERA. Mr. Ineson is senior director of global gas for IHS CERA.
A 'shale gale' of unconventional and abundant U.S. gas is transforming the energy market.
The biggest energy innovation of the decade is natural gas—more specifically what is called "unconventional" natural gas. Some call it a revolution.
Yet the natural gas revolution has unfolded with no great fanfare, no grand opening ceremony, no ribbon cutting. It just crept up. In 1990, unconventional gas—from shales, coal-bed methane and so-called "tight" formations—was about 10% of total U.S. production. Today it is around 40%, and growing fast, with shale gas by far the biggest part.
The potential of this "shale gale" only really became clear around 2007. In Washington, D.C., the discovery has come later—only in the last few months. Yet it is already changing the national energy dialogue and overall energy outlook in the U.S.—and could change the global natural gas balance.
From the time of the California energy crisis at the beginning of this decade, it appeared that the U.S. was headed for an extended period of tight supplies, even shortages, of natural gas.
While gas has many favorable attributes—as a clean, relatively low-carbon fuel—abundance did not appear to be one of them. Prices had gone up, but increased drilling failed to bring forth additional supplies. The U.S., it seemed, was destined to become much more integrated into the global gas market, with increasing imports of liquefied natural gas (LNG).
But a few companies were trying to solve a perennial problem: how to liberate shale gas—the plentiful natural gas supplies locked away in the impermeable shale. The experimental lab was a sprawling area called the Barnett Shale in the environs of Fort Worth, Texas.
The companies were experimenting with two technologies. One was horizontal drilling. Instead of merely drilling straight down into the resource, horizontal wells go sideways after a certain depth, opening up a much larger area of the resource-bearing formation.
The other technology is known as hydraulic fracturing, or "fraccing." Here, the producer injects a mixture of water and sand at high pressure to create multiple fractures throughout the rock, liberating the trapped gas to flow into the well.
The critical but little-recognized breakthrough was early in this decade—finding a way to meld together these two increasingly complex technologies to finally crack the shale rock, and thus crack the code for a major new resource. It was not a single eureka moment, but rather the result of incremental experimentation and technical skill. The success freed the gas to flow in greater volumes and at a much lower unit cost than previously thought possible.
In the last few years, the revolution has spread into other shale plays, from Louisiana and Arkansas to Pennsylvania and New York State, and British Columbia as well.
The supply impact has been dramatic. In the lower 48, states thought to be in decline as a natural gas source, production surged an astonishing 15% from the beginning of 2007 to mid-2008. This increase is more than most other countries produce in total.
Equally dramatic is the effect on U.S. reserves. Proven reserves have risen to 245 trillion cubic feet (Tcf) in 2008 from 177 Tcf in 2000, despite having produced nearly 165 Tcf during those years. The recent increase in estimated U.S. gas reserves by the Potential Gas Committee, representing both academic and industry experts, is in itself equivalent to more than half of the total proved reserves of Qatar, the new LNG powerhouse. With more drilling experience, U.S. estimates are likely to rise dramatically in the next few years. At current levels of demand, the U.S. has about 90 years of proven and potential supply—a number that is bound to go up as more and more shale gas is found.
To have the resource base suddenly expand by this much is a game changer. But what is getting changed?
It transforms the debate over generating electricity. The U.S. electric power industry faces very big questions about fuel choice and what kind of new generating capacity to build. In the face of new climate regulations, the increased availability of gas will likely lead to more natural gas consumption in electric power because of gas's relatively lower CO2 emissions. Natural gas power plants can also be built more quickly than coal-fired plants.
Some areas like Pennsylvania and New York, traditionally importers of the bulk of their energy from elsewhere, will instead become energy producers. It could also mean that more buses and truck fleets will be converted to natural gas. Energy-intensive manufacturing companies, which have been moving overseas in search of cheaper energy in order to remain globally competitive, may now stay home.
But these industrial users and the utilities with their long investment horizons—both of which have been whipsawed by recurrent cycles of shortage and surplus in natural gas over several decades—are inherently skeptical and will require further confirmation of a sustained shale gale before committing.
More abundant gas will have another, not so well recognized effect—facilitating renewable development. Sources like wind and solar are "intermittent." When the wind doesn't blow and the sun doesn't shine, something has to pick up the slack, and that something is likely to be natural-gas fired electric generation. This need will become more acute as the mandates for renewable electric power grow.
So far only one serious obstacle to development of shale resources across the U.S. has appeared—water. The most visible concern is the fear in some quarters that hydrocarbons or chemicals used in fraccing might flow into aquifers that supply drinking water. However, in most instances, the gas-bearing and water-bearing layers are widely separated by thousands of vertical feet, as well as by rock, with the gas being much deeper.
Therefore, the hydraulic fracturing of gas shales is unlikely to contaminate drinking water. The risks of contamination from surface handling of wastes, common to all industrial processes, requires continued care. While fraccing uses a good deal of water, it is actually less water-intensive than many other types of energy production.
Unconventional natural gas has already had a global impact. With the U.S. market now oversupplied, and storage filled to the brim, there's been much less room for LNG. As a result more LNG is going into Europe, leading to lower spot prices and talk of modifying long-term contracts.
But is unconventional natural gas going to go global? Preliminary estimates suggest that shale gas resources around the world could be equivalent to or even greater than current proven natural gas reserves. Perhaps much greater. But here in the U.S., our independent oil and gas sector, open markets and private ownership of mineral rights facilitated development. Elsewhere development will require negotiations with governments, and potentially complex regulatory processes. Existing long-term contracts, common in much of the natural gas industry outside the U.S., could be another obstacle. Extensive new networks of pipelines and infrastructure will have to be built. And many parts of the world still have ample conventional gas to develop first.
Yet interest and activity are picking up smartly outside North America. A shale gas revolution in Europe and Asia would change the competitive dynamics of the globalized gas market, altering economic calculations and international politics.
This new innovation will take time to establish its global credentials. The U.S. is really only beginning to grapple with the significance. It may be half a decade before the strength of the unconventional gas revolution outside North America can be properly assessed. But what has begun as the shale gale in the U.S. could end up being an increasingly powerful wind that blows through the world economy.
Mr. Yergin, author of the Pulitzer Prize-winning "The Prize: The Epic Quest for Oil, Money, & Power" (Free Press, new edition, 2009) is chairman of IHS CERA. Mr. Ineson is senior director of global gas for IHS CERA.
Monday, November 2, 2009
CIT's Bankruptcy Lesson - Treasury proves it can't identify systemic risk
CIT's Bankruptcy Lesson. WSJ Editorial
Treasury proves it can't identify systemic risk.
The Wall Street Journal, page A20
The $2.3 billion of Troubled Asset Relief Program money that will likely be lost in the bankruptcy of commercial lender CIT is hard to swallow, but it may be the most instructive loss taxpayers absorb all year.
Just as the Treasury Department is urging Congress to junk the bankruptcy process and hand over virtually unlimited bailout authority to the executive branch, CIT is proving two things: Bankruptcy works—even for financial firms—and the U.S. Treasury judges systemic risk out of its political hip pocket.
Treasury provided the $2.3 billion TARP injection last December. Then when CIT was on the ropes last July, Treasury urged the Federal Deposit Insurance Corp. to provide debt guarantees to help the company raise capital. Treasury made the case that a CIT failure posed a systemic risk given the number of small and medium-sized companies that rely on CIT for short-term financing.
We argued against this in July. More importantly, FDIC Chair Sheila Bair rejected it. Since her wise decision, CIT has been providing a laboratory to observe the recuperative pain of bankruptcy in an experiment uncontrolled by politicians.
With no federal lifeline coming, the company's major bondholders quickly agreed to a $3 billion secured loan facility and the company began restructuring its liabilities. It became clear that bankruptcy would be necessary and the company recently gained the support of almost 90% of its voting debt holders for a prepackaged reorganization plan that could allow the lender to emerge from Chapter 11 by the end of the year.
While the holding company declared bankruptcy on Sunday, its operating subsidiaries remain outside Chapter 11 and continue to serve customers. Some are choosing to continue with CIT, others are choosing to go with a competitor. Armageddon it is not.
Bankruptcy is a process under the rule of law that is demanded by the Constitution. "Markets not ministers," says former SEC Chairman Richard Breeden in summing up his preference for bankruptcy guided by judges over interventions crafted by politicians. Let's hope CIT's example brings the former back into fashion.
Treasury proves it can't identify systemic risk.
The Wall Street Journal, page A20
The $2.3 billion of Troubled Asset Relief Program money that will likely be lost in the bankruptcy of commercial lender CIT is hard to swallow, but it may be the most instructive loss taxpayers absorb all year.
Just as the Treasury Department is urging Congress to junk the bankruptcy process and hand over virtually unlimited bailout authority to the executive branch, CIT is proving two things: Bankruptcy works—even for financial firms—and the U.S. Treasury judges systemic risk out of its political hip pocket.
Treasury provided the $2.3 billion TARP injection last December. Then when CIT was on the ropes last July, Treasury urged the Federal Deposit Insurance Corp. to provide debt guarantees to help the company raise capital. Treasury made the case that a CIT failure posed a systemic risk given the number of small and medium-sized companies that rely on CIT for short-term financing.
We argued against this in July. More importantly, FDIC Chair Sheila Bair rejected it. Since her wise decision, CIT has been providing a laboratory to observe the recuperative pain of bankruptcy in an experiment uncontrolled by politicians.
With no federal lifeline coming, the company's major bondholders quickly agreed to a $3 billion secured loan facility and the company began restructuring its liabilities. It became clear that bankruptcy would be necessary and the company recently gained the support of almost 90% of its voting debt holders for a prepackaged reorganization plan that could allow the lender to emerge from Chapter 11 by the end of the year.
While the holding company declared bankruptcy on Sunday, its operating subsidiaries remain outside Chapter 11 and continue to serve customers. Some are choosing to continue with CIT, others are choosing to go with a competitor. Armageddon it is not.
Bankruptcy is a process under the rule of law that is demanded by the Constitution. "Markets not ministers," says former SEC Chairman Richard Breeden in summing up his preference for bankruptcy guided by judges over interventions crafted by politicians. Let's hope CIT's example brings the former back into fashion.
Saturday, October 31, 2009
Bank Regulation and the Resolution of Banking Crises course: PDFs of articles
hi, I found useful to get the electronic version of the PDFs of these articles/texts in the Bank Regulation and the Resolution of Banking Crises course reader:
Unit 1 (updated Dec 23, 2009, & Dec 30, 2009):
That way, I need not to carry the reader with me, I can read the articles on any computer. I'll update this post with links to further units' articles.
If anyone has problems accessing some text I can send it via e-mail. Just drop a note in this blog.
Best Regards,
UPDATED twice: I found the PDFs for these three:
Unit 3:
As always, you can ask the files to be sent by e-mail.
UPDATED again Nov 09, 2009:
Unit 4:
Bagehot W (1873): Lombard Street: a description of the money market. London: HS King. http://www.gutenberg.org/etext/4359
Basel Committee on Banking Supervision (2002) ‘Supervisory Guidance on Dealing with Weak Banks’, Basel: Bank for International Settlements. http://www.bis.org/publ/bcbs88.pdf
Diamond D and P Dytvig (1983) ‘Bank Runs, Deposit Insurance and Liquidity’, Journal of Political Economy, Vol. 91, pp. 401–19. DiamondDytvig-BankRunsDepositInsuranceandLiquidity.pdf & .html
Dong He (2002) ‘Emergency Liquidity Facilities’, Chapter 5 of C Enoch, D Marston and M Taylor, Building Strong Banks through Surveillance and Resolution, Washington DC: International Monetary Fund. It can be enough to read http://www.imf.org/external/pubs/ft/wp/2000/wp0079.pdf (DongHe-EmergencyLiquiditySupportFacilities2000.pdf), IMF Working Paper 00/79
Freixas Xavier, Curzio Giannini, Glenn Hoggarth and Farouk Soussa (1999) ‘Lender of Last Resort: A Review of the Literature’, Bank of England, Financial Stability Review, November. http://www.bankofengland.co.uk/publications/fsr/1999/fsr07art6.pdf
James C (1991) ‘The Losses Realised in Bank Failures’, Journal of Finance, September, pp 1223–42. James-TheLossesRealisedinBankFailures1991.pdf
UPDATED again Dec 12, 2009:
Unit 5:
Chopra, Ajai, Kang, Kenneth, Karasulu, Meral, Liang, Hong, Ma, Henry and Richards, Anthony J., From Crisis to Recovery in Korea Strategy, Achievements, and Lessons (October 2001). IMF Working Paper, Vol. , pp. 1-94, 2001. http://ssrn.com/abstract=879974 Chopraetalii-FromcrisistorecoveryinKorea-strategyachievementsandlessonsOct2001.pdf (40 Mby)
Demirgüç-Kunt A and E Detragiache (2002) ‘Does deposit insurance increase banking system stability?’, Journal of Monetary Economics, Vol 49(7), October, pp 1373–406. You can request the PDF.
Dong He (2004) ‘The Role of KAMCO in Resolving Non-Performing Loans in the Republic of Korea’ IMF Working Paper, No. WP/04/172, International Monetary Fund, Washington D.C. You can request the PDF.
Glenn Hoggarth, Jack Reidhill and Peter Sinclair (2004) ‘On the resolution of banking crises: theory and evidence’, Bank of England Working Paper, No. 229. You can request the PDF.
Gillian Garcia (2000) Chapter 3: ‘A Survey of Deposit Insurance Practices’ Deposit Insurance – Actual and Good Practices, Occasional Paper, No. 197, International Monetary Fund, Washington D.C. I cannot find the PDF. There are two precursor papers published by the IMF previously, you can request them.
International Association of Deposit Insurers 2009 'Core Principles for Effective Deposit Insurance Systems'. June 2009. Request the PDF.
Optional:
David Hoelscher (2002) Chapter 9: ‘Guidelines for Bank Resolution’ in Enoch, C., D. Marston and M. Taylor Building Strong Banks Through Surveillance and Resolution, International Monetary Fund, Washington D.C. I cannot find the PDF.
Unit 6:
Abrams, R and M Taylor (2002) ‘Issues in the Unification of Financial Sector Supervision’, Chapter 6 in Charles Enoch, David Marston and Michael Taylor (eds) Building Strong Banks Through Surveillance and Resolution, Washington DC: International Monetary Fund.
Also: Abrams, Richard K. & Michael Taylor 2000 'Issues in the Unification of Financial Sector Supervision'. IMF Working Paper No. 00/213. Washington, DC: International Monetary Fund. http://www.imf.org/external/pubs/cat/longres.cfm?sk=3939.0
Elizabeth Brown (2007) ‘E Pluribus Unum – Out of Many: Why the United States Needs a Single Financial Services Agency’, University of Miami Business Law Review, Fall/Winter. Request the article.
Financial Stability Institute (2007) ‘Institutional Arrangements for Financial Sector Supervision’, Occasional Paper No. 7, Basel, Switzerland: Financial Stability Institute, BIS. http://www.bis.org/fsi/fsipapers07.htm
Goodhart, C (2000) ‘The Organisational Structure of Banking Supervision’, FSI Occasional Paper No. 1, November, Basel, Switzerland: Financial Stability Institute, BIS. http://www.bis.org/fsi/fsipapers01.pdf
The International Bank for Reconstruction and Development/The World Bank/The International Monetary Fund (2005) 'Financial Sector Assessment: A Handbook', Appendix F: ’Institutional Structure of Financial Regulation and Supervision’. Washington DC: IBRD, WB, IMF. Request the whole book.
Sinclair, Peter JN (2000) ‘Central Banks and Financial Stability’, Bank of England Quarterly Bulletin, November: 377–89. http://www.bankofengland.co.uk/publications/quarterlybulletin/qb000403.pdf
Taylor, Michael (1995) Twin Peaks: A Regulatory Structure for the New Century, London: Centre for the Study of Financial Innovation (December). I cannot find this publication in PDF.
US Treasury Department (2008) ‘The Department of the Treasury Blueprint for a Modernised Regulatory Financial Structure’ (April), Washington DC: US Treasury Department. http://www.treas.gov/press/releases/reports/Blueprint.pdf
Unit 7:
Armstrong, A. and M. Spencer (1998), ‘Will the Asian Phoenix Rise Again? Global Emerging Markets, Vol. 1 No. 3, October. I cannot find this paper.
Bordo, M., B. Eichengreen, D. Klingebiel and M. Soledad Martinez-Peria (2001) ‘Is the crisis problem growing more severe?’, Economic Policy, vol. 16(32) pages 51–82. BordoEichengreenKlingebielMartinez-Peria-Isthecrisisproblemgrowingmoresevere_EconomicPolicyv16(32)pp51–82.-2001.pdf
Financial Stability Forum (2008) ‘Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience’, April 07, http://www.financialstabilityboard.org/publications/r_0804.pdf
Caprio, G. and P. Honohan (1999) ‘Beyond Capital Ideals: Restoring Banking Stability’, World Bank Policy Research Working Paper No. 2235, Washington DC: The World Bank. http://ideas.repec.org/p/wbk/wbrwps/2235.html
Freixas, X., C. Giannini, G. Hoggarth and F. Soussa (2000) ‘The Lender of Last Resort: what have we learnt since Bagehot?’, Financial Services Research, 18(1), October, pp. 63–87.
Geithner, T. (2008) ‘Reducing Systemic Risk in a Dynamic Financial System’, Remarks at The Economic Club of New York, 12 June 2008, Federal Reserve Bank of New York. http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html
Group of 30 (1993) ‘Derivatives: Practices and Principles’, Basel Switzerland: Global Derivatives Study Group. I cannot find the PDF.
Herring, R. (2003) ‘International Financial Conglomerates: Implications for Bank Insolvency Regimes’, Philadelphia Pennsylvania: Wharton School, University of Pennsylvania’, www.wharton.upenn.edu Request the paper.
Honohan, P. and A. Klingebiel (2000) ‘Controlling the Fiscal Costs of Banking Crises’, World Bank, Policy Research Working Paper WPS 2441, Washington DC: The World Bank. http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2000/11/04/000094946_0010200530432/Rendered/PDF/multi_page.pdf
UPDATED Dec 27, 2009:
Unit 8:
Alexander K, R Dhumale and J Eatwell (2006) 'Global Governance of Financial Systems: The International Regulation of Systemic Risk'. Oxford: Oxford University Press. No PDF.
Barth J, G Caprio Jr and R Levine (2006) Rethinking Bank Regulation – Till Angels Govern, Chapter 3 Section 3.H.3, Cambridge: Cambridge University Press. Files in JPEG format.
Crockett A (2001) ‘Issues in Global Financial Supervision’, speech given at the 36th SEACEN Governors’ Conference held in Singapore, 1 June. http://www.bis.org/speeches/sp010601.htm
Eatwell J and L Taylor (1998) ‘International Capital Markets and the Future of Economic Policy’, paper prepared for the Ford Foundation Project International Capital Markets and the Future of Economic Policy, New York: Center for Economic Policy Analysis; London: Institute for Public Policy Research. http://www.newschool.edu/cepa/publications/workingpapers/archive/cepa0309.pdf
Fischer S (1999) ‘On the Need for an International Lender of Last Resort’, Journal of Economic Perspectives, Fall, Volume 13, Number 4, 85–104.
Original speech: Stanley Fischer (1999) 'On the Need for an International Lender of Last Resort'. This is a slightly revised version of a paper prepared for delivery at the joint luncheon of the American Economic Association and the American Finance Association. New York, January 3, 1999. http://www.imf.org/external/np/speeches/1999/010399.htm
Geithner, T (2008) ‘Reducing Systemic Risk in a Dynamic Financial System’, Remarks at The Economic Club of New York, 12 June 2008, Federal Reserve Bank of New York. http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html
Unit 1 (updated Dec 23, 2009, & Dec 30, 2009):
- Dewatripont & Tirole: http://www.cefims.ac.uk/pdfs/U1Dewatripont.pdf
- Feldstein, M (1993), Comment to Boyd and Gertler (1993), p 375, in John Boyd & Mark Gertler, US Commercial Banking - Trends, Cycles and Policy, in NBER Macroeconomics Annual 1993, Volume 8, Olivier Blanchard and Stanley Fischer (eds), MIT Press. http://www.nber.org/chapters/c11003
- Financial Services Authority (2009) The Turner Review: A regulatory response to the global banking crisis, London: Financial Services Authority, March, http://www.fsa.gov.uk/pubs/other/turner_review.pdf
- WSJ Editorial (2009) 'One Cheer for Barney Frank - The credit raters lose their oligopoly.' WSJ, Dec 23, 2009. http://bipartisanalliance.blogspot.com/2009/12/credit-raters-lose-their-oligopoly.html
- Frederic Mishkin (1992): 'The Causes and Propagation of Financial Instability: Lessons for Policymakers', Symposium Proceedings of the Federal Reserve Bank of Kansas City. http://ideas.repec.org/a/fip/fedkpr/y1997p55-96.html
- Jaime Caruana and Aditya Narain (2008) 'Banking on More Capital', IMF’s Finance and Development. http://www.naider.com/upload/caruana.pdf (the IMF page for June 2008 articles fail).
That way, I need not to carry the reader with me, I can read the articles on any computer. I'll update this post with links to further units' articles.
If anyone has problems accessing some text I can send it via e-mail. Just drop a note in this blog.
Best Regards,
UPDATED twice: I found the PDFs for these three:
Unit 3:
- Basel Committee on Banking Supervision (2006) ‘Core Principles for Effective Banking Supervision’, Basel: Bank for International Settlements. http://www.bis.org/publ/bcbs129.pdf
- Beck T, A Demirgüç-Kunt and R Levine (2003) ‘Bank Supervision and Corporate Finance’, World Bank Policy Research Working Paper 3042, May. http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2003/05/30/000094946_03051604080286/Rendered/PDF/multi0page.pdf
- International Monetary Fund (2007) 'Turkey: Financial System Stability Assessment', IMF Country Report Number 07/361, November, Washington DC: IMF. http://www.imf.org/external/pubs/ft/scr/2007/cr07361.pdf
As always, you can ask the files to be sent by e-mail.
UPDATED again Nov 09, 2009:
Unit 4:
Bagehot W (1873): Lombard Street: a description of the money market. London: HS King. http://www.gutenberg.org/etext/4359
Basel Committee on Banking Supervision (2002) ‘Supervisory Guidance on Dealing with Weak Banks’, Basel: Bank for International Settlements. http://www.bis.org/publ/bcbs88.pdf
Diamond D and P Dytvig (1983) ‘Bank Runs, Deposit Insurance and Liquidity’, Journal of Political Economy, Vol. 91, pp. 401–19. DiamondDytvig-BankRunsDepositInsuranceandLiquidity.pdf & .html
Dong He (2002) ‘Emergency Liquidity Facilities’, Chapter 5 of C Enoch, D Marston and M Taylor, Building Strong Banks through Surveillance and Resolution, Washington DC: International Monetary Fund. It can be enough to read http://www.imf.org/external/pubs/ft/wp/2000/wp0079.pdf (DongHe-EmergencyLiquiditySupportFacilities2000.pdf), IMF Working Paper 00/79
Freixas Xavier, Curzio Giannini, Glenn Hoggarth and Farouk Soussa (1999) ‘Lender of Last Resort: A Review of the Literature’, Bank of England, Financial Stability Review, November. http://www.bankofengland.co.uk/publications/fsr/1999/fsr07art6.pdf
James C (1991) ‘The Losses Realised in Bank Failures’, Journal of Finance, September, pp 1223–42. James-TheLossesRealisedinBankFailures1991.pdf
UPDATED again Dec 12, 2009:
Unit 5:
Chopra, Ajai, Kang, Kenneth, Karasulu, Meral, Liang, Hong, Ma, Henry and Richards, Anthony J., From Crisis to Recovery in Korea Strategy, Achievements, and Lessons (October 2001). IMF Working Paper, Vol. , pp. 1-94, 2001. http://ssrn.com/abstract=879974 Chopraetalii-FromcrisistorecoveryinKorea-strategyachievementsandlessonsOct2001.pdf (40 Mby)
Demirgüç-Kunt A and E Detragiache (2002) ‘Does deposit insurance increase banking system stability?’, Journal of Monetary Economics, Vol 49(7), October, pp 1373–406. You can request the PDF.
Dong He (2004) ‘The Role of KAMCO in Resolving Non-Performing Loans in the Republic of Korea’ IMF Working Paper, No. WP/04/172, International Monetary Fund, Washington D.C. You can request the PDF.
Glenn Hoggarth, Jack Reidhill and Peter Sinclair (2004) ‘On the resolution of banking crises: theory and evidence’, Bank of England Working Paper, No. 229. You can request the PDF.
Gillian Garcia (2000) Chapter 3: ‘A Survey of Deposit Insurance Practices’ Deposit Insurance – Actual and Good Practices, Occasional Paper, No. 197, International Monetary Fund, Washington D.C. I cannot find the PDF. There are two precursor papers published by the IMF previously, you can request them.
International Association of Deposit Insurers 2009 'Core Principles for Effective Deposit Insurance Systems'. June 2009. Request the PDF.
Optional:
David Hoelscher (2002) Chapter 9: ‘Guidelines for Bank Resolution’ in Enoch, C., D. Marston and M. Taylor Building Strong Banks Through Surveillance and Resolution, International Monetary Fund, Washington D.C. I cannot find the PDF.
Unit 6:
Abrams, R and M Taylor (2002) ‘Issues in the Unification of Financial Sector Supervision’, Chapter 6 in Charles Enoch, David Marston and Michael Taylor (eds) Building Strong Banks Through Surveillance and Resolution, Washington DC: International Monetary Fund.
Also: Abrams, Richard K. & Michael Taylor 2000 'Issues in the Unification of Financial Sector Supervision'. IMF Working Paper No. 00/213. Washington, DC: International Monetary Fund. http://www.imf.org/external/pubs/cat/longres.cfm?sk=3939.0
Elizabeth Brown (2007) ‘E Pluribus Unum – Out of Many: Why the United States Needs a Single Financial Services Agency’, University of Miami Business Law Review, Fall/Winter. Request the article.
Financial Stability Institute (2007) ‘Institutional Arrangements for Financial Sector Supervision’, Occasional Paper No. 7, Basel, Switzerland: Financial Stability Institute, BIS. http://www.bis.org/fsi/fsipapers07.htm
Goodhart, C (2000) ‘The Organisational Structure of Banking Supervision’, FSI Occasional Paper No. 1, November, Basel, Switzerland: Financial Stability Institute, BIS. http://www.bis.org/fsi/fsipapers01.pdf
The International Bank for Reconstruction and Development/The World Bank/The International Monetary Fund (2005) 'Financial Sector Assessment: A Handbook', Appendix F: ’Institutional Structure of Financial Regulation and Supervision’. Washington DC: IBRD, WB, IMF. Request the whole book.
Sinclair, Peter JN (2000) ‘Central Banks and Financial Stability’, Bank of England Quarterly Bulletin, November: 377–89. http://www.bankofengland.co.uk/publications/quarterlybulletin/qb000403.pdf
Taylor, Michael (1995) Twin Peaks: A Regulatory Structure for the New Century, London: Centre for the Study of Financial Innovation (December). I cannot find this publication in PDF.
US Treasury Department (2008) ‘The Department of the Treasury Blueprint for a Modernised Regulatory Financial Structure’ (April), Washington DC: US Treasury Department. http://www.treas.gov/press/releases/reports/Blueprint.pdf
Unit 7:
Armstrong, A. and M. Spencer (1998), ‘Will the Asian Phoenix Rise Again? Global Emerging Markets, Vol. 1 No. 3, October. I cannot find this paper.
Bordo, M., B. Eichengreen, D. Klingebiel and M. Soledad Martinez-Peria (2001) ‘Is the crisis problem growing more severe?’, Economic Policy, vol. 16(32) pages 51–82. BordoEichengreenKlingebielMartinez-Peria-Isthecrisisproblemgrowingmoresevere_EconomicPolicyv16(32)pp51–82.-2001.pdf
Financial Stability Forum (2008) ‘Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience’, April 07, http://www.financialstabilityboard.org/publications/r_0804.pdf
Caprio, G. and P. Honohan (1999) ‘Beyond Capital Ideals: Restoring Banking Stability’, World Bank Policy Research Working Paper No. 2235, Washington DC: The World Bank. http://ideas.repec.org/p/wbk/wbrwps/2235.html
Freixas, X., C. Giannini, G. Hoggarth and F. Soussa (2000) ‘The Lender of Last Resort: what have we learnt since Bagehot?’, Financial Services Research, 18(1), October, pp. 63–87.
Geithner, T. (2008) ‘Reducing Systemic Risk in a Dynamic Financial System’, Remarks at The Economic Club of New York, 12 June 2008, Federal Reserve Bank of New York. http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html
Group of 30 (1993) ‘Derivatives: Practices and Principles’, Basel Switzerland: Global Derivatives Study Group. I cannot find the PDF.
Herring, R. (2003) ‘International Financial Conglomerates: Implications for Bank Insolvency Regimes’, Philadelphia Pennsylvania: Wharton School, University of Pennsylvania’, www.wharton.upenn.edu Request the paper.
Honohan, P. and A. Klingebiel (2000) ‘Controlling the Fiscal Costs of Banking Crises’, World Bank, Policy Research Working Paper WPS 2441, Washington DC: The World Bank. http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2000/11/04/000094946_0010200530432/Rendered/PDF/multi_page.pdf
UPDATED Dec 27, 2009:
Unit 8:
Alexander K, R Dhumale and J Eatwell (2006) 'Global Governance of Financial Systems: The International Regulation of Systemic Risk'. Oxford: Oxford University Press. No PDF.
Barth J, G Caprio Jr and R Levine (2006) Rethinking Bank Regulation – Till Angels Govern, Chapter 3 Section 3.H.3, Cambridge: Cambridge University Press. Files in JPEG format.
Crockett A (2001) ‘Issues in Global Financial Supervision’, speech given at the 36th SEACEN Governors’ Conference held in Singapore, 1 June. http://www.bis.org/speeches/sp010601.htm
Eatwell J and L Taylor (1998) ‘International Capital Markets and the Future of Economic Policy’, paper prepared for the Ford Foundation Project International Capital Markets and the Future of Economic Policy, New York: Center for Economic Policy Analysis; London: Institute for Public Policy Research. http://www.newschool.edu/cepa/publications/workingpapers/archive/cepa0309.pdf
Fischer S (1999) ‘On the Need for an International Lender of Last Resort’, Journal of Economic Perspectives, Fall, Volume 13, Number 4, 85–104.
Original speech: Stanley Fischer (1999) 'On the Need for an International Lender of Last Resort'. This is a slightly revised version of a paper prepared for delivery at the joint luncheon of the American Economic Association and the American Finance Association. New York, January 3, 1999. http://www.imf.org/external/np/speeches/1999/010399.htm
Geithner, T (2008) ‘Reducing Systemic Risk in a Dynamic Financial System’, Remarks at The Economic Club of New York, 12 June 2008, Federal Reserve Bank of New York. http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html
Sunday, October 25, 2009
Six Steps to Revitalize the Financial System
Six Steps to Revitalize the Financial System. By SANFORD I. WEILL, former chairman and CEO of Citigroup, AND JUDAH S. KRAUSHAAR, managing partner of Roaring Brook Capital
We need one regulator that can see a company's entire balance sheet. Pay caps will only drive talent abroad.
WSJ, Oct 26, 2009
The debate over financial services reform has meandered for weeks without a clear sense of urgency. It would be a huge opportunity lost if our political, regulatory and business leaders cannot craft a credible new regulatory foundation for one of America's pre-eminent industries. It's time to set politics and regulatory infighting aside and establish the new rules of the road for this critically important business.
Several principles should guide reform. Our country needs to strive for transparency in financial-company balance sheets and recognize the direct correlation between clarity in asset value and how financial enterprises are valued by investors. Mark-to-market based accounting must be revitalized, and complex instruments and securities must be subject to regular market-valuation tests whenever possible.
To accomplish this, a single regulator needs to be tasked with overseeing systemic risks and must be empowered to monitor risks in all sorts of financial institutions. There should be no more balkanization of regulation.
At the same time, regulators and industry leaders must come together and develop workable arrangements whereby innovation in financial services can once again flourish. We need to agree upon new capital requirements and rules for how the securitization market will operate. All parties need to operate with dispatch because the revitalization of the U.S. economy is what's at stake.
One thing our public officials should not do is get caught up in a debate over "too big to fail." It's a catchy phrase, but that's about it. Indeed, it is important to recognize that our recent financial crisis was provoked by last year's failure of Lehman Brothers, a company that few, if anyone, would have argued was too big to fail. Rather than get side-tracked on this and other complex questions, our policy leaders should focus directly on how to create and enhance market discipline.
We have six specific recommendations for reforming the financial services business:
1) Make the Federal Reserve the super-regulator responsible for overseeing systemic risk. It is vital that one regulator be able to see the entire balance sheet of the country's largest financial institutions, and this regulator needs to cut across artificial institutional lines. Large banks, securities firms, insurers and hedge funds should all come under the Fed's aegis. Anything less risks a perpetuation of regulatory arbitrage, where industry participants house their riskiest activities in the unit overseen by the most lenient regulator.
Other regulators would continue to focus on their respective industry segments exclusive of the largest, most complex institutions. Policy makers should avoid creating new bureaucracies, as some have recommended. Existing regulatory bodies should be given a broader charge to oversee consumer protection for credit-related products.
2) As much as possible, complex instruments should be subject to regular market valuation tests and clear through a central clearing house. We need a system that encourages valuations to be based on real markets and not on "mark-to-model." These last 18 months have demonstrated to us all that models work until they don't work. For underwritten offerings, a financial institution must be able to find a real public market value or the transaction should not be done. Derivatives with standardized features should be subject to daily valuation marks, and owners of these instruments should be required to maintain a reasonable amount of equity to support the position (i.e., akin to the traditional margin requirement on other securities).
For highly customized products and newer instruments that might not yet be mature enough to enjoy a large and deep market, we would allow an exemption to encourage innovation. Nonetheless, these exemptions should be regularly reviewed with regulators who should establish disclosure and trading rules that would promote maximum transparency or a means of public market price discovery. Lastly, everyone should apply the basic principle that if you don't understand something, you probably shouldn't be doing it in the first place.
3) Reform and revitalize the securitization market. Though the securitization process has been given a black eye over the past couple of years, it is important to recall that this market adds value by allowing issuers and investors to efficiently match risk, return and duration preferences. While portions of the market were abused, it is important that the baby not be thrown out with the bathwater. In the future, issuers should be required to retain on their balance sheets a substantial portion of the securitization and should be required to periodically test for current market values by selling into the market a portion of their holdings. In this fashion, both the issuing institution and the investors who bought the securitized asset would value the same asset equally.
4) The regulators need to engage the rating agencies. Going forward, the rating agencies should develop clearer standards for rating complex securities. The integrity of principal must be paramount whenever a security is given an investment grade rating. Moreover, the activities of the rating agencies should be subject to an annual review by the systemic regulator (i.e., the Federal Reserve), which in turn should publicly report issues that might compromise the safety and soundness of the country's largest financial institutions.
5) Capital requirements and reserve policies need to be overhauled. While excess leverage and imploding asset values provoked the recent crisis, pro-cyclical loan-loss reserve methodologies aggravated the situation. This has been particularly true in consumer credit where the Securities and Exchange Commission in recent years has forced banks to lower reserves as delinquencies have declined and reverse course when problems moved higher. This sort of regime seems foolhardy. Formulas work no better than mark to model.
To address the matter, financial companies should be encouraged (or perhaps required) to securitize credit wherever possible and carry the instruments at current market value. The greater the transparency in asset valuation, the better. For instruments that may not lend themselves to securitization, such as business loans with highly customized terms, the financial institutions should be allowed—in close coordination with the regulators—to set forward-looking reserves that would smooth earnings (and confidence) during periods of credit stress. Assuming an increased percentage of large financial institutions' assets could be subject to market-value accounting, earnings volatility might increase, but improved transparency would be a net positive for how these institutions would be valued. Of course, higher regulatory capital requirements could go a long way toward dampening earnings volatility; and we'd favor a relatively simple and conservative definition for regulatory capital, namely focusing on tangible common equity as a percentage of assets.
6) Align executive compensation with long-term returns. Policy makers need to move past polemics and recognize the importance of fostering loyal and motivated employees in the financial services business. Knee-jerk caps on pay will only drive talented human capital to foreign companies and erode the traditional leadership of U.S. financial institutions. We recommend a system in which equity-based pay and cash compensation be vested over a relatively long period.
The cash portion should be allowed to increase or decrease in value over the vesting period at a rate consistent with the company's return on equity. In this manner, employees would not be allowed to benefit from inherently short-term results, and risk-taking within institutions would be better controlled.
U.S. financial markets are at a unique moment in history. Without comprehensive and thoughtful reform, American leadership in global finance could be compromised, and lingering uncertainty regarding the "rules of the road" could undermine economic recovery and growth. To restore confidence, U.S. policy makers need to create a muscular super-regulator and promote market-based valuations for financial company balance sheets. Such a program would send a powerful message of transparency and integrity to the markets.
Mr. Weill is former chairman and CEO of Citigroup. Mr. Kraushaar is managing partner of Roaring Brook Capital.
We need one regulator that can see a company's entire balance sheet. Pay caps will only drive talent abroad.
WSJ, Oct 26, 2009
The debate over financial services reform has meandered for weeks without a clear sense of urgency. It would be a huge opportunity lost if our political, regulatory and business leaders cannot craft a credible new regulatory foundation for one of America's pre-eminent industries. It's time to set politics and regulatory infighting aside and establish the new rules of the road for this critically important business.
Several principles should guide reform. Our country needs to strive for transparency in financial-company balance sheets and recognize the direct correlation between clarity in asset value and how financial enterprises are valued by investors. Mark-to-market based accounting must be revitalized, and complex instruments and securities must be subject to regular market-valuation tests whenever possible.
To accomplish this, a single regulator needs to be tasked with overseeing systemic risks and must be empowered to monitor risks in all sorts of financial institutions. There should be no more balkanization of regulation.
At the same time, regulators and industry leaders must come together and develop workable arrangements whereby innovation in financial services can once again flourish. We need to agree upon new capital requirements and rules for how the securitization market will operate. All parties need to operate with dispatch because the revitalization of the U.S. economy is what's at stake.
One thing our public officials should not do is get caught up in a debate over "too big to fail." It's a catchy phrase, but that's about it. Indeed, it is important to recognize that our recent financial crisis was provoked by last year's failure of Lehman Brothers, a company that few, if anyone, would have argued was too big to fail. Rather than get side-tracked on this and other complex questions, our policy leaders should focus directly on how to create and enhance market discipline.
We have six specific recommendations for reforming the financial services business:
1) Make the Federal Reserve the super-regulator responsible for overseeing systemic risk. It is vital that one regulator be able to see the entire balance sheet of the country's largest financial institutions, and this regulator needs to cut across artificial institutional lines. Large banks, securities firms, insurers and hedge funds should all come under the Fed's aegis. Anything less risks a perpetuation of regulatory arbitrage, where industry participants house their riskiest activities in the unit overseen by the most lenient regulator.
Other regulators would continue to focus on their respective industry segments exclusive of the largest, most complex institutions. Policy makers should avoid creating new bureaucracies, as some have recommended. Existing regulatory bodies should be given a broader charge to oversee consumer protection for credit-related products.
2) As much as possible, complex instruments should be subject to regular market valuation tests and clear through a central clearing house. We need a system that encourages valuations to be based on real markets and not on "mark-to-model." These last 18 months have demonstrated to us all that models work until they don't work. For underwritten offerings, a financial institution must be able to find a real public market value or the transaction should not be done. Derivatives with standardized features should be subject to daily valuation marks, and owners of these instruments should be required to maintain a reasonable amount of equity to support the position (i.e., akin to the traditional margin requirement on other securities).
For highly customized products and newer instruments that might not yet be mature enough to enjoy a large and deep market, we would allow an exemption to encourage innovation. Nonetheless, these exemptions should be regularly reviewed with regulators who should establish disclosure and trading rules that would promote maximum transparency or a means of public market price discovery. Lastly, everyone should apply the basic principle that if you don't understand something, you probably shouldn't be doing it in the first place.
3) Reform and revitalize the securitization market. Though the securitization process has been given a black eye over the past couple of years, it is important to recall that this market adds value by allowing issuers and investors to efficiently match risk, return and duration preferences. While portions of the market were abused, it is important that the baby not be thrown out with the bathwater. In the future, issuers should be required to retain on their balance sheets a substantial portion of the securitization and should be required to periodically test for current market values by selling into the market a portion of their holdings. In this fashion, both the issuing institution and the investors who bought the securitized asset would value the same asset equally.
4) The regulators need to engage the rating agencies. Going forward, the rating agencies should develop clearer standards for rating complex securities. The integrity of principal must be paramount whenever a security is given an investment grade rating. Moreover, the activities of the rating agencies should be subject to an annual review by the systemic regulator (i.e., the Federal Reserve), which in turn should publicly report issues that might compromise the safety and soundness of the country's largest financial institutions.
5) Capital requirements and reserve policies need to be overhauled. While excess leverage and imploding asset values provoked the recent crisis, pro-cyclical loan-loss reserve methodologies aggravated the situation. This has been particularly true in consumer credit where the Securities and Exchange Commission in recent years has forced banks to lower reserves as delinquencies have declined and reverse course when problems moved higher. This sort of regime seems foolhardy. Formulas work no better than mark to model.
To address the matter, financial companies should be encouraged (or perhaps required) to securitize credit wherever possible and carry the instruments at current market value. The greater the transparency in asset valuation, the better. For instruments that may not lend themselves to securitization, such as business loans with highly customized terms, the financial institutions should be allowed—in close coordination with the regulators—to set forward-looking reserves that would smooth earnings (and confidence) during periods of credit stress. Assuming an increased percentage of large financial institutions' assets could be subject to market-value accounting, earnings volatility might increase, but improved transparency would be a net positive for how these institutions would be valued. Of course, higher regulatory capital requirements could go a long way toward dampening earnings volatility; and we'd favor a relatively simple and conservative definition for regulatory capital, namely focusing on tangible common equity as a percentage of assets.
6) Align executive compensation with long-term returns. Policy makers need to move past polemics and recognize the importance of fostering loyal and motivated employees in the financial services business. Knee-jerk caps on pay will only drive talented human capital to foreign companies and erode the traditional leadership of U.S. financial institutions. We recommend a system in which equity-based pay and cash compensation be vested over a relatively long period.
The cash portion should be allowed to increase or decrease in value over the vesting period at a rate consistent with the company's return on equity. In this manner, employees would not be allowed to benefit from inherently short-term results, and risk-taking within institutions would be better controlled.
U.S. financial markets are at a unique moment in history. Without comprehensive and thoughtful reform, American leadership in global finance could be compromised, and lingering uncertainty regarding the "rules of the road" could undermine economic recovery and growth. To restore confidence, U.S. policy makers need to create a muscular super-regulator and promote market-based valuations for financial company balance sheets. Such a program would send a powerful message of transparency and integrity to the markets.
Mr. Weill is former chairman and CEO of Citigroup. Mr. Kraushaar is managing partner of Roaring Brook Capital.
Friday, October 23, 2009
The Chamber of Commerce is only the latest target of the Chicago Gang in the White House
The Chicago Way. By KIMBERLEY A. STRASSEL
The Chamber of Commerce is only the latest target of the Chicago Gang in the White House.
WSJ, Oct 23, 2009
They pull a knife, you pull a gun. He sends one of yours to the hospital, you send one of his to the morgue. That's the Chicago way.
–Jim Malone,
"The Untouchables"
When Barack Obama promised to deliver "a new kind of politics" to Washington, most folk didn't picture Rahm Emanuel with a baseball bat. These days, the capital would make David Mamet, who wrote Malone's memorable movie dialogue, proud.
A White House set on kneecapping its opponents isn't, of course, entirely new. (See: Nixon) What is a little novel is the public and bare-knuckle way in which the Obama team is waging these campaigns against the other side.
In recent weeks the Windy City gang added a new name to their list of societal offenders: the Chamber of Commerce. For the cheek of disagreeing with Democrats on climate and financial regulation, it was reported the Oval Office will neuter the business lobby. Obama adviser Valerie Jarrett slammed the outfit as "old school," and warned CEOs they'd be wise to seek better protection.
That was after the president accused the business lobby of false advertising. And that recent black eye for the Chamber (when several companies, all with Democratic ties, quit in a huff)—think that happened on its own? ("Somebody messes with me, I'm gonna mess with him! Somebody steals from me, I'm gonna say you stole. Not talk to him for spitting on the sidewalk. Understand!?")
The Chamber can at least take comfort in crowds. Who isn't on the business end of the White House's sawed-off shotgun? First up were Chrysler bondholders who—upon balking at a White House deal that rewarded only unions—were privately threatened and then publicly excoriated by the president.
Next, every pharmaceutical, hospital and insurance executive in the nation was held out as a prime obstacle to health-care nirvana. And that was their reward for cooperating. When Humana warned customers about cuts to Medicare under "reform," the White House didn't bother to complain. They went straight for the gag order. When the insurance industry criticized the Baucus health bill, the response was this week's bill to strip them of their federal antitrust immunity. ("I want you to find this nancy-boy . . . I want him dead! I want his family dead! I want his house burned to the ground!")
This summer Arizona Sen. Jon Kyl criticized stimulus dollars. Obama cabinet secretaries sent letters to Arizona Gov. Jan Brewer. One read: "if you prefer to forfeit the money we are making available to the state, as Senator Kyl suggests," let us know. The Arizona Republic wrote: "Let's not mince words here: The White House is intent on shutting Kyl up . . . using whatever means necessary." When Sens. Robert Bennett and Lamar Alexander took issue with the administration's czars, the White House singled them out, by name, on its blog. Sen. Alexander was annoyed enough to take to the floor this week to warn the White House off an "enemies list."
House Minority Whip Eric Cantor? Targeted for the sin of being a up-and-coming conservative voice. Though even Mr. Cantor was shoved aside in August so the Chicago gang could target at least seven Democratic senators, via the president's campaign arm, Organizing for America, for not doing more on health care. ("What I'm saying is: What are you prepared to do??!!")
And don't forget Fox News Channel ("nothing but a lot of talk and a badge!"). Fox, like MSNBC, has its share of commentators. But according to Obama Communications Director Anita Dunn, the entire network is "opinion journalism masquerading as news." Many previous White House press officers, when faced with criticism, try this thing called outreach. The Chicago crowd has boycotted Fox altogether.
What makes these efforts notable is that they are not the lashing out of a frustrated political operation. They are calculated campaigns, designed to create bogeymen, to divide the opposition, to frighten players into compliance. The White House sees a once-in-a-generation opportunity on health care and climate. It is obsessed with winning these near-term battles, and will take no prisoners. It knows that CEOs are easily intimidated and (Fox News ratings aside) it is getting some of its way. Besides, roughing up conservatives gives the liberal blogosphere something to write about besides Guantanamo.
The Oval Office might be more concerned with the long term. It is 10 months in; more than three long years to go. The strategy to play dirty now and triangulate later is risky. One day, say when immigration reform comes due, the Chamber might come in handy. That is if the Chamber isn't too far gone.
White House targets also aren't dopes. The corporate community is realizing that playing nice doesn't guarantee safety. The health executives signed up for reform, only to remain the president's political piñatas. It surely grates that the unions—now running their own ads against ObamaCare—haven't been targeted. If the choice is cooperate and get nailed, or oppose and possibly win, some might take that bet.
There's also the little fact that many Americans voted for this president in thrall to his vow to bring the country together. It's hard to do that amid gunfire, and voters might just notice.
("I do not approve of your methods! Yeah, well . . . You're not from Chicago.")
The Chamber of Commerce is only the latest target of the Chicago Gang in the White House.
WSJ, Oct 23, 2009
They pull a knife, you pull a gun. He sends one of yours to the hospital, you send one of his to the morgue. That's the Chicago way.
–Jim Malone,
"The Untouchables"
When Barack Obama promised to deliver "a new kind of politics" to Washington, most folk didn't picture Rahm Emanuel with a baseball bat. These days, the capital would make David Mamet, who wrote Malone's memorable movie dialogue, proud.
A White House set on kneecapping its opponents isn't, of course, entirely new. (See: Nixon) What is a little novel is the public and bare-knuckle way in which the Obama team is waging these campaigns against the other side.
In recent weeks the Windy City gang added a new name to their list of societal offenders: the Chamber of Commerce. For the cheek of disagreeing with Democrats on climate and financial regulation, it was reported the Oval Office will neuter the business lobby. Obama adviser Valerie Jarrett slammed the outfit as "old school," and warned CEOs they'd be wise to seek better protection.
That was after the president accused the business lobby of false advertising. And that recent black eye for the Chamber (when several companies, all with Democratic ties, quit in a huff)—think that happened on its own? ("Somebody messes with me, I'm gonna mess with him! Somebody steals from me, I'm gonna say you stole. Not talk to him for spitting on the sidewalk. Understand!?")
The Chamber can at least take comfort in crowds. Who isn't on the business end of the White House's sawed-off shotgun? First up were Chrysler bondholders who—upon balking at a White House deal that rewarded only unions—were privately threatened and then publicly excoriated by the president.
Next, every pharmaceutical, hospital and insurance executive in the nation was held out as a prime obstacle to health-care nirvana. And that was their reward for cooperating. When Humana warned customers about cuts to Medicare under "reform," the White House didn't bother to complain. They went straight for the gag order. When the insurance industry criticized the Baucus health bill, the response was this week's bill to strip them of their federal antitrust immunity. ("I want you to find this nancy-boy . . . I want him dead! I want his family dead! I want his house burned to the ground!")
This summer Arizona Sen. Jon Kyl criticized stimulus dollars. Obama cabinet secretaries sent letters to Arizona Gov. Jan Brewer. One read: "if you prefer to forfeit the money we are making available to the state, as Senator Kyl suggests," let us know. The Arizona Republic wrote: "Let's not mince words here: The White House is intent on shutting Kyl up . . . using whatever means necessary." When Sens. Robert Bennett and Lamar Alexander took issue with the administration's czars, the White House singled them out, by name, on its blog. Sen. Alexander was annoyed enough to take to the floor this week to warn the White House off an "enemies list."
House Minority Whip Eric Cantor? Targeted for the sin of being a up-and-coming conservative voice. Though even Mr. Cantor was shoved aside in August so the Chicago gang could target at least seven Democratic senators, via the president's campaign arm, Organizing for America, for not doing more on health care. ("What I'm saying is: What are you prepared to do??!!")
And don't forget Fox News Channel ("nothing but a lot of talk and a badge!"). Fox, like MSNBC, has its share of commentators. But according to Obama Communications Director Anita Dunn, the entire network is "opinion journalism masquerading as news." Many previous White House press officers, when faced with criticism, try this thing called outreach. The Chicago crowd has boycotted Fox altogether.
What makes these efforts notable is that they are not the lashing out of a frustrated political operation. They are calculated campaigns, designed to create bogeymen, to divide the opposition, to frighten players into compliance. The White House sees a once-in-a-generation opportunity on health care and climate. It is obsessed with winning these near-term battles, and will take no prisoners. It knows that CEOs are easily intimidated and (Fox News ratings aside) it is getting some of its way. Besides, roughing up conservatives gives the liberal blogosphere something to write about besides Guantanamo.
The Oval Office might be more concerned with the long term. It is 10 months in; more than three long years to go. The strategy to play dirty now and triangulate later is risky. One day, say when immigration reform comes due, the Chamber might come in handy. That is if the Chamber isn't too far gone.
White House targets also aren't dopes. The corporate community is realizing that playing nice doesn't guarantee safety. The health executives signed up for reform, only to remain the president's political piñatas. It surely grates that the unions—now running their own ads against ObamaCare—haven't been targeted. If the choice is cooperate and get nailed, or oppose and possibly win, some might take that bet.
There's also the little fact that many Americans voted for this president in thrall to his vow to bring the country together. It's hard to do that amid gunfire, and voters might just notice.
("I do not approve of your methods! Yeah, well . . . You're not from Chicago.")
Don't be fooled by the bond market. Banks are holding prices down because they can buy Treasurys with free money from the Fed
Preventing the Next Financial Crisis. By ALLAN H. MELTZER
Don't be fooled by the bond market. Banks are holding prices down because they can buy Treasurys with free money from the Fed.
WSJ, Oct 23, 2009
The United States is headed toward a new financial crisis. History gives many examples of countries with high actual and expected money growth, unsustainable budget deficits, and a currency expected to depreciate. Unless these countries made massive policy changes, they ended in crisis. We will escape only if we act forcefully and soon.
As long ago as the 1960s, then French President Charles de Gaulle complained that the U.S. had the "exorbitant privilege" of financing its budget deficit by issuing more dollars. Massive purchases of dollar debt by foreigners can of course delay the crisis, but today most countries have their own deficits to finance. It is unwise to expect them, mainly China, to continue financing up to half of ours for the next 10 or more years. Our current and projected deficits are too large relative to current and prospective world saving to rely on that outcome.
Worse, banks' idle reserves that are available for lending reached $1 trillion last week. Federal Reserve Chairman Ben Bernanke said repeatedly in the past that excess reserves would run down when banks and other financial companies repaid their heavy short-term borrowing to the Fed. The borrowing has been repaid but idle reserves have increased. Once banks begin to expand loans or finance even more of the massive deficits, money growth will rise rapidly and the dollar will sink to new lows. Do we have to wait for a crisis before we replace promises with effective restraint?
Many market participants reassure themselves that inflation won't come by noting the decline in yields on longer-term Treasury bonds and the spread between nominal Treasury yields and index-linked TIPS that protect against inflation. They measure expectations of higher inflation by the difference between these two rates, and imply long-term investors aren't demanding higher interest rates to protect themselves against it. But those traditional inflation-warning indicators are distorted because the Fed lends money at about a zero rate and the banks buy Treasury securities, reducing their yield and thus the size of the inflation premium.
Further, the Fed is buying massive amounts of mortgages to depress and distort the mortgage rate. This way of subsidizing bank profits and increasing their capital bails out these institutions but avoids going to Congress for more money to do so. It follows the Fed's usual practice of protecting big banks instead of the public.
The administration admits to about $1 trillion budget deficits per year, on average, for the next 10 years. That's clearly an underestimate, because it counts on the projected $200 billion to $300 billion of projected reductions in Medicare spending that will not be realized. And who can believe that the projected increase in state spending for Medicaid can be paid by the states, or that payments to doctors will be reduced by about 25%?
While Chinese government purchases of our debt may delay a dollar and debt crisis, they also delay any effective program to reduce the size of that crisis. It is far better to begin containing the problem before we blow a hole in the dollar and start another downturn.
A weak economy is a poor time to reduce current government spending or raise tax rates, but we don't require draconian immediate changes. We do need a fully specified, multi-year program to restore fiscal probity by reducing spending, and a budget rule that limits the size and frequency of deficits. The plan should be announced in a rousing speech by the president. The emphasis should be on reducing government spending.
The Obama administration chooses to blame outsize deficits on its predecessor. That's a mistake, because it hides a structural flaw: We no longer have any way of imposing fiscal restraint and financial prudence. Federal, state and local governments understate future spending and run budget deficits in good times and bad. Budgets do not report these future obligations.
Except for a few years in the 1990s, both parties have been at fault for decades, and the Obama administration is one of the worst offenders. Its $780 billion stimulus bill, enacted earlier this year, has been wasteful and ineffective. The Council of Economic Advisers was so pressed to justify the spending spree that it shamefully invented a number called "jobs saved" that has never been seen before, has no agreed meaning, and no academic standing.
One reason for the great inflation of the 1970s was that the Federal Reserve gave primacy to reducing unemployment. But attempts to tame inflation later didn't last, and the result was a decade of high and rising unemployment and prices. It did not end until the public accepted temporarily higher unemployment—more than 10.5% in the fall of 1982—to reduce inflation.
Another error of the 1970s was the assumption there was a necessary trade-off along a stable Phillips Curve between unemployment and inflation—in other words, that more inflation was supposed to lower unemployment. Instead, both rose. The Fed under Paul Volcker stopped making those errors, and inflation fell permanently for the first time since the 1950s.
Both errors are back. The Fed and most others do not see inflation in the near term. Neither do I. High inflation is unlikely in 2010. That's why a program beginning now should start to lower excess reserves gradually so that the Fed will not have to make its usual big shift from excessive ease to severe contraction that causes a major downturn in the economy.
A steady, committed policy to reduce future inflation and lower future budget deficits will avoid the crisis that current policies will surely bring. Low inflation and fiscal prudence is the right way to strengthen the dollar and increase economic well being.
Mr. Meltzer is professor of political economy at Carnegie Mellon University and the author of the multi-volume "A History of the Federal Reserve" (University of Chicago, 2004 and 2010).
Don't be fooled by the bond market. Banks are holding prices down because they can buy Treasurys with free money from the Fed.
WSJ, Oct 23, 2009
The United States is headed toward a new financial crisis. History gives many examples of countries with high actual and expected money growth, unsustainable budget deficits, and a currency expected to depreciate. Unless these countries made massive policy changes, they ended in crisis. We will escape only if we act forcefully and soon.
As long ago as the 1960s, then French President Charles de Gaulle complained that the U.S. had the "exorbitant privilege" of financing its budget deficit by issuing more dollars. Massive purchases of dollar debt by foreigners can of course delay the crisis, but today most countries have their own deficits to finance. It is unwise to expect them, mainly China, to continue financing up to half of ours for the next 10 or more years. Our current and projected deficits are too large relative to current and prospective world saving to rely on that outcome.
Worse, banks' idle reserves that are available for lending reached $1 trillion last week. Federal Reserve Chairman Ben Bernanke said repeatedly in the past that excess reserves would run down when banks and other financial companies repaid their heavy short-term borrowing to the Fed. The borrowing has been repaid but idle reserves have increased. Once banks begin to expand loans or finance even more of the massive deficits, money growth will rise rapidly and the dollar will sink to new lows. Do we have to wait for a crisis before we replace promises with effective restraint?
Many market participants reassure themselves that inflation won't come by noting the decline in yields on longer-term Treasury bonds and the spread between nominal Treasury yields and index-linked TIPS that protect against inflation. They measure expectations of higher inflation by the difference between these two rates, and imply long-term investors aren't demanding higher interest rates to protect themselves against it. But those traditional inflation-warning indicators are distorted because the Fed lends money at about a zero rate and the banks buy Treasury securities, reducing their yield and thus the size of the inflation premium.
Further, the Fed is buying massive amounts of mortgages to depress and distort the mortgage rate. This way of subsidizing bank profits and increasing their capital bails out these institutions but avoids going to Congress for more money to do so. It follows the Fed's usual practice of protecting big banks instead of the public.
The administration admits to about $1 trillion budget deficits per year, on average, for the next 10 years. That's clearly an underestimate, because it counts on the projected $200 billion to $300 billion of projected reductions in Medicare spending that will not be realized. And who can believe that the projected increase in state spending for Medicaid can be paid by the states, or that payments to doctors will be reduced by about 25%?
While Chinese government purchases of our debt may delay a dollar and debt crisis, they also delay any effective program to reduce the size of that crisis. It is far better to begin containing the problem before we blow a hole in the dollar and start another downturn.
A weak economy is a poor time to reduce current government spending or raise tax rates, but we don't require draconian immediate changes. We do need a fully specified, multi-year program to restore fiscal probity by reducing spending, and a budget rule that limits the size and frequency of deficits. The plan should be announced in a rousing speech by the president. The emphasis should be on reducing government spending.
The Obama administration chooses to blame outsize deficits on its predecessor. That's a mistake, because it hides a structural flaw: We no longer have any way of imposing fiscal restraint and financial prudence. Federal, state and local governments understate future spending and run budget deficits in good times and bad. Budgets do not report these future obligations.
Except for a few years in the 1990s, both parties have been at fault for decades, and the Obama administration is one of the worst offenders. Its $780 billion stimulus bill, enacted earlier this year, has been wasteful and ineffective. The Council of Economic Advisers was so pressed to justify the spending spree that it shamefully invented a number called "jobs saved" that has never been seen before, has no agreed meaning, and no academic standing.
One reason for the great inflation of the 1970s was that the Federal Reserve gave primacy to reducing unemployment. But attempts to tame inflation later didn't last, and the result was a decade of high and rising unemployment and prices. It did not end until the public accepted temporarily higher unemployment—more than 10.5% in the fall of 1982—to reduce inflation.
Another error of the 1970s was the assumption there was a necessary trade-off along a stable Phillips Curve between unemployment and inflation—in other words, that more inflation was supposed to lower unemployment. Instead, both rose. The Fed under Paul Volcker stopped making those errors, and inflation fell permanently for the first time since the 1950s.
Both errors are back. The Fed and most others do not see inflation in the near term. Neither do I. High inflation is unlikely in 2010. That's why a program beginning now should start to lower excess reserves gradually so that the Fed will not have to make its usual big shift from excessive ease to severe contraction that causes a major downturn in the economy.
A steady, committed policy to reduce future inflation and lower future budget deficits will avoid the crisis that current policies will surely bring. Low inflation and fiscal prudence is the right way to strengthen the dollar and increase economic well being.
Mr. Meltzer is professor of political economy at Carnegie Mellon University and the author of the multi-volume "A History of the Federal Reserve" (University of Chicago, 2004 and 2010).
Thursday, October 22, 2009
Wage controls are politically easier than genuine reforms
Our New Paymasters. WSJ Editorial
Wage controls are politically easier than genuine reforms.
The Wall Street Journal, page A20, Oct 23, 2009
In the annals of what used to be known as American capitalism, yesterday will go down as a sorry day: The Treasury and Federal Reserve announced wage controls on private American companies. So once again our politicians are blaming bankers, rather than addressing the incentives the politicians themselves created for bankers to take excessive risks.
President Obama cheered the pay reductions as "an important step forward" and urged Congress to "continue moving forward on financial reform to help prevent the crisis we saw last fall from happening again." The pay curbs are intended to feed the official political narrative that the bankers caused the entire crisis, and that cutting their future pay will prevent the next one. Only a politician could really believe this, or at least pretend to.
We certainly have no sympathy for bankers who've been bailed out, and the most defensible of yesterday's pay curbs are those announced by Treasury "pay czar" Ken Feinberg. He was handed the task of determining compensation for 175 executives at seven companies that are still using money from the Troubled Asset Relief Program: Citigroup, AIG, Bank of America, General Motors, Chrysler, GMAC and Chrysler Financial. These companies—and executives—owe their survival to political intervention, and the price of such taxpayer help is inevitably some populist retribution.
Mr. Feinberg thus has the impossible job of navigating between Congress's desire for revenge and the incentives needed to motivate business success at companies that still need to repay taxpayers. His strategy seems to be to slash cash compensation to $500,000 or less for most of the affected workers, while the bulk of their compensation will come in the form of stock tied to future corporate performance. This seems reasonable enough in principle. But the danger is that these pay limits will drive the most talented people at these firms to other companies without such onerous pay limits.
Far more dangerous is yesterday's announcement that the Fed plans to impose new pay guidelines on all of the banks it regulates. While the Fed imposed no pay cap, and it was at pains to say it didn't want to impose a "one size fits all" standard, the implication is that any large single-year payouts will be frowned upon by regulators. The Fed wants what it refers to as more "balanced" pay standards, which in practice is likely to mean smaller bonuses up front and longer time frames to see if "risks" pay off over several years.
The irony is that judgments about what constitutes "excessive risk" at banks will presumably be made by the same Fed regulators who let Citigroup put hundreds of billions in SIVs off its balance sheet. That certainly looks "excessive" now, though apparently it didn't amid the credit mania. The point is that Fed officials aren't likely to have a clue what kind of risks warrant tighter compensation rules. And these new guidelines may also drive the best and brightest out of the banks and into less regulated institutions.
Paul Volcker must be smiling at that one. Like Bank of England Governor Mervyn King (see below), the former Fed Chairman argued in Obama circles that a better way to regulate banks is to separate the riskiest trading activities from those that accept taxpayer guaranteed deposits. That reform would have moved the riskiest proprietary trading out of taxpayer-protected institutions. But the White House and Treasury deemed this too politically difficult, so instead they are now regulating the pay of bankers as an alternative way to diminish those risks. Good luck.
Meanwhile, the Administration still hasn't done anything to change the incentives for excessive risk-taking that are embedded in its own "too big to fail" doctrine. As long as bankers and their creditors believe they have a federal safety net, they will have a cheaper cost of capital that will encourage them to take greater risks. New pay rules will quickly be worked around or through.
As Mr. King put it this week, "The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the 'too important to fail' question. The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion." The same can be said for pay curbs.
The most profound mistake in these rules is the terrible precedent they set for wage controls
across the economy. The Obama Administration will say that banks are a special case, and that is true. But once politicians feel free to regulate executive pay for one industry, it is no great leap to do it for everyone. Our guess is that these pay rules will prove to be both ineffectual and destructive—a perfect Washington combination.
Wage controls are politically easier than genuine reforms.
The Wall Street Journal, page A20, Oct 23, 2009
In the annals of what used to be known as American capitalism, yesterday will go down as a sorry day: The Treasury and Federal Reserve announced wage controls on private American companies. So once again our politicians are blaming bankers, rather than addressing the incentives the politicians themselves created for bankers to take excessive risks.
President Obama cheered the pay reductions as "an important step forward" and urged Congress to "continue moving forward on financial reform to help prevent the crisis we saw last fall from happening again." The pay curbs are intended to feed the official political narrative that the bankers caused the entire crisis, and that cutting their future pay will prevent the next one. Only a politician could really believe this, or at least pretend to.
We certainly have no sympathy for bankers who've been bailed out, and the most defensible of yesterday's pay curbs are those announced by Treasury "pay czar" Ken Feinberg. He was handed the task of determining compensation for 175 executives at seven companies that are still using money from the Troubled Asset Relief Program: Citigroup, AIG, Bank of America, General Motors, Chrysler, GMAC and Chrysler Financial. These companies—and executives—owe their survival to political intervention, and the price of such taxpayer help is inevitably some populist retribution.
Mr. Feinberg thus has the impossible job of navigating between Congress's desire for revenge and the incentives needed to motivate business success at companies that still need to repay taxpayers. His strategy seems to be to slash cash compensation to $500,000 or less for most of the affected workers, while the bulk of their compensation will come in the form of stock tied to future corporate performance. This seems reasonable enough in principle. But the danger is that these pay limits will drive the most talented people at these firms to other companies without such onerous pay limits.
Far more dangerous is yesterday's announcement that the Fed plans to impose new pay guidelines on all of the banks it regulates. While the Fed imposed no pay cap, and it was at pains to say it didn't want to impose a "one size fits all" standard, the implication is that any large single-year payouts will be frowned upon by regulators. The Fed wants what it refers to as more "balanced" pay standards, which in practice is likely to mean smaller bonuses up front and longer time frames to see if "risks" pay off over several years.
The irony is that judgments about what constitutes "excessive risk" at banks will presumably be made by the same Fed regulators who let Citigroup put hundreds of billions in SIVs off its balance sheet. That certainly looks "excessive" now, though apparently it didn't amid the credit mania. The point is that Fed officials aren't likely to have a clue what kind of risks warrant tighter compensation rules. And these new guidelines may also drive the best and brightest out of the banks and into less regulated institutions.
Paul Volcker must be smiling at that one. Like Bank of England Governor Mervyn King (see below), the former Fed Chairman argued in Obama circles that a better way to regulate banks is to separate the riskiest trading activities from those that accept taxpayer guaranteed deposits. That reform would have moved the riskiest proprietary trading out of taxpayer-protected institutions. But the White House and Treasury deemed this too politically difficult, so instead they are now regulating the pay of bankers as an alternative way to diminish those risks. Good luck.
Meanwhile, the Administration still hasn't done anything to change the incentives for excessive risk-taking that are embedded in its own "too big to fail" doctrine. As long as bankers and their creditors believe they have a federal safety net, they will have a cheaper cost of capital that will encourage them to take greater risks. New pay rules will quickly be worked around or through.
As Mr. King put it this week, "The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the 'too important to fail' question. The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion." The same can be said for pay curbs.
The most profound mistake in these rules is the terrible precedent they set for wage controls
across the economy. The Obama Administration will say that banks are a special case, and that is true. But once politicians feel free to regulate executive pay for one industry, it is no great leap to do it for everyone. Our guess is that these pay rules will prove to be both ineffectual and destructive—a perfect Washington combination.
Brown v. King - Politicians hate hearing their subsidies contributed to the crisis
Brown v. King. WSJ Editorial
Politicians hate hearing their subsidies contributed to the crisis.
WSJ, Oct 22, 2009
Gordon Brown gave the Bank of England its independence 12 years ago, but this week he seemed to be looking for someone to rid him of his troublesome central banker. Bank of England Governor Mervyn King gave a speech in Edinburgh Tuesday in which he said, in effect, that if a bank is too big to fail, it's just too big. On Wednesday, The British Prime Minister shot back that breaking up the largest financial institutions wasn't the answer, adding the now obligatory call for global regulation of banker pay.
One can disagree with Governor King's contention Tuesday that the banking system, and the economy, would be better served by a stricter division between investment banking and commercial or retail banking. But more important than Mr. King's solution was his diagnosis of the problem, which shows more understanding of what caused last year's panic than the usual pabulum about magic bonuses.
"Why," Mr. King asked, "were banks willing to take risks that proved so damaging both to themselves and the rest of the economy?" His answer: "One of the key reasons . . . is that the incentives to manage risk and to increase leverage were distorted by the implicit support or guarantee provided by government to creditors of banks that were seen as 'too important to fail.'" Politicians hate hearing that it was their subsidies for credit and for the biggest banks that contributed to the problem.
Mr. King wasn't done: "Such banks could raise funding more cheaply and expand faster than other institutions. They had less incentive than others to guard against tail risk. Banks and their creditors knew that if they were sufficiently important to the economy or the rest of the financial system, and things went wrong, the government would always stand behind them." He concluded: "And they were right."
On this essential point, Mr. King is on target, and it's heartening to hear an important public official put his finger on the real problem so succinctly. Mr. Brown would prefer to point to inadequate "global regulation" of finance. But show us the regulator who could have prevented the panic, even with unlimited power, and we'll show you a world without the freedom to succeed or fail.
Politicians hate hearing their subsidies contributed to the crisis.
WSJ, Oct 22, 2009
Gordon Brown gave the Bank of England its independence 12 years ago, but this week he seemed to be looking for someone to rid him of his troublesome central banker. Bank of England Governor Mervyn King gave a speech in Edinburgh Tuesday in which he said, in effect, that if a bank is too big to fail, it's just too big. On Wednesday, The British Prime Minister shot back that breaking up the largest financial institutions wasn't the answer, adding the now obligatory call for global regulation of banker pay.
One can disagree with Governor King's contention Tuesday that the banking system, and the economy, would be better served by a stricter division between investment banking and commercial or retail banking. But more important than Mr. King's solution was his diagnosis of the problem, which shows more understanding of what caused last year's panic than the usual pabulum about magic bonuses.
"Why," Mr. King asked, "were banks willing to take risks that proved so damaging both to themselves and the rest of the economy?" His answer: "One of the key reasons . . . is that the incentives to manage risk and to increase leverage were distorted by the implicit support or guarantee provided by government to creditors of banks that were seen as 'too important to fail.'" Politicians hate hearing that it was their subsidies for credit and for the biggest banks that contributed to the problem.
Mr. King wasn't done: "Such banks could raise funding more cheaply and expand faster than other institutions. They had less incentive than others to guard against tail risk. Banks and their creditors knew that if they were sufficiently important to the economy or the rest of the financial system, and things went wrong, the government would always stand behind them." He concluded: "And they were right."
On this essential point, Mr. King is on target, and it's heartening to hear an important public official put his finger on the real problem so succinctly. Mr. Brown would prefer to point to inadequate "global regulation" of finance. But show us the regulator who could have prevented the panic, even with unlimited power, and we'll show you a world without the freedom to succeed or fail.
Tuesday, October 20, 2009
Industry views: The U.S. doubles down on solar subsidies while Europe retreats
The U.S. doubles down on solar subsidies while Europe retreats
IER, Oct 19, 2009
The cap and trade bills circulating in Congress (such as H.R. 2454, the Waxman-Markey bill) not only “tax” the people of the nation for the right to reduce greenhouse gas emissions in this country, but they contain additional energy-related “tax” provisions.[i] One of these is a Renewable Portfolio Standard (RPS) that requires 20 percent of electricity generation to come from qualified renewable technologies by 2020.[ii] This is a “tax” because it requires those utilities unable to meet the required percentage to purchase renewable credits from those that can exceed the targeted amount. The higher generating costs incurred from constructing and operating the renewable technologies, or buying renewable credits, will be passed on to the users of the electricity. These “taxes” are in addition to the generous tax-funded subsidies already provided to many qualified renewables.
The concept of an RPS is not new. Twenty-nine states and the District of Columbia currently have some form of RPS[iii], but few states are meeting their mandates,[iv] and these states have often tailored their “qualified renewables” liberally to what makes sense to their area. Texas, a state that has met its mandates mainly from wind-generated power, the least-cost qualified renewable, is now considering expanding into more costly renewables, such as solar power. Houston, for example, is considering using solar to generate 1.5 percent of its government’s needs from a 10-megawatt plant to be built by NRG and to be operating by July 2010. When the sun is not visible, the plant will be backed-up by the city’s natural gas-fired generating units.
The proposed 10-megawatt Houston plant is estimated to cost $40 million[v], $4,000 per kilowatt, which is a smaller cost figure than many other solar project estimates and most probably speculative. And, that $4,000 per kilowatt is also far more costly than other generating technologies that are more reliable to boot. For example, the Energy information Administration (EIA), an independent agency within the U.S. Department of Energy, is estimating the cost to build a coal-fired plant at about half the estimated cost in Houston, or just over $2,000 per kilowatt, and a natural-gas fired plant at less than a quarter of that cost, at below $1,000 per kilowatt. [vi] EIA’s estimate for a photovoltaic plant, which is what is being proposed in Houston, is just over $6,000 per kilowatt, 50 percent higher than the NRG cost estimate.[vii] In fact, photovoltaic solar is the highest-cost generating technology of EIA’s slate of 20 potential technologies for generating this country’s future electricity needs.[viii]
European Experience
However, we do not have to use EIA’s cost figures to know that solar is non-competitive with conventional grid generation. Several countries in Europe have already implemented RPS type programs with hefty subsidies funded by the country’s taxpayers. They include Spain, Germany, and Denmark. For example, in Alvarado, Spain, the energy firm Acciona inaugurated a 50-MW concentrating solar power plant in late July. The cost is €236 million, about $350 million U.S., or about $7,000 per kilowatt.[ix] Construction of the plant began in February 2008, with an average of 350 people working throughout the 18-month construction period. The plant will be run by a 31-person operation and maintenance team. This is the second solar plant of this type built in Spain. Its predecessor has been operating since June 2007.[x]
Spain ranks second in the world in installed solar capacity, second only to Germany.[xi] To achieve that ranking, Spain initiated legislation that requires 20 percent of its electricity generation to be from renewable energy by 2010. To make renewable energy attractive to investors, Spain also subsidized its renewable technologies. In 2008, for instance, when solar power generated less than 1 percent of Spain’s electricity, its cost was over 7 times higher than the average electricity price. Due to feed-in tariffs, utility companies were forced to buy the renewable power at its higher cost. And not only is solar power more expensive, jobs that could have been fostered and continued elsewhere in the Spanish economy were foregone to meet the government’s renewable mandates. A Spanish researcher found that while solar energy employs many workers in the plant’s construction, it consumes a great amount of capital that would have created many more jobs in other parts of the economy. In fact, for each megawatt of solar energy installed in Spain, 12.7 jobs were lost elsewhere in the Spanish economy.[xii] Recently, the Spanish government decided to slash subsidies to solar power. Spain will subsidize just 500 megawatts of solar projects this year, down sharply from 2,400 megawatts last year.[xiii]
Germany—the world’s highest ranking country for installed solar capacity and the largest market for solar products—is also slashing its subsidies for solar power in order to ease costs for electricity users. Owners of solar panels receive as much as 43 euro cents (64 U.S. cents) per kilowatt hour of power they generate.[xiv] The Energy Information Administration calculates the levelized cost of electricity[xv] from solar photovoltaic power to be 39.57 cents per kilowatt hour (2007 dollars) in 2016,[xvi] far less than the German subsidy. According to some German researchers, the feed-in tariff for solar is 43 euro cents per kilowatt hour (kWh), making solar electricity by far the most subsidized technology among all forms of renewable energy. This feed-in tariff for solar photovoltaic power is more than eight times higher than the electricity price at the power exchange and more than four times the feed-in tariff paid for electricity produced by on-shore wind turbines. Because of solar power’s low capacity factor, solar generated only 0.6 percent of Germany’s electricity in 2008.[xvii] Since the sun doesn’t always shine on solar plants, solar power cannot compete with more mature generating technologies. The EIA estimates the capacity factor for solar in 2008 to be 17 percent.[xviii]
U.S. Subsidies
While the U.S. does not have feed-in tariffs at this time, it does subsidize solar power through investment tax credits that are as high as 30 percent currently and until 2016. Solar also benefits from a permanent investment tax credit of 10 percent in the U.S., and a 5-year accelerated depreciation write-off. The Energy information Administration estimates that total federal subsidies for electric production from solar power for fiscal year 2007 were $24.34 per megawatt hour, compared to 25 cents per megawatt hour for natural gas and petroleum fueled technologies—98 times higher.[xix] Yet, even with these subsidies, solar generated only 0.02 percent of U.S. electricity in 2008.[xx] That is because solar at around 40 cents per kilowatt hour is more than 4 times as expensive on a levelized cost basis than its fossil competitors. (EIA estimates that levelized costs for conventional coal are 9.46 cents per kilowatt hour and those for natural gas combined cycle are 8.39 cents per kilowatt hour (in 2007 dollars) for 2016.[xxi])
Of course, the U.S. is slow in learning from Europe’s experiences. On October 12, 2009, California Governor Arnold Schwarzenegger signed into law S.B. 32, a feed-in tariff that requires California utilities to buy all renewable generation under 3 megawatts within their service territories, until they hit a state-wide total cap of 750 megawatts.[xxii] How California will monitor this program is yet to be seen. It has yet to achieve its renewable generating mandates from its RPS program.[xxiii]
Conclusion
Solar power has it place in certain applications. As always, the individual citizen or company should be able to choose if solar works for their energy needs. But using solar power to generate electricity for the electrical grid is very expensive. Requiring ratepayers to buy solar power, either through renewable energy mandates or through feed-in tariffs, will only increase the price of electricity. The last thing the economy needs is higher energy prices, but that is exactly what solar energy’s supporters are promoting.
References
[i] Robert J. Michaels, The Other Half of Waxman-Markey: An Examination of the non-Cap-and-Trade Provisions, http://www.instituteforenergyresearch.org/pdf/Other_Half_of_Waxman-Markey–FINAL.pdf
[ii] H.R. 2454, section 101
[iii] Database of State Incentives for Renewables and Efficiency (DSIRE), North Carolina State University, http://www.dsireusa.org/incentives/index.cfm?SearchType=RPS&&EE=0&RS=1
[iv] Traci Watson, States not meeting renewable energy goals, USA Today, Oct. 8, 2009, http://www.usatoday.com/money/industries/energy/2009-10-08-altenergy_N.htm.
[v] “Solar forecast: expensive”, Loren Steffy, Houston Chronicle, September 29, 2009, http://www.chron.com/disp/story.mpl/business/steffy/6643904.html
[vi] Energy information Administration, Assumptions to the Annual Energy outlook 2009, Table 8.2.
[vii] Ibid.
[viii] Ibid.
[ix] Sonal Patel, Power Digest, Power Magazine, Sept. 2009, http://powermag.com/business/2144.html.
[x] Sonal Patel, Interest in Solar Tower Technology Rising, Power Magazine, http://powermag.com/renewables/solar/Interest-in-Solar-Tower-Technology-Rising_1876.html.
[xi] Solar Energy Industries Association, http://www.seia.org/cs/about_solar_energy/industry_data
[xii] Study of the effects on employment of public aid to renewable energy sources, Universidad Rey Juan Carlos, March 2009, http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf
[xiii] Wall Street journal, “Darker Times for Solar-Power Industry”, May 11, 2009, http://online.wsj.com/article/SB124199500034504717.html .
[xiv] “Merkel’s Coalition to “Definitely” Cut German Solar subsidies”, Brian Parker and Nicholas Comfort, Bloomberg, October 12, 2009, http://www.bloomberg.com/apps/news?pid=206011
[xv] The levelized cost of a generating technology is the present value of the total cost of building and operating the generating plant over its financial life.
[xvi]“Levelized Cost of New Electricity Generating Technologies” , Institute for Energy Research, May 12, 2009, http://www.instituteforenergyresearch.org/2009/05/12/levelized-cost-of-new-generating-technologies/
[xvii] “Economic impacts from the promotion of renewable energies”, Rheinisch-Westfälisches Institut für Wirtschaft sforschung
[xviii] “Solar forecast: expensive”, Loren Steffy, Houston Chronicle, September 29, 2009, http://www.chron.com/disp/story.mpl/business/steffy/6643904.html
[xix] Energy information Administration, Federal Financial interventions and Subsidies in Energy markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html .
[xx] Energy Information Administration, Monthly Energy Review, Table 7.2a, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec7_5.pdf
[xxi]“Levelized Cost of New Electricity Generating Technologies” , Institute for Energy Research, May 12, 2009, http://www.instituteforenergyresearch.org/2009/05/12/levelized-cost-of-new-generating-technologies/
[xxii] Greenwire, “California: Schwarzenegger signs feed-in tariff, spate of enviro bills”, October 12, 2009, http://www.eenews.net/Greenwire/2009/10/12/4/
[xxiii] Robert J. Michaels, “A National Renewable Portfolio Standard: Politically Correct, Economically Suspect,” Electricity Journal 21 (April 2008)
IER, Oct 19, 2009
The cap and trade bills circulating in Congress (such as H.R. 2454, the Waxman-Markey bill) not only “tax” the people of the nation for the right to reduce greenhouse gas emissions in this country, but they contain additional energy-related “tax” provisions.[i] One of these is a Renewable Portfolio Standard (RPS) that requires 20 percent of electricity generation to come from qualified renewable technologies by 2020.[ii] This is a “tax” because it requires those utilities unable to meet the required percentage to purchase renewable credits from those that can exceed the targeted amount. The higher generating costs incurred from constructing and operating the renewable technologies, or buying renewable credits, will be passed on to the users of the electricity. These “taxes” are in addition to the generous tax-funded subsidies already provided to many qualified renewables.
The concept of an RPS is not new. Twenty-nine states and the District of Columbia currently have some form of RPS[iii], but few states are meeting their mandates,[iv] and these states have often tailored their “qualified renewables” liberally to what makes sense to their area. Texas, a state that has met its mandates mainly from wind-generated power, the least-cost qualified renewable, is now considering expanding into more costly renewables, such as solar power. Houston, for example, is considering using solar to generate 1.5 percent of its government’s needs from a 10-megawatt plant to be built by NRG and to be operating by July 2010. When the sun is not visible, the plant will be backed-up by the city’s natural gas-fired generating units.
The proposed 10-megawatt Houston plant is estimated to cost $40 million[v], $4,000 per kilowatt, which is a smaller cost figure than many other solar project estimates and most probably speculative. And, that $4,000 per kilowatt is also far more costly than other generating technologies that are more reliable to boot. For example, the Energy information Administration (EIA), an independent agency within the U.S. Department of Energy, is estimating the cost to build a coal-fired plant at about half the estimated cost in Houston, or just over $2,000 per kilowatt, and a natural-gas fired plant at less than a quarter of that cost, at below $1,000 per kilowatt. [vi] EIA’s estimate for a photovoltaic plant, which is what is being proposed in Houston, is just over $6,000 per kilowatt, 50 percent higher than the NRG cost estimate.[vii] In fact, photovoltaic solar is the highest-cost generating technology of EIA’s slate of 20 potential technologies for generating this country’s future electricity needs.[viii]
European Experience
However, we do not have to use EIA’s cost figures to know that solar is non-competitive with conventional grid generation. Several countries in Europe have already implemented RPS type programs with hefty subsidies funded by the country’s taxpayers. They include Spain, Germany, and Denmark. For example, in Alvarado, Spain, the energy firm Acciona inaugurated a 50-MW concentrating solar power plant in late July. The cost is €236 million, about $350 million U.S., or about $7,000 per kilowatt.[ix] Construction of the plant began in February 2008, with an average of 350 people working throughout the 18-month construction period. The plant will be run by a 31-person operation and maintenance team. This is the second solar plant of this type built in Spain. Its predecessor has been operating since June 2007.[x]
Spain ranks second in the world in installed solar capacity, second only to Germany.[xi] To achieve that ranking, Spain initiated legislation that requires 20 percent of its electricity generation to be from renewable energy by 2010. To make renewable energy attractive to investors, Spain also subsidized its renewable technologies. In 2008, for instance, when solar power generated less than 1 percent of Spain’s electricity, its cost was over 7 times higher than the average electricity price. Due to feed-in tariffs, utility companies were forced to buy the renewable power at its higher cost. And not only is solar power more expensive, jobs that could have been fostered and continued elsewhere in the Spanish economy were foregone to meet the government’s renewable mandates. A Spanish researcher found that while solar energy employs many workers in the plant’s construction, it consumes a great amount of capital that would have created many more jobs in other parts of the economy. In fact, for each megawatt of solar energy installed in Spain, 12.7 jobs were lost elsewhere in the Spanish economy.[xii] Recently, the Spanish government decided to slash subsidies to solar power. Spain will subsidize just 500 megawatts of solar projects this year, down sharply from 2,400 megawatts last year.[xiii]
Germany—the world’s highest ranking country for installed solar capacity and the largest market for solar products—is also slashing its subsidies for solar power in order to ease costs for electricity users. Owners of solar panels receive as much as 43 euro cents (64 U.S. cents) per kilowatt hour of power they generate.[xiv] The Energy Information Administration calculates the levelized cost of electricity[xv] from solar photovoltaic power to be 39.57 cents per kilowatt hour (2007 dollars) in 2016,[xvi] far less than the German subsidy. According to some German researchers, the feed-in tariff for solar is 43 euro cents per kilowatt hour (kWh), making solar electricity by far the most subsidized technology among all forms of renewable energy. This feed-in tariff for solar photovoltaic power is more than eight times higher than the electricity price at the power exchange and more than four times the feed-in tariff paid for electricity produced by on-shore wind turbines. Because of solar power’s low capacity factor, solar generated only 0.6 percent of Germany’s electricity in 2008.[xvii] Since the sun doesn’t always shine on solar plants, solar power cannot compete with more mature generating technologies. The EIA estimates the capacity factor for solar in 2008 to be 17 percent.[xviii]
U.S. Subsidies
While the U.S. does not have feed-in tariffs at this time, it does subsidize solar power through investment tax credits that are as high as 30 percent currently and until 2016. Solar also benefits from a permanent investment tax credit of 10 percent in the U.S., and a 5-year accelerated depreciation write-off. The Energy information Administration estimates that total federal subsidies for electric production from solar power for fiscal year 2007 were $24.34 per megawatt hour, compared to 25 cents per megawatt hour for natural gas and petroleum fueled technologies—98 times higher.[xix] Yet, even with these subsidies, solar generated only 0.02 percent of U.S. electricity in 2008.[xx] That is because solar at around 40 cents per kilowatt hour is more than 4 times as expensive on a levelized cost basis than its fossil competitors. (EIA estimates that levelized costs for conventional coal are 9.46 cents per kilowatt hour and those for natural gas combined cycle are 8.39 cents per kilowatt hour (in 2007 dollars) for 2016.[xxi])
Of course, the U.S. is slow in learning from Europe’s experiences. On October 12, 2009, California Governor Arnold Schwarzenegger signed into law S.B. 32, a feed-in tariff that requires California utilities to buy all renewable generation under 3 megawatts within their service territories, until they hit a state-wide total cap of 750 megawatts.[xxii] How California will monitor this program is yet to be seen. It has yet to achieve its renewable generating mandates from its RPS program.[xxiii]
Conclusion
Solar power has it place in certain applications. As always, the individual citizen or company should be able to choose if solar works for their energy needs. But using solar power to generate electricity for the electrical grid is very expensive. Requiring ratepayers to buy solar power, either through renewable energy mandates or through feed-in tariffs, will only increase the price of electricity. The last thing the economy needs is higher energy prices, but that is exactly what solar energy’s supporters are promoting.
References
[i] Robert J. Michaels, The Other Half of Waxman-Markey: An Examination of the non-Cap-and-Trade Provisions, http://www.instituteforenergyresearch.org/pdf/Other_Half_of_Waxman-Markey–FINAL.pdf
[ii] H.R. 2454, section 101
[iii] Database of State Incentives for Renewables and Efficiency (DSIRE), North Carolina State University, http://www.dsireusa.org/incentives/index.cfm?SearchType=RPS&&EE=0&RS=1
[iv] Traci Watson, States not meeting renewable energy goals, USA Today, Oct. 8, 2009, http://www.usatoday.com/money/industries/energy/2009-10-08-altenergy_N.htm.
[v] “Solar forecast: expensive”, Loren Steffy, Houston Chronicle, September 29, 2009, http://www.chron.com/disp/story.mpl/business/steffy/6643904.html
[vi] Energy information Administration, Assumptions to the Annual Energy outlook 2009, Table 8.2.
[vii] Ibid.
[viii] Ibid.
[ix] Sonal Patel, Power Digest, Power Magazine, Sept. 2009, http://powermag.com/business/2144.html.
[x] Sonal Patel, Interest in Solar Tower Technology Rising, Power Magazine, http://powermag.com/renewables/solar/Interest-in-Solar-Tower-Technology-Rising_1876.html.
[xi] Solar Energy Industries Association, http://www.seia.org/cs/about_solar_energy/industry_data
[xii] Study of the effects on employment of public aid to renewable energy sources, Universidad Rey Juan Carlos, March 2009, http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf
[xiii] Wall Street journal, “Darker Times for Solar-Power Industry”, May 11, 2009, http://online.wsj.com/article/SB124199500034504717.html .
[xiv] “Merkel’s Coalition to “Definitely” Cut German Solar subsidies”, Brian Parker and Nicholas Comfort, Bloomberg, October 12, 2009, http://www.bloomberg.com/apps/news?pid=206011
[xv] The levelized cost of a generating technology is the present value of the total cost of building and operating the generating plant over its financial life.
[xvi]“Levelized Cost of New Electricity Generating Technologies” , Institute for Energy Research, May 12, 2009, http://www.instituteforenergyresearch.org/2009/05/12/levelized-cost-of-new-generating-technologies/
[xvii] “Economic impacts from the promotion of renewable energies”, Rheinisch-Westfälisches Institut für Wirtschaft sforschung
[xviii] “Solar forecast: expensive”, Loren Steffy, Houston Chronicle, September 29, 2009, http://www.chron.com/disp/story.mpl/business/steffy/6643904.html
[xix] Energy information Administration, Federal Financial interventions and Subsidies in Energy markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html .
[xx] Energy Information Administration, Monthly Energy Review, Table 7.2a, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec7_5.pdf
[xxi]“Levelized Cost of New Electricity Generating Technologies” , Institute for Energy Research, May 12, 2009, http://www.instituteforenergyresearch.org/2009/05/12/levelized-cost-of-new-generating-technologies/
[xxii] Greenwire, “California: Schwarzenegger signs feed-in tariff, spate of enviro bills”, October 12, 2009, http://www.eenews.net/Greenwire/2009/10/12/4/
[xxiii] Robert J. Michaels, “A National Renewable Portfolio Standard: Politically Correct, Economically Suspect,” Electricity Journal 21 (April 2008)
Monday, October 19, 2009
Calomiris: We can solve the too-big-to-fail problem without losing the benefits of a global financial system
In the World of Banks, Bigger Can Be Better. By CHARLES CALOMIRIS
We can solve the too-big-to-fail problem without losing the benefits of a global financial system.
WSJ, Oct 20, 2009
Legitimate concern about the risks to taxpayers and the economy posed by banks that are "too-big-to-fail" has prompted some observers, among them Simon Johnson, former chief economist of the International Monetary Fund, to favor draconian limits on financial institution size. This is misguided. There are sizable gains from retaining large, complex, global financial institutions—and other ways to credibly protect taxpayers from the cost of government bailouts.
Governments currently have trouble allowing large, complex financial institutions to enter bankruptcy, or receivership in the case of banks, because there is no orderly means for transferring control of assets and operations, including the completion of complex transactions with many counterparties perhaps in scores of countries via thousands of affiliates. The problem is important to resolve. The inability of regulators to agree on who had claim to which assets in the case of the Lehman bankruptcy, for example, has substantially prolonged the resolution of that bankruptcy.
Yet the challenge of coordinating the efforts among different countries' regulators can be met through prearranged, loss-sharing arrangements that assign assets to particular subsidiaries based on clear rules. This would make it possible to transfer control over the assets and operations of a large international financial institution in an orderly fashion, in case of its failure. This process could be handled by the courts for nonbank failures and the Federal Deposit Insurance Corp. for banks. With such arrangements in place, governments will have no reason (or excuse) to bail out large, international institutions.
But is it worth the trouble to preserve large financial institutions? Emphatically, it is.
Oliver Williamson, an economist at the University of California, Berkeley, just won the Nobel Prize for his pathbreaking work on the "boundaries of the firm," specifically for arguing that it can be more efficient to extend the boundaries of a single firm than for independent firms to contract with each other in the market. That theory explains why nonbank corporations operate world-wide supply chains.
International trade today, unlike the 19th and early 20th centuries, is largely driven by those supply chains. Intermediate goods, not final goods, account for most of international trade, and the same firms that import the bulk of goods into the U.S. also account for the bulk of exports. This underlying reality is the background factor that helps explain why some financial firms also need to be large.
First and foremost, they need to be large to operate on a global scale—and they need to do so because their clients are large and operate globally. Small, local banks simply could not provide global corporations the same physical capabilities for trade finance, foreign exchange contracting, and global capital access that large global financial institutions can.
Second, there are economies of scope when financial firms combine different products within the same firm (lending and foreign-exchange swaps, for example). A financial firm able to offer multiple products to a customer means savings in marketing costs and in the costs of information production (about the creditworthiness of clients, for example). Economies of scope among products also imply economies of scale within finance suppliers, since small financial firms cannot afford the overhead costs of building platforms with many complex products.
True, some empirical studies in the field of finance have failed to find big gains from mergers. But those studies measured gains to banks only, and measured only the performance improvements of recently consolidated institutions against other institutions, many of which had improved their performance due to previous consolidation.
Yet even unconsolidated banks have improved their performance under the pressure of increased competition following the removal of branching restrictions, which permitted the consolidation wave in banking. And when an entire industry is involved in a protracted consolidation wave, the best indicator of the gains from consolidation is the performance of the industry as a whole. One study of bank productivity growth during the heart of the merger wave (1991-1997), by Kevin Stiroh, an economist at the New York Federal Reserve, found that it rose more than 0.4% per year.
Third, many of the gains of consolidation accrued to customers, not banks, in the form of cheaper and better financial services. For example, my research shows that from 1980 to 1999, after controlling for changes in the mix of firms, the underwriting costs of accessing the public equity market fell by more than 20%. These declining costs encouraged an expanded use of the market particularly by young, growing firms.
Large-scale global finance has also expanded the supply of credit to emerging market economies. That's transformed the political economy of those economies very much for the better, by undermining domestic crony-capitalist networks. Indeed, perhaps the greatest accomplishment of global finance in the past two decades has been the replacement of crony banking networks in emerging market countries with branches of large global banks.
Fourth, global financial institutions also have made stock, bond and foreign exchange markets globally integrated and more efficient. Global financial institutions are the institutions that provide the funds for arbitrage across markets, which ensure global market integration.
Research in the 1970s and early 1980s by international economists like Stanford University's Ron McKinnon bemoaned the inefficiency of foreign exchange markets due to the lack of arbitrage funding, which promoted exchange rate volatility and limited the ability of exporters and importers to hedge their risks. Today the foreign exchange markets for most currencies are extremely active for a wide variety of currencies. Important developing countries now enjoy deep markets for currency trading against the major currencies, which promotes greater access to trade and international capital markets.
Limiting the size, complexity and global reach of financial institutions is fraught with downsides for the international economy. We can solve the too-big-to-fail problem without destroying global finance. It certainly is worth a try.
Mr. Calomiris is a professor of finance at Columbia Business School and a research associate of the National Bureau of Economic Research.
We can solve the too-big-to-fail problem without losing the benefits of a global financial system.
WSJ, Oct 20, 2009
Legitimate concern about the risks to taxpayers and the economy posed by banks that are "too-big-to-fail" has prompted some observers, among them Simon Johnson, former chief economist of the International Monetary Fund, to favor draconian limits on financial institution size. This is misguided. There are sizable gains from retaining large, complex, global financial institutions—and other ways to credibly protect taxpayers from the cost of government bailouts.
Governments currently have trouble allowing large, complex financial institutions to enter bankruptcy, or receivership in the case of banks, because there is no orderly means for transferring control of assets and operations, including the completion of complex transactions with many counterparties perhaps in scores of countries via thousands of affiliates. The problem is important to resolve. The inability of regulators to agree on who had claim to which assets in the case of the Lehman bankruptcy, for example, has substantially prolonged the resolution of that bankruptcy.
Yet the challenge of coordinating the efforts among different countries' regulators can be met through prearranged, loss-sharing arrangements that assign assets to particular subsidiaries based on clear rules. This would make it possible to transfer control over the assets and operations of a large international financial institution in an orderly fashion, in case of its failure. This process could be handled by the courts for nonbank failures and the Federal Deposit Insurance Corp. for banks. With such arrangements in place, governments will have no reason (or excuse) to bail out large, international institutions.
But is it worth the trouble to preserve large financial institutions? Emphatically, it is.
Oliver Williamson, an economist at the University of California, Berkeley, just won the Nobel Prize for his pathbreaking work on the "boundaries of the firm," specifically for arguing that it can be more efficient to extend the boundaries of a single firm than for independent firms to contract with each other in the market. That theory explains why nonbank corporations operate world-wide supply chains.
International trade today, unlike the 19th and early 20th centuries, is largely driven by those supply chains. Intermediate goods, not final goods, account for most of international trade, and the same firms that import the bulk of goods into the U.S. also account for the bulk of exports. This underlying reality is the background factor that helps explain why some financial firms also need to be large.
First and foremost, they need to be large to operate on a global scale—and they need to do so because their clients are large and operate globally. Small, local banks simply could not provide global corporations the same physical capabilities for trade finance, foreign exchange contracting, and global capital access that large global financial institutions can.
Second, there are economies of scope when financial firms combine different products within the same firm (lending and foreign-exchange swaps, for example). A financial firm able to offer multiple products to a customer means savings in marketing costs and in the costs of information production (about the creditworthiness of clients, for example). Economies of scope among products also imply economies of scale within finance suppliers, since small financial firms cannot afford the overhead costs of building platforms with many complex products.
True, some empirical studies in the field of finance have failed to find big gains from mergers. But those studies measured gains to banks only, and measured only the performance improvements of recently consolidated institutions against other institutions, many of which had improved their performance due to previous consolidation.
Yet even unconsolidated banks have improved their performance under the pressure of increased competition following the removal of branching restrictions, which permitted the consolidation wave in banking. And when an entire industry is involved in a protracted consolidation wave, the best indicator of the gains from consolidation is the performance of the industry as a whole. One study of bank productivity growth during the heart of the merger wave (1991-1997), by Kevin Stiroh, an economist at the New York Federal Reserve, found that it rose more than 0.4% per year.
Third, many of the gains of consolidation accrued to customers, not banks, in the form of cheaper and better financial services. For example, my research shows that from 1980 to 1999, after controlling for changes in the mix of firms, the underwriting costs of accessing the public equity market fell by more than 20%. These declining costs encouraged an expanded use of the market particularly by young, growing firms.
Large-scale global finance has also expanded the supply of credit to emerging market economies. That's transformed the political economy of those economies very much for the better, by undermining domestic crony-capitalist networks. Indeed, perhaps the greatest accomplishment of global finance in the past two decades has been the replacement of crony banking networks in emerging market countries with branches of large global banks.
Fourth, global financial institutions also have made stock, bond and foreign exchange markets globally integrated and more efficient. Global financial institutions are the institutions that provide the funds for arbitrage across markets, which ensure global market integration.
Research in the 1970s and early 1980s by international economists like Stanford University's Ron McKinnon bemoaned the inefficiency of foreign exchange markets due to the lack of arbitrage funding, which promoted exchange rate volatility and limited the ability of exporters and importers to hedge their risks. Today the foreign exchange markets for most currencies are extremely active for a wide variety of currencies. Important developing countries now enjoy deep markets for currency trading against the major currencies, which promotes greater access to trade and international capital markets.
Limiting the size, complexity and global reach of financial institutions is fraught with downsides for the international economy. We can solve the too-big-to-fail problem without destroying global finance. It certainly is worth a try.
Mr. Calomiris is a professor of finance at Columbia Business School and a research associate of the National Bureau of Economic Research.
Friday, October 16, 2009
Almost two-thirds of all bad mortgages in our financial system were bought by government agencies or required by government regulations
Barney Frank, Predatory Lender. By PETER J. WALLISON
Almost two-thirds of all bad mortgages in our financial system were bought by government agencies or required by government regulations.
WSJ, Oct 16, 2009
Recent reports that the Federal Housing Administration (FHA) will suffer default rates of more than 20% on the 2007 and 2008 loans it guaranteed has raised questions once again about the government's role in the financial crisis and its efforts to achieve social purposes by distorting the financial system.
The FHA's function is to guarantee mortgages of low-income borrowers (the mortgages are then sold through securitizations by Ginnie Mae) and thus to take reasonable credit risks in the interests of making mortgage credit available to the nation's low-income citizens. Accordingly, the larger than normal losses that will result from the 2007 and 2008 cohort could be justified by Barney Frank, the chairman of the House Financial Services Committee, as "policy"—an effort to ease the housing downturn through the application of government credit. The FHA, he argued, is buying more weak mortgages in order to help put a floor under the housing market. Eventually, the taxpayers will have to judge whether this policy was justified.
Far more interesting than the FHA's prospective losses on its 2007 and 2008 book are the agency's losses on its 2005 and 2006 guarantees, when the housing bubble was inflating at its fastest rate and there was no need for government support. FHA-backed loans during those years also have delinquency rates between 20% and 30%. These adverse results—not the result of a "policy" effort to shore up markets—pose a significant challenge to those who are trying to absolve the U.S. government of responsibility for the financial crisis.
When the crisis first arose, the left's explanation was that it was caused by corporate greed, primarily on Wall Street, and by deregulation of the financial system during the Bush administration. The implicit charge was that the financial system was flawed and required broader regulation to keep it out of trouble. As it became clear that there was no financial deregulation during the Bush administration and that the financial crisis was caused by the meltdown of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages—the narrative changed. The new villains were the unregulated mortgage brokers who allegedly earned enormous fees through a new form of "predatory" lending—by putting unsuspecting home buyers into subprime mortgages when they could have afforded prime mortgages. This idea underlies the Obama administration's proposal for a Consumer Financial Protection Agency. The link to the financial crisis—recently emphasized by President Obama—is that these mortgages would not have been made if regulators had been watching those fly-by-night mortgage brokers.
There was always a problem with this theory. Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.
The role of the FHA is particularly difficult to fit into the narrative that the left has been selling. While it might be argued that Fannie and Freddie and insured banks were profit-seekers because they were shareholder-owned, what can explain the fact that the FHA—a government agency—was guaranteeing the same bad mortgages that the unregulated mortgage brokers were supposedly creating through predatory lending?
The answer, of course, is that it was government policy for these poor quality loans to be made. Since the early 1990s, the government has been attempting to expand home ownership in full disregard of the prudent lending principles that had previously governed the U.S. mortgage market. Now the motives of the GSEs fall into place. Fannie and Freddie were subject to "affordable housing" regulations, issued by the Department of Housing and Urban Development (HUD), which required them to buy mortgages made to home buyers who were at or below the median income. This quota began at 30% of all purchases in the early 1990s, and was gradually ratcheted up until it called for 55% of all mortgage purchases to be "affordable" in 2007, including 25% that had to be made to low-income home buyers.
It was not easy to find candidates for traditional mortgages—loans to people with good credit records or the resources for a substantial downpayment—among home buyers who qualified under HUD's guidelines. To meet their affordable housing requirements, therefore, Fannie and Freddie reduced their lending standards and reached into the FHA's turf. The FHA, although it lost market share, continued to guarantee what it could, adding to the demand that the unregulated mortgage brokers filled. If they were engaged in predatory lending, it was ultimately driven by the government's own requirements. The mortgages that resulted are now problem loans for the GSEs, the FHA and the big banks that were required to make them in order to burnish their CRA credentials.
The significance of the FHA's troubles is that this agency had no profit motive. Yet it dipped into the same pool of subprime and other nontraditional mortgages that the GSEs and Wall Street were fishing in. The left cannot have it both ways, blaming the private sector for subprime lending while absolving the government policies that created the demand for subprime loans. If the financial crisis was caused by subprime mortgages and predatory lending, the government's own policies made it happen.
Mr. Walllison is a senior fellow at the American Enterprise Institute.
Almost two-thirds of all bad mortgages in our financial system were bought by government agencies or required by government regulations.
WSJ, Oct 16, 2009
Recent reports that the Federal Housing Administration (FHA) will suffer default rates of more than 20% on the 2007 and 2008 loans it guaranteed has raised questions once again about the government's role in the financial crisis and its efforts to achieve social purposes by distorting the financial system.
The FHA's function is to guarantee mortgages of low-income borrowers (the mortgages are then sold through securitizations by Ginnie Mae) and thus to take reasonable credit risks in the interests of making mortgage credit available to the nation's low-income citizens. Accordingly, the larger than normal losses that will result from the 2007 and 2008 cohort could be justified by Barney Frank, the chairman of the House Financial Services Committee, as "policy"—an effort to ease the housing downturn through the application of government credit. The FHA, he argued, is buying more weak mortgages in order to help put a floor under the housing market. Eventually, the taxpayers will have to judge whether this policy was justified.
Far more interesting than the FHA's prospective losses on its 2007 and 2008 book are the agency's losses on its 2005 and 2006 guarantees, when the housing bubble was inflating at its fastest rate and there was no need for government support. FHA-backed loans during those years also have delinquency rates between 20% and 30%. These adverse results—not the result of a "policy" effort to shore up markets—pose a significant challenge to those who are trying to absolve the U.S. government of responsibility for the financial crisis.
When the crisis first arose, the left's explanation was that it was caused by corporate greed, primarily on Wall Street, and by deregulation of the financial system during the Bush administration. The implicit charge was that the financial system was flawed and required broader regulation to keep it out of trouble. As it became clear that there was no financial deregulation during the Bush administration and that the financial crisis was caused by the meltdown of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages—the narrative changed. The new villains were the unregulated mortgage brokers who allegedly earned enormous fees through a new form of "predatory" lending—by putting unsuspecting home buyers into subprime mortgages when they could have afforded prime mortgages. This idea underlies the Obama administration's proposal for a Consumer Financial Protection Agency. The link to the financial crisis—recently emphasized by President Obama—is that these mortgages would not have been made if regulators had been watching those fly-by-night mortgage brokers.
There was always a problem with this theory. Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.
The role of the FHA is particularly difficult to fit into the narrative that the left has been selling. While it might be argued that Fannie and Freddie and insured banks were profit-seekers because they were shareholder-owned, what can explain the fact that the FHA—a government agency—was guaranteeing the same bad mortgages that the unregulated mortgage brokers were supposedly creating through predatory lending?
The answer, of course, is that it was government policy for these poor quality loans to be made. Since the early 1990s, the government has been attempting to expand home ownership in full disregard of the prudent lending principles that had previously governed the U.S. mortgage market. Now the motives of the GSEs fall into place. Fannie and Freddie were subject to "affordable housing" regulations, issued by the Department of Housing and Urban Development (HUD), which required them to buy mortgages made to home buyers who were at or below the median income. This quota began at 30% of all purchases in the early 1990s, and was gradually ratcheted up until it called for 55% of all mortgage purchases to be "affordable" in 2007, including 25% that had to be made to low-income home buyers.
It was not easy to find candidates for traditional mortgages—loans to people with good credit records or the resources for a substantial downpayment—among home buyers who qualified under HUD's guidelines. To meet their affordable housing requirements, therefore, Fannie and Freddie reduced their lending standards and reached into the FHA's turf. The FHA, although it lost market share, continued to guarantee what it could, adding to the demand that the unregulated mortgage brokers filled. If they were engaged in predatory lending, it was ultimately driven by the government's own requirements. The mortgages that resulted are now problem loans for the GSEs, the FHA and the big banks that were required to make them in order to burnish their CRA credentials.
The significance of the FHA's troubles is that this agency had no profit motive. Yet it dipped into the same pool of subprime and other nontraditional mortgages that the GSEs and Wall Street were fishing in. The left cannot have it both ways, blaming the private sector for subprime lending while absolving the government policies that created the demand for subprime loans. If the financial crisis was caused by subprime mortgages and predatory lending, the government's own policies made it happen.
Mr. Walllison is a senior fellow at the American Enterprise Institute.
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