Don't Shoot the Pollster. By PATRICK CADDELL AND DOUGLAS E. SCHOEN
Attacks on Scott Rasmussen and Fox News show a disturbing attitude toward dissent.
WSJ, Jan 15, 2010
Polling is both an art and a science, but recently it's also become a subject of political intimidation.
One shot was fired by White House Press Secretary Robert Gibbs on Dec. 8, when he dismissed Gallup's daily tracking of President Obama's job approval. It had hit a record low of 47%, and Mr. Gibbs called the results meaningless:
"If I was a heart patient and Gallup was my EKG I'd visit my doctor. If you look back I think five days ago. . . there was an 11 point spread, now there's a one point spread. . . I'm sure a six-year-old with a crayon could do something not unlike that. I don't put a lot of stake in, never have, in the EKG that is the daily Gallup trend. I don't pay a lot of attention to meaninglessness."
Polling is a science because it requires a range of sampling techniques to be used to select a sample. It is an art because constructing a sample and asking questions is something that requires skill, experience and intellectual integrity. The possibility of manipulation—or, indeed, intimidation—is great.
A recent case in point is what has happened to Scott Rasmussen, an independent pollster we both work with, who has an unchallenged record for both integrity and accuracy. Mr. Rasmussen correctly predicted the 2004 and 2008 presidential races within a percent, and accurately called the vast majority of contested Senate races in 2004 and 2006. His work has sometimes been of concern for Republicans, particularly when they were losing congressional seats in 2004 and 2006.
Most recently, Mr. Rasmussen has been the leader in chronicling the decline in the public's support for President Obama. And so he has been the target of increasingly virulent attacks from left-wing bloggers seeking to undermine his credibility, and thus muffle his findings. A Politico piece, "Low Favorables: Democrats Rip Rasmussen," reported on the attacks from blogs like the Daily Kos, Swing State Project, and Media Matters.
"Rasmussen Caught With Their Thumb on the Scale," cried the Daily Kos last summer. "Rasmussen Reports, You Decide," the blog Swing State Project headlined not long ago in a play on the Fox News motto.
"I don't think there are Republican polling firms that get as good a result as Rasmussen does," Eric Boehlert, a senior fellow with the progressive research outfit Media Matters, said in a Jan. 2 Politico article. "His data looks like it all comes out of the RNC."
Liberals have also noted that Rasmussen's daily presidential tracking polls have consistently placed Mr. Obama's approval numbers around five percentage points lower than other polling outfits throughout the year. This is because Rasmussen surveys likely voters, who are now more Republican in orientation than the overall electorate. (Gallup and other pollsters survey the entire adult population.) On other key issues like health care, Rasmussen's numbers have been echoed by everyone else.
Mr. Rasmussen, who is avowedly not part of the Beltway crowd in Washington, has been willing to take on issues like ethics and corruption in ways no other pollsters have been able to do. He was also one of the first pollsters to stress people's real fear of the growing size of government, the size of the deficit, and the concern about spending at a time when these issues were not really on Washington's radar screen.
The reaction against him has been strident and harsh. He's been called an adjunct of the Republican Party when in fact he has never worked for any political party. Nor has he consulted with any candidates seeking elective office.
The attacks on Rasmussen and Gallup follow an effort by the White House to wage war on Fox News and to brand it, as former White House Director of Communications Anita Dunn did, as "not a real news organization." The move backfired; in time, other news organizations rallied around Fox News. But the message was clear: criticize the White House at your peril.
As pollsters for two Democratic presidents who served before Barack Obama, we view this unprecedented attempt to silence the media and to attack the credibility of unpopular polling as chilling to the free exercise of democracy.
This is more than just inside baseball. As practicing political consultants, both of us have seen that the established parties try to stifle dissent among their political advisers and consultants. The parties go out of their way to try to determine in advance what questions will be asked and what answers will be obtained to reinforce existing party messages. The thing most feared is independence, which is what Mr. Rasmussen brings.
Mr. Gibbs's comments and the recent attempts by the Democratic left to muzzle Scott Rasmussen reflect a disturbing trend in our politics: a tendency to try to stifle legitimate feedback about political concerns—particularly if the feedback is negative to the incumbent administration.
Mr. Caddell served as a pollster for President Jimmy Carter. Mr. Schoen, who served as a pollster for President Bill Clinton, is the author of "The Political Fix" just out from Henry Holt.
Thursday, January 14, 2010
Don't Like the Numbers? Change 'Em
Don't Like the Numbers? Change 'Em. By MICHAEL J. BOSKIN
If a CEO issued the kind of distorted figures put out by politicians and scientists, he'd wind up in prison.
WSJ, Jan 14, 2010
Politicians and scientists who don't like what their data show lately have simply taken to changing the numbers. They believe that their end—socialism, global climate regulation, health-care legislation, repudiating debt commitments, la gloire française—justifies throwing out even minimum standards of accuracy. It appears that no numbers are immune: not GDP, not inflation, not budget, not job or cost estimates, and certainly not temperature. A CEO or CFO issuing such massaged numbers would land in jail.
The late economist Paul Samuelson called the national income accounts that measure real GDP and inflation "one of the greatest achievements of the twentieth century." Yet politicians from Europe to South America are now clamoring for alternatives that make them look better.
A commission appointed by French President Nicolas Sarkozy suggests heavily weighting "stability" indicators such as "security" and "equality" when calculating GDP. And voilà!—France outperforms the U.S., despite the fact that its per capita income is 30% lower. Nobel laureate Ed Prescott called this disparity the difference between "prosperity and depression" in a 2002 paper—and attributed it entirely to France's higher taxes.
With Venezuela in recession by conventional GDP measures, President Hugo Chávez declared the GDP to be a capitalist plot. He wants a new, socialist-friendly way to measure the economy. Maybe East Germans were better off than their cousins in the West when the Berlin Wall fell; starving North Koreans are really better off than their relatives in South Korea; the 300 million Chinese lifted out of abject poverty in the last three decades were better off under Mao; and all those Cubans risking their lives fleeing to Florida on dinky boats are loco.
There is historical precedent for a "socialist GDP." When President George H.W. Bush sent me to help Mikhail Gorbachev with economic reform, I found out that the Soviet statistics office kept two sets of books: those they published, and those they actually believed (plus another for Stalin when he was alive).
In Argentina, President Néstor Kirchner didn't like the political and budget hits from high inflation. After a politicized personnel purge in 2002, he changed the inflation measures. Conveniently, the new numbers showed lower inflation and therefore lower interest payments on the government's inflation-linked bonds. Investor and public confidence in the objectivity of the inflation statistics evaporated. His wife and successor Cristina Kirchner is now trying to grab the central bank's reserves to pay for the country's debt.
America has not been immune from this dangerous numbers game. Every president is guilty of spinning unpleasant statistics. President Richard Nixon even thought there was a conspiracy against him at the Bureau of Labor Statistics. But President Barack Obama has taken it to a new level. His laudable attempt at transparency in counting the number of jobs "created or saved" by the stimulus bill has degenerated into farce and was just junked this week.
The administration has introduced the new notion of "jobs saved" to take credit where none was ever taken before. It seems continually to confuse gross and net numbers. For example, it misses the jobs lost or diverted by the fiscal stimulus. And along with the congressional leadership it hypes the number of "green jobs" likely to be created from the explosion of spending, subsidies, loans and mandates, while ignoring the job losses caused by its taxes, debt, regulations and diktats.
The president and his advisers—their credibility already reeling from exaggeration (the stimulus bill will limit unemployment to 8%) and reneged campaign promises (we'll go through the budget "line-by-line")—consistently imply that their new proposed regulation is a free lunch. When the radical attempt to regulate energy and the environment with the deeply flawed cap-and-trade bill is confronted with economic reality, instead of honestly debating the trade-offs they confidently pronounce that it boosts the economy. They refuse to admit that it simply boosts favored sectors and firms at the expense of everyone else.
Rabid environmentalists have descended into a separate reality where only green counts. It's gotten so bad that the head of the California Air Resources Board, Mary Nichols, announced this past fall that costly new carbon regulations would boost the economy shortly after she was told by eight of the state's most respected economists that they were certain these new rules would damage the economy. The next day, her own economic consultant, Harvard's Robert Stavis, denounced her statement as a blatant distortion.
Scientists are expected to make sure their findings are replicable, to make the data available, and to encourage the search for new theories and data that may overturn the current consensus. This is what Galileo, Darwin and Einstein—among the most celebrated scientists of all time—did. But some climate researchers, most notably at the University of East Anglia, attempted to hide or delete temperature data when that data didn't show recent rapid warming. They quietly suppressed and replaced the numbers, and then attempted to squelch publication of studies coming to different conclusions.
The Obama administration claims a dubious "Keynesian" multiplier of 1.5 to feed the Democrats' thirst for big spending. The administration's idea is that virtually all their spending creates jobs for unemployed people and that additional rounds of spending create still more—raising income by $1.50 for each dollar of government spending. Economists differ on such multipliers, with many leading figures pegging them at well under 1.0 as the government spending in part replaces private spending and jobs. But all agree that every dollar of spending requires a present value of a dollar of future taxes, which distorts decisions to work, save, and invest and raises the cost of the dollar of spending to well over a dollar. Thus, only spending with large societal benefits is justified, a criterion unlikely to be met by much current spending (perusing the projects on recovery.gov doesn't inspire confidence).
Even more blatant is the numbers game being used to justify health-insurance reform legislation, which claims to greatly expand coverage, decrease health-insurance costs, and reduce the deficit. That magic flows easily from counting 10 years of dubious Medicare "savings" and tax hikes, but only six years of spending; assuming large cuts in doctor reimbursements that later will be cancelled; and making the states (other than Sen. Ben Nelson's Nebraska) pay a big share of the cost by expanding Medicaid eligibility. The Medicare "savings" and payroll tax hikes are counted twice—first to help pay for expanded coverage, and then to claim to extend the life of Medicare.
One piece of good news: The public isn't believing much of this out-of-control spin. Large majorities believe the health-care legislation will raise their insurance costs and increase the budget deficit. Most Americans are highly skeptical of the claims of climate extremists. And they have a more realistic reaction to the extraordinary deterioration in our public finances than do the president and Congress.
As a society and as individuals, we need to make difficult, even wrenching choices, often with grave consequences. To base those decisions on highly misleading, biased, and even manufactured numbers is not just wrong, but dangerous.
Squandering their credibility with these numbers games will only make it more difficult for our elected leaders to enlist support for difficult decisions from a public increasingly inclined to disbelieve them.
Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.
If a CEO issued the kind of distorted figures put out by politicians and scientists, he'd wind up in prison.
WSJ, Jan 14, 2010
Politicians and scientists who don't like what their data show lately have simply taken to changing the numbers. They believe that their end—socialism, global climate regulation, health-care legislation, repudiating debt commitments, la gloire française—justifies throwing out even minimum standards of accuracy. It appears that no numbers are immune: not GDP, not inflation, not budget, not job or cost estimates, and certainly not temperature. A CEO or CFO issuing such massaged numbers would land in jail.
The late economist Paul Samuelson called the national income accounts that measure real GDP and inflation "one of the greatest achievements of the twentieth century." Yet politicians from Europe to South America are now clamoring for alternatives that make them look better.
A commission appointed by French President Nicolas Sarkozy suggests heavily weighting "stability" indicators such as "security" and "equality" when calculating GDP. And voilà!—France outperforms the U.S., despite the fact that its per capita income is 30% lower. Nobel laureate Ed Prescott called this disparity the difference between "prosperity and depression" in a 2002 paper—and attributed it entirely to France's higher taxes.
With Venezuela in recession by conventional GDP measures, President Hugo Chávez declared the GDP to be a capitalist plot. He wants a new, socialist-friendly way to measure the economy. Maybe East Germans were better off than their cousins in the West when the Berlin Wall fell; starving North Koreans are really better off than their relatives in South Korea; the 300 million Chinese lifted out of abject poverty in the last three decades were better off under Mao; and all those Cubans risking their lives fleeing to Florida on dinky boats are loco.
There is historical precedent for a "socialist GDP." When President George H.W. Bush sent me to help Mikhail Gorbachev with economic reform, I found out that the Soviet statistics office kept two sets of books: those they published, and those they actually believed (plus another for Stalin when he was alive).
In Argentina, President Néstor Kirchner didn't like the political and budget hits from high inflation. After a politicized personnel purge in 2002, he changed the inflation measures. Conveniently, the new numbers showed lower inflation and therefore lower interest payments on the government's inflation-linked bonds. Investor and public confidence in the objectivity of the inflation statistics evaporated. His wife and successor Cristina Kirchner is now trying to grab the central bank's reserves to pay for the country's debt.
America has not been immune from this dangerous numbers game. Every president is guilty of spinning unpleasant statistics. President Richard Nixon even thought there was a conspiracy against him at the Bureau of Labor Statistics. But President Barack Obama has taken it to a new level. His laudable attempt at transparency in counting the number of jobs "created or saved" by the stimulus bill has degenerated into farce and was just junked this week.
The administration has introduced the new notion of "jobs saved" to take credit where none was ever taken before. It seems continually to confuse gross and net numbers. For example, it misses the jobs lost or diverted by the fiscal stimulus. And along with the congressional leadership it hypes the number of "green jobs" likely to be created from the explosion of spending, subsidies, loans and mandates, while ignoring the job losses caused by its taxes, debt, regulations and diktats.
The president and his advisers—their credibility already reeling from exaggeration (the stimulus bill will limit unemployment to 8%) and reneged campaign promises (we'll go through the budget "line-by-line")—consistently imply that their new proposed regulation is a free lunch. When the radical attempt to regulate energy and the environment with the deeply flawed cap-and-trade bill is confronted with economic reality, instead of honestly debating the trade-offs they confidently pronounce that it boosts the economy. They refuse to admit that it simply boosts favored sectors and firms at the expense of everyone else.
Rabid environmentalists have descended into a separate reality where only green counts. It's gotten so bad that the head of the California Air Resources Board, Mary Nichols, announced this past fall that costly new carbon regulations would boost the economy shortly after she was told by eight of the state's most respected economists that they were certain these new rules would damage the economy. The next day, her own economic consultant, Harvard's Robert Stavis, denounced her statement as a blatant distortion.
Scientists are expected to make sure their findings are replicable, to make the data available, and to encourage the search for new theories and data that may overturn the current consensus. This is what Galileo, Darwin and Einstein—among the most celebrated scientists of all time—did. But some climate researchers, most notably at the University of East Anglia, attempted to hide or delete temperature data when that data didn't show recent rapid warming. They quietly suppressed and replaced the numbers, and then attempted to squelch publication of studies coming to different conclusions.
The Obama administration claims a dubious "Keynesian" multiplier of 1.5 to feed the Democrats' thirst for big spending. The administration's idea is that virtually all their spending creates jobs for unemployed people and that additional rounds of spending create still more—raising income by $1.50 for each dollar of government spending. Economists differ on such multipliers, with many leading figures pegging them at well under 1.0 as the government spending in part replaces private spending and jobs. But all agree that every dollar of spending requires a present value of a dollar of future taxes, which distorts decisions to work, save, and invest and raises the cost of the dollar of spending to well over a dollar. Thus, only spending with large societal benefits is justified, a criterion unlikely to be met by much current spending (perusing the projects on recovery.gov doesn't inspire confidence).
Even more blatant is the numbers game being used to justify health-insurance reform legislation, which claims to greatly expand coverage, decrease health-insurance costs, and reduce the deficit. That magic flows easily from counting 10 years of dubious Medicare "savings" and tax hikes, but only six years of spending; assuming large cuts in doctor reimbursements that later will be cancelled; and making the states (other than Sen. Ben Nelson's Nebraska) pay a big share of the cost by expanding Medicaid eligibility. The Medicare "savings" and payroll tax hikes are counted twice—first to help pay for expanded coverage, and then to claim to extend the life of Medicare.
One piece of good news: The public isn't believing much of this out-of-control spin. Large majorities believe the health-care legislation will raise their insurance costs and increase the budget deficit. Most Americans are highly skeptical of the claims of climate extremists. And they have a more realistic reaction to the extraordinary deterioration in our public finances than do the president and Congress.
As a society and as individuals, we need to make difficult, even wrenching choices, often with grave consequences. To base those decisions on highly misleading, biased, and even manufactured numbers is not just wrong, but dangerous.
Squandering their credibility with these numbers games will only make it more difficult for our elected leaders to enlist support for difficult decisions from a public increasingly inclined to disbelieve them.
Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.
Health Experts and Double Standards - Jonathan Gruber, Peter Orszag and the press corps
Health Experts and Double Standards. WSJ Editorial
Jonathan Gruber, Peter Orszag and the press corps.
The Wall Street Journal, page A18, Jan 14, 2010
The press corps is agonizing, or claims to be agonizing, over the news of Jonathan Gruber's conflict of interest: The MIT economist has been among the foremost promoters of ObamaCare—even as he had nearly $400,000 in consulting contracts with the Administration that weren't disclosed in the many stories in which he was cited as an independent authority.
Mr. Gruber is a health economist and former Clinton Treasury hand, as well an architect of Mitt Romney's 2006 health plan in Massachusetts that so closely resembles ObamaCare. His econometric health-care modelling is well-regarded. So his $297,600 plum from the Department of Health and Human Services in March for "technical assistance" estimating changes in insurance costs and coverage under ObamaCare, plus another $95,000 job, is at least defensible.
However, this financial relationship only came to wide notice when Mr. Gruber wrote a commentary for the New England Journal of Medicine, which has a more stringent disclosure policy than most media outlets. Last week the New York Times said it would have disclosed Mr. Gruber's financial ties had it known when it published one of his op-eds last year. Mr. Gruber told Politico's Ben Smith that "at no time have I publicly advocated a position that I did not firmly believe—indeed, I have been completely consistent with my academic track record."
We don't doubt Mr. Gruber's sincerity about his research, though the same benefit of the political doubt wasn't extended to, say, Armstrong Williams when it was revealed that the conservative pundit had a contract with the Department of Education during the No Child Left Behind debate. Any number of former Generals-turned-TV-analysts were skewered in the New York Times in 2008 merely because of continuing contact—and no financial ties—with the Pentagon.
The political exploitation of Mr. Gruber's commentary is another matter. His work figured heavily into a recent piece by Ron Brownstein in the Atlantic Monthly that the Administration promoted as an antidote to skepticism about ObamaCare's cost control (or lack thereof). White House budget director Peter Orszag has also relied on a letter from Mr. Gruber and other economists endorsing the Senate bill.
In a December conference call with reporters, Mr. Orszag said that "I agree with Jon Gruber that basically everything that has been put forward in health policy discussions for a decade is in this bill." He also praised "the folks who have actually done the reporting and read the bill and gone through and done the hard work to actually examine, rather than just going on buzz and sort of loose talk, but actually gone through and looked at the specific details in the bill," citing Mr. Brownstein in particular. Which is to say, the journalists who had "done the reporting" were those who agreed with the Gruber-White House spin.
Mr. Orszag never mentioned Mr. Gruber's contract. Nor did HHS disclose the contract when Mike Enzi, the ranking Republican on the Senate health committee, asked specifically for a list of all consultants as part of routine oversight in July. His request noted that "Transparency regarding these positions will help ensure that the public has confidence in the qualifications, character and abilities of individuals serving in these positions."
We're not Marxists who think everyone's opinion depends entirely on financial circumstances. But if Mr. Gruber qualifies as a health expert despite his self-interest, then the studies of self-interested businesses deserve at least as much media attention. The insurer WellPoint has built a very detailed and rigorous model on the likely impact of ObamaCare, using its own actuarial data in regional markets, and found that insurance costs will spike across the board. The White House trashed it, and the press corps ignored it.
This is a double standard that has corroded much of the coverage of ObamaCare, with journalists treating government claims as oracular but business arguments as self-serving. We'll bet Messrs. Orszag and Brownstein that WellPoint's analysis will more closely reflect the coming insurance reality than the fruits of Mr. Gruber's government paycheck.
Jonathan Gruber, Peter Orszag and the press corps.
The Wall Street Journal, page A18, Jan 14, 2010
The press corps is agonizing, or claims to be agonizing, over the news of Jonathan Gruber's conflict of interest: The MIT economist has been among the foremost promoters of ObamaCare—even as he had nearly $400,000 in consulting contracts with the Administration that weren't disclosed in the many stories in which he was cited as an independent authority.
Mr. Gruber is a health economist and former Clinton Treasury hand, as well an architect of Mitt Romney's 2006 health plan in Massachusetts that so closely resembles ObamaCare. His econometric health-care modelling is well-regarded. So his $297,600 plum from the Department of Health and Human Services in March for "technical assistance" estimating changes in insurance costs and coverage under ObamaCare, plus another $95,000 job, is at least defensible.
However, this financial relationship only came to wide notice when Mr. Gruber wrote a commentary for the New England Journal of Medicine, which has a more stringent disclosure policy than most media outlets. Last week the New York Times said it would have disclosed Mr. Gruber's financial ties had it known when it published one of his op-eds last year. Mr. Gruber told Politico's Ben Smith that "at no time have I publicly advocated a position that I did not firmly believe—indeed, I have been completely consistent with my academic track record."
We don't doubt Mr. Gruber's sincerity about his research, though the same benefit of the political doubt wasn't extended to, say, Armstrong Williams when it was revealed that the conservative pundit had a contract with the Department of Education during the No Child Left Behind debate. Any number of former Generals-turned-TV-analysts were skewered in the New York Times in 2008 merely because of continuing contact—and no financial ties—with the Pentagon.
The political exploitation of Mr. Gruber's commentary is another matter. His work figured heavily into a recent piece by Ron Brownstein in the Atlantic Monthly that the Administration promoted as an antidote to skepticism about ObamaCare's cost control (or lack thereof). White House budget director Peter Orszag has also relied on a letter from Mr. Gruber and other economists endorsing the Senate bill.
In a December conference call with reporters, Mr. Orszag said that "I agree with Jon Gruber that basically everything that has been put forward in health policy discussions for a decade is in this bill." He also praised "the folks who have actually done the reporting and read the bill and gone through and done the hard work to actually examine, rather than just going on buzz and sort of loose talk, but actually gone through and looked at the specific details in the bill," citing Mr. Brownstein in particular. Which is to say, the journalists who had "done the reporting" were those who agreed with the Gruber-White House spin.
Mr. Orszag never mentioned Mr. Gruber's contract. Nor did HHS disclose the contract when Mike Enzi, the ranking Republican on the Senate health committee, asked specifically for a list of all consultants as part of routine oversight in July. His request noted that "Transparency regarding these positions will help ensure that the public has confidence in the qualifications, character and abilities of individuals serving in these positions."
We're not Marxists who think everyone's opinion depends entirely on financial circumstances. But if Mr. Gruber qualifies as a health expert despite his self-interest, then the studies of self-interested businesses deserve at least as much media attention. The insurer WellPoint has built a very detailed and rigorous model on the likely impact of ObamaCare, using its own actuarial data in regional markets, and found that insurance costs will spike across the board. The White House trashed it, and the press corps ignored it.
This is a double standard that has corroded much of the coverage of ObamaCare, with journalists treating government claims as oracular but business arguments as self-serving. We'll bet Messrs. Orszag and Brownstein that WellPoint's analysis will more closely reflect the coming insurance reality than the fruits of Mr. Gruber's government paycheck.
Tuesday, January 12, 2010
Bashing Bankers Is a Political Duty
Bashing Bankers Is a Political Duty. By HOLMAN W. JENKINS, JR
But don't overlook the fact that taxpayers are making out on the bailout too.
WSJ, Jan 13, 2010
If you would know why bankers are enjoying a large and controversial deluge of annual bonuses, look no further than the monthly report of the New York State Comptroller's Office. The economy may be in the dumps, but Wall Street enjoyed record profits of $50 billion in the first nine months of last year—"nearly two and a half times the previous annual peak in 2000."
"Profitability," adds the state of New York, "has soared because revenues rose while the costs of doing business—particularly interest costs—declined" (in other words, thank you Federal Reserve).
That $50 billion may seem odd in relation to Wall Street's reported bonus pool of $90 billion, but compensation isn't paid out of profits, it's paid out of revenues. Goldman last year paid out about 44% of revenues as compensation, Citigoup about 30%. In contrast, an auto company pays out about 11% of revenues, but an auto company consumes a lot of other inputs—glass, steel, energy, advertising, aluminum—whereas Wall Street has only two inputs: smarts and money.
Bonuses are a dominant part of compensation because Wall Street firms pay a large chunk of compensation as variable comp, for which the word bonus has been used. Now some firms are paying larger fixed salaries just so the public won't hear the word bonus.
But look at it this way: The $90 billion that will be distributed to employees is but a sliver of the massive capital Wall Street is sitting on. One firm, Goldman, cares for $880 billion, Citi another $1.9 trillion, JP Morgan another $2 trillion. Much of the nation's paper wealth rebounded sharply last year from depressed values after (choose your reason) Americans overbet on housing or the federal government briefly fumbled public trust in its ability to protect the financial system.
Do bankers deserve it? Of course not. Do you deserve your good looks, good health or good luck in choice of parents and/or country you were born in?
Compensation in our society is not set by Henry Waxman and a committee of Congress, but as a matter of legal and instrumental obligation under circumstances of market competition. A firm's management, with its own interests strongly in mind, ultimately decides how much of a firm's revenue to spend pleasing the highly mobile employees who do the work of pleasing the firm's highly mobile clients and investors.
But didn't taxpayers bail out the financial system, so don't taxpayers deserve the bonuses? No. Taxpayers (aka voters) were acting in their own interests in bailing out the system. They weren't doing anybody a favor. Furthermore, government already stands to collect about 50% of any Wall Street cash bonuses in the form of income tax (which explains why the subject is of interest to the New York state comptroller).
What's more, despite a casual imputation that taxpayers were the suckers at the table, taxpayers did not, as commonly alleged, "spend" money to bail out the banks. They traded one claim for another. Mostly, they traded claims they printed (dollars) for claims on real assets, such as housing, commercial property and industrial equipment.
Taxpayers effectively acquired these assets on a bet that taxpayers' own intervention would raise their value, which had previously been depressed at least partly by fears that taxpayers wouldn't intervene. That bet has proved a good one so far (as bets often do when you control the outcome). Even the most notorious of the exchanges that taxpayers engaged in—dollars for securities held by Goldman Sachs that had been guaranteed by AIG—are accruing profits on the balance sheet of the Federal Reserve.
In fact, yesterday the Fed, whose balance sheet is about the size of Citigroup's, reported whopping profits for 2009 of $52 billion—just a few billion shy of what Wall Street as a whole is likely to report for the year. (All this throws a mocking light on the Obama administration's claim yesterday that a new tax must be imposed on banks to "recoup" bailout costs.)
None of this means Americans don't have an ancient and abiding interest in subjecting bankers to scorn. A rough socialism is fundamental to civilization: The most beautiful virgin must be sacrificed to make the other virgins feel better—a service politicians are especially keen to provide when the alternative might be looking at their own role in the reckless risk-taking of banks and homebuyers.
Still, looking at Washington's own role would be a good idea, since taxpayers' success (so far) in catching the falling knife is certainly no reason to repeat the experiment.
But don't overlook the fact that taxpayers are making out on the bailout too.
WSJ, Jan 13, 2010
If you would know why bankers are enjoying a large and controversial deluge of annual bonuses, look no further than the monthly report of the New York State Comptroller's Office. The economy may be in the dumps, but Wall Street enjoyed record profits of $50 billion in the first nine months of last year—"nearly two and a half times the previous annual peak in 2000."
"Profitability," adds the state of New York, "has soared because revenues rose while the costs of doing business—particularly interest costs—declined" (in other words, thank you Federal Reserve).
That $50 billion may seem odd in relation to Wall Street's reported bonus pool of $90 billion, but compensation isn't paid out of profits, it's paid out of revenues. Goldman last year paid out about 44% of revenues as compensation, Citigoup about 30%. In contrast, an auto company pays out about 11% of revenues, but an auto company consumes a lot of other inputs—glass, steel, energy, advertising, aluminum—whereas Wall Street has only two inputs: smarts and money.
Bonuses are a dominant part of compensation because Wall Street firms pay a large chunk of compensation as variable comp, for which the word bonus has been used. Now some firms are paying larger fixed salaries just so the public won't hear the word bonus.
But look at it this way: The $90 billion that will be distributed to employees is but a sliver of the massive capital Wall Street is sitting on. One firm, Goldman, cares for $880 billion, Citi another $1.9 trillion, JP Morgan another $2 trillion. Much of the nation's paper wealth rebounded sharply last year from depressed values after (choose your reason) Americans overbet on housing or the federal government briefly fumbled public trust in its ability to protect the financial system.
Do bankers deserve it? Of course not. Do you deserve your good looks, good health or good luck in choice of parents and/or country you were born in?
Compensation in our society is not set by Henry Waxman and a committee of Congress, but as a matter of legal and instrumental obligation under circumstances of market competition. A firm's management, with its own interests strongly in mind, ultimately decides how much of a firm's revenue to spend pleasing the highly mobile employees who do the work of pleasing the firm's highly mobile clients and investors.
But didn't taxpayers bail out the financial system, so don't taxpayers deserve the bonuses? No. Taxpayers (aka voters) were acting in their own interests in bailing out the system. They weren't doing anybody a favor. Furthermore, government already stands to collect about 50% of any Wall Street cash bonuses in the form of income tax (which explains why the subject is of interest to the New York state comptroller).
What's more, despite a casual imputation that taxpayers were the suckers at the table, taxpayers did not, as commonly alleged, "spend" money to bail out the banks. They traded one claim for another. Mostly, they traded claims they printed (dollars) for claims on real assets, such as housing, commercial property and industrial equipment.
Taxpayers effectively acquired these assets on a bet that taxpayers' own intervention would raise their value, which had previously been depressed at least partly by fears that taxpayers wouldn't intervene. That bet has proved a good one so far (as bets often do when you control the outcome). Even the most notorious of the exchanges that taxpayers engaged in—dollars for securities held by Goldman Sachs that had been guaranteed by AIG—are accruing profits on the balance sheet of the Federal Reserve.
In fact, yesterday the Fed, whose balance sheet is about the size of Citigroup's, reported whopping profits for 2009 of $52 billion—just a few billion shy of what Wall Street as a whole is likely to report for the year. (All this throws a mocking light on the Obama administration's claim yesterday that a new tax must be imposed on banks to "recoup" bailout costs.)
None of this means Americans don't have an ancient and abiding interest in subjecting bankers to scorn. A rough socialism is fundamental to civilization: The most beautiful virgin must be sacrificed to make the other virgins feel better—a service politicians are especially keen to provide when the alternative might be looking at their own role in the reckless risk-taking of banks and homebuyers.
Still, looking at Washington's own role would be a good idea, since taxpayers' success (so far) in catching the falling knife is certainly no reason to repeat the experiment.
Monday, January 11, 2010
Group of Central Bank Governors and Heads of Supervision reinforces Basel Committee reform package
Group of Central Bank Governors and Heads of Supervision reinforces Basel Committee reform package
BIS, January 11, 2010
The Group of Central Bank Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, met on 10 January at the Bank for International Settlements. It welcomed the substantial progress of the Basel Committee to translate the Group's September 2009 agreements into a concrete package of measures, as elaborated in the Committee's 17 December 2009 Consultative proposals for Strengthening the resilience of the banking sector and the International framework for liquidity risk measurement, standards and monitoring. Governors and Heads of Supervision requested the Committee to deliver a fully calibrated and finalised package of reforms by the end of this year.
President Jean-Claude Trichet, who chairs the Group, emphasised that "timely completion of the Basel Committee reform programme is critical to achieving a more resilient banking system that can support sound economic growth over the long term."
Central Bank Governors and Heads of Supervision welcomed the Basel Committee's focus on both microprudential reforms to strengthen the level and quality of international capital and liquidity standards, as well as the introduction of a macroprudential overlay to address procyclicality and systemic risk. They also provided guidance and noted the importance of making progress in the following key areas:
Provisioning: It is essential that accounting standards setters and supervisors develop a truly robust provisioning approach based on expected losses (EL). Building on the Basel Committee's August 2009 Guiding Principles for the replacement of IAS 39, a sound EL provisioning approach should achieve the following key objectives: 1) address the deficiencies of the incurred loss approach without introducing an expansion of fair value accounting, 2) promote adequate and more forward looking provisioning through early identification and recognition of credit losses in a consistent and robust manner, 3) address concerns about procyclicality under the current incurred loss provisioning model, 4) incorporate a broader range of credit information, both quantitative and qualitative, 5) draw from banks' risk management and capital adequacy systems and 6) be transparent and subject to appropriate internal and external validation by auditors, supervisors and other constituents. So-called "through-the-cycle" approaches that are consistent with these principles and which promote the build up of provisions when credit exposures are taken on in good times that can be used in a downturn would be recognised. The Basel Committee should translate these principles into a practical proposal by its March 2010 meeting for subsequent consideration by both supervisors and accounting standards setters.
Introducing a framework of countercyclical capital buffers: Such a framework could contain two key elements that are complementary. First, it is intended to promote the build-up of appropriate buffers at individual banks and the banking sector that can be used in periods of stress. This would be achieved through a combination of capital conservation measures, including actions to limit excessive dividend payments, share buybacks and compensation. Second, it would achieve the broader macroprudential goal of protecting the banking sector from periods of excess credit growth through a countercyclical capital buffer linked to one or more credit variables.
Addressing the risk of systemic banking institutions: Supervisors are working to develop proposals to address the risk of systemically important banks (SIBs). To this end, the Basel Committee has established a Macroprudential Group. The Committee should develop a menu of approaches using continuous measures of systemic importance to address the risk for the financial system and the broader economy. This includes evaluating the pros and cons of a capital and liquidity surcharge and other supervisory tools as additional possible policy options such as resolution mechanisms and structural adjustments. This forms a key input to the Financial Stability Board's initiatives to address the "too-big-to-fail" problem.
Contingent capital: The Basel Committee is reviewing the role that contingent capital and convertible capital instruments could play in the regulatory capital framework. This includes possible entry criteria for such instruments in Tier 1 and/or Tier 2 to ensure loss absorbency and the role of contingent and convertible capital more generally both within the regulatory capital minimum and as buffers.
Liquidity: Based on information collected through the quantitative impact assessment, the Committee should flesh out the details of the global minimum liquidity standard, which includes both the 30-day liquidity coverage ratio and the longer term structural liquidity ratio.
Central Bank Governors and Heads of Supervision will review concrete proposals on each of these topics later this year.
They endorsed the Committee's approach to extensive consultation on and comprehensive assessment of the proposed reforms, covering both the impact on the banking sector and the broader economy, before arriving at a final calibration of the minimum level of capital and the buffers above the minimum at the end of this year. They stressed that the aim of the new global standards should be to achieve a better balance between banking sector stability and sustainable credit growth. President Trichet noted that "the Group of Central Bank Governors and Heads of Supervision will provide strong oversight of the work of the Basel Committee during this phase, including both the completion and calibration of the reforms."
The fully calibrated set of standards will be developed by the end of 2010 to be phased in as financial conditions improve and the economic recovery is assured with the aim of implementation by the end of 2012. This includes appropriate phase-in measures and grandfathering arrangements for a sufficiently long period to ensure a smooth transition to the new standards.
About the Group of Central Bank Governors and Heads of Supervision
The Group of Central Bank Governors and Heads of Supervision is the oversight body of the Basel Committee on Banking Supervision and is comprised of the same member jurisdictions as the Committee.
Friday, January 8, 2010
On Lender of Last Resort facilities
On Lender of Last Resort facilities. By A J R, contributing blogger.
Nov 28, 2009
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As is elegantly summarized in Alexander, Dhumale and Eatwell [ADhE 2006], to manage risks, especially of systemic nature ("the awkward tendency for financial crises to cluster over time" [S 2000]), regulators choose from a "crisis management menu" [T 2009] of ex ante and ex post measures. Among the former we can find:
capital adequacy requirements - e.g., the Basel I and II frameworks;
large exposure limits;
limitations on lending
The ex post measures they mention are deposit insurance and the lender of last resort (LOLR) function. Basically, "[t]hese regulatory measures compose the main framework of bank prudential regulation."
A detailed list of steps to be taken after weaknesses are detected after ex ante measures, but before direct support is warranted by the bank being in a distress situation, and of course before closure or liquidation, is printed in Figure 1 of BCBS "Supervisory Guidance on Dealing with Weak Banks," p. 5 [BCBS 2002]. We show several we'll mention later:
Cash (equity) injection by shareholders (*)
Suspension of shareholders' rights, including voting rights
Prohibition on distribution of profits or other withdrawals by shareholders
Removal of directors and managers
Immediate and/or enhanced provisioning of doubtful assets (*)
Stop principal or interest repayments on subordinated debt
Appointment of an administrator
Most of the measures are designed to reduce the hemorrhage of money in case of weakness and to help the bank to strengthen itself. But the two measures highlighted with asterisk are direct ways (if successful) to avoid invoking the LOLR facilities.
How it differs LOLR support from those weak banks measures and other ex post ones? Which is the nature of lender of last resort facilities?
Definition, purpose of LOLR support
Freixas et alii [FGHS 1999] define LOLR as
the discretionary provision of liquidity to a financial institution (or the market [...]) by the central bank in reaction to an adverse shock which causes an abnormal increase in demand for liquidity which cannot be met from an alternative source.
This discretionary element that [FGHS 1999] mentions is important, and is used in the guidance to deal with weak banks [BCBS 2002]. It is obvious the need to keep awake in the night those who may need funds. If the LOLR function were automatic, moral hazard would be even greater than it already is, with the repeated bail-outs of unsecured creditors, the Treasuries support to any amount in individuals' accounts, and the more easy criteria for acceptance to be a member of the too-big-to-fail category.
Humphrey [H 1989], focusing in the system, sees the LOLR role as defined by Thornton and Bagehot [B 1873] as valid back in 1989:
…(1) to protect the money stock, (2) to support the whole financial system rather than individual financial institutions, (3) to behave consistently with the longer-run objective of stable money growth, and (4) to preannounce its policy in advance of crises so as to remove uncertainty. They also advised the LLR to let insolvent institutions fail, to lend to creditworthy institutions only, to charge penalty rates, and to require good collateral. Such rules they thought would minimize problems of moral hazard and remove bankers’ incentives to take undue risks.
Humphrey adds:
These precepts, though honored in the breach as well as in the observance, continue to serve as a benchmark and model for central bank policy today.
So we can say that until 1988 at least, LOLR followed closely the Thornton-Bagehot doctrine. We'll see below today's changing picture.
Aside from these valuable definitions, I'd like to add the following as main differentiating characteristics of this kind of support relative to the measures for weak banks:
LOLR facilities are not designed for weak banks (or financial systems), but for those institutions or systems with liquidity/solvency problems – as such, most of the [BCBS 2002]measures must be tried first.
The many different pathways than can be followed by the regulator are even less clearly determined.
There is a need for high publicity in case of panics, both for just a single institution (to fight "internal descredit" (Bagehot [B 1873]) and in general failure ("to remove instability") – but the [BCBS 2002] measures are recommended to be applied as silently as possible, to prevent doing harm to the bank that is under such intervention.
Transparency of last resort support
Obviously, the last point is not applicable to many of the measures for weak banks. Those printed supra in italics will be highly publicized or at least will be known by rival banks pretty soon. But the intention is to delay as much as possible public knowledge about them. In many cases it is possible to avoid the knowledge the suspension of rights or the prohibition of distribution of profits until a general meeting of shareholders, and that can be almost a year, if you can wait for the next one to pass without intervention.
In the case of other soft ex post measures, it is conceivable to keep them under wraps for some time, supposedly more than a year. In his ‘Emergency Liquidity Facilities’ [DH 2002, p. 124], Dong He details support for a Finnish bank. The last resort help didn't get published until more than a year later. Also, not only the central bank did help, but this wasn't known until it was published with such delay in the central bank bulletin.
This is just a schematic way to explain the differences. In practice, some of the [BCBS 2002]measures that we've referred to as clearly separated in time overlap to some degree. Nothing prevents the regulator from injecting emergency funds, both to the interbank market or to the institutions, and simultaneously adopting many of the [BCBS 2002] measures.
There is few guidance on LOLR facilities if we exclude national laws. Dong He summarizes the relevant information for twenty nations in his paper's appendix, but, as he says, the "study of emergency lending operations is hampered by a general lack of information on country practices in this area".
LOLR support types – by need
We can try to classify LOLR support according to the need of it. By this criterium, it can be invoked mainly by two needs:
because of undercapitalization by day-to-day operations – this is not a contentious point;
because of a panic – when many players "run for the exit at the same time" [W-P 2009] due to the sequential service constraint, which was noted by both Thornton and Bagehot.
[W-P 2009] summarizes many cases of panics in the XIX century and explains how central banks appeared in several countries, and with them the LOLR support in both "emergency lending in normal times" and "in systemic crises", as [DH 2002] calls them. This last support is subject of much discussion today.
Liquidity problems caused by normal, day-to-day operations
If the bank is not suffering "internal discredit", but the regulator, thru routine work, discovers that the financial institution is in distress, which is more common an ocurrence than panics, it may be decided to provide "advances [...] to an immense amount" as Bagehot registered in his book, aside from possible using many of the measures for weak banks we mentioned at the beginning.
Although there is agreement on this, the path is full of perils. Bagehot notes:
But though the rule is clear, the greatest delicacy, the finest and best skilled judgment, are needed to deal [with such affairs].
I've counted twelve times the root "delic-" in his book applied to how fragile and difficult to manage is the system. See References.
Liquidity problems caused by panics – both individual and systemic
Why runs happen even when the bank is not insolvent and can find ways to gather capital at reasonable cost? The work of Diamond and Dybvig [DD 1983] shows that the uncoordinated character of dispersed, uninsured, small depositors can reach what seem several equilibria, among them a bank run, even in such favorable circumstances. Later, Morris & Shin confirmed this [MS 1999]:
Creditors of a distressed borrower face a coordination problem. Even if the fundamentals are sound, fear of premature foreclosure by others may lead to pre-emptive action, undermining the project.
Bagehot offers what it seemed a counterintuitive method to stop a run:
In opposition to what might be at first sight supposed, the best way for the bank or banks who have the custody of the bank reserve to deal with a drain arising from internal discredit, is to lend freely.
He also explains why this solution seems to work:
This discredit means, 'an opinion that you have not got any money,' and to dissipate that opinion, you must, if possible, show that you have money: you must employ it for the public benefit in order that the public may know that you have it. The time for economy and for accumulation is before. A good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times.
And later adds, speaking of panics thru an example of successfully solving it (my emphasis):
The holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. They must lend to merchants, to minor bankers, to 'this man and that man,' whenever the security is good. In wild periods of alarm, one failure makes many [...]. 'We lent it [...] by every possible means and in modes we had never adopted before; [...] we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank [...].' After a day or two of this treatment, the entire panic subsided, and the 'City' was quite calm.
In a way or the other, these considerations keep living in current legislation, at least until Dong He wrote his working paper for the IMF. We can also say that no single country preserves all those prescriptions in writing, there are always subtle changes that well check in the last section, "LOLR support types – by differences in application".
LOLR support types – by differences in application
We can too classify LOLR support according to its differences in application or last resort support.
Size limit
In some countries there are great limits to the amount of liquidity that can be provided – that is, they do not follow the principle of lending freely. As D. He says, p. 129, Argentina, Hong Kong, Turkey and the Philippines have clear limitations in the size limit of last resort support. Dong He adds that this kind of limits is controversial, as they can encourage runs.
Independence of regulator
In others, there is a need to coordinate the bank with the money reserves with politicians at the executive departments, because of law or because of subtle pressure. In the end, in many cases the much trumpeted independence of the regulator is not fully respected. In the IMF report on Turkey [IMF 2007] we find (details in References):
81. In practice the BRSA lacks full operational independence in regulatory and budgetary matters. Before issuing a regulation [...] must conduct consultations with the related Ministry and the Undersecretariat of the State Planning Organization. While nonbinding consultation is appropriate, the process is perceived as binding, thus raising the possibility of undue government interference. [...] All visits abroad by the BRSA management or staff, such as for on-site inspections or for training, must be approved by the government. [...]
[The situation is not as bad as it sounds in this text selection we made. Turkey made great progress in the years before this report was written, as the report says.]
Collateral
In some countries, the quality of the collateral doesn't follow Bagehot's criterium (to relax the standard). The Hong Kong Monetary Authority's policy is to accept only high-quality paper. Other countries follow the criterium: e.g., the Bank of Korea may support banks with "the collateral of any assets which are defined temporarily as acceptable security" in some cases. See examples in [DH 2002, p. 126].
Fisher [F 2000] argues that requiring adequate collateral diminishes moral hazard: the prospective borrower would reduce excessive risks because the risky assets won't be accepted as collateral.
Solvent and insolvent institutions
If the firm is just temporarily illiquid but it is solvent, Bagehot recommends to lend freely (although at "very high" interest rates). If the company is insolvent, he recommends to let it fail.
Several issues are raised here:
In the hurry in which these crises are dealt with it is very difficult to know if the institution is solvent or not.
The pressure to help the firm if it is systemically important is enormous, and Bagehot view is increasingly not followed today. See next section.
Impact of recent developments on LOLR principles
Several reasons force our contemporary regulator to provide assistance to institutions that previously would not qualify. Paramount among them are Too Big To Fail (TBTF) issues:
bank failures have direct large costs of liquidation (see abstract of James below [J 1991]), which affect management and shareholders – much more so with big institutions
the payments system is affected – stopping payments by a TBTF bank touches too many economic agents
the interbank market (both as borrower and lender) is greatly affected if such a bank is liquidated
all this helps reduce economic activity – but even worse, the bank knowledge about the customers (how good or bad is someone repaying his debts, his bills, etc.) is lost, further slowing the economy
the Treasury also suffers, since it must support the interbank market and try to soften the situation
compounding this, the size of such a bank can affect the banking system credibility much more than a small bank's failure – system disorders can emerge
Abandoning punitive rates
Rustomjee [R 2009, p. 19] offers two reasons why many "regulators have opted not to provide support at penalty rates":
"charging a higher than market rate could aggravate [...] the bank’s liquidity or solvency challenge"
"public knowledge that a bank is being offered emergency lending at a penalty rate could deepen the loss of confidence in bank management and could itself exacerbate any concerns either by banks that have lent to the weak bank, or depositors, so prompting a bank run."
Market makers of last resort (MMLR)
BoE's Tucker [T 2009], which defines LOLR as putting "a finger in the dyke," comments on the increasing "amount of credit that gets intermediated via markets" rather than via institutions in a speech this month and discusses the need to stand ready to act as MMLRs, which is really complex: When you buy from an individual bank you have some leverage to change things, but once you enter into the market as a buyer (that means potentially a really large number of transactions and counterparties) you cannot later renegotiate the price of the assets if their quality deteriorate.
References
[ADhE 2006] Alexander K, R Dhumale and J Eatwell /2006): 'Global Governance of the Financial System - The international regulation of systemic risk'. Oxford UK: Oxford University Press.
[B 1873] Bagehot W (1873) Lombard Street: A Description of the Money Market, London: HS King. http://www.econlib.org/library/Bagehot/bagLom.html
But in exact proportion to the power of this system is its delicacy I should har dly say too much if I said its danger.
And this foreign deposit is evidently of a delicate and peculiar nature.
That such an arrangement is strange must be plain; but its strangeness can only be comprehended when we know what the custody of a national banking reserve means, and how delicate and difficult it is.
But though the rule is clear, the greatest delicacy, the finest and best skilled judgment, are needed to deal at once with such great and contrary evils.
And great as is the delicacy of such a problem in all countries, it is far great er in England now than it was or is elsewhere. The strain thrown by a panic on the final bank reserve is proportional to the magnitude of a country's commerce [...].
2ndly. Because, being a one-reserve system, it reduces the spare cash of the Money Market to a smaller amount than any other system, and so makes that market more delicate.
But it is of great importance to point out that our industrial organisation is liable not only to irregnlar external accidents, but likewise to regular internal changes; that these changes make our credit system much more delicate at some times than at others; and that it is the recurrence of these periodical seasons of delicacy which has given rise to the notion that panics come according to a fixed rule, that every ten years or so we must have one of them.
This is the surer to happen that Lombard Street is, as has been shown before, a very delicate market.
In a time when the trading classes were much ruder than they now are, many private bankers possessed variety of knowledge and a delicacy of attainment which would even now be very rare.
So that our one-reserve system of banking combines two evils: first, it makes the demand of the brokers upon the final reserve greater, because under it so many bankers remove so much money from the brokers; and under it also the final reserve is reduced to its minimum point, and the entire system of credit is made more delicate, and more sensitive.
And this is the reason why the Bank of England ought, I think, to deal most cautiously and delicately with their banking deposits.
We must therefore, I think, have recourse to feeble and humble palliatives such as I have suggested. With good sense, good judgment, and good care, I have no doubt that they may be enough. But I have written in vain if I require to say now that the problem is delicate, that the solution is varying and difficult, and that the result is inestimable to us all.
[BCBS 2002] Basel Committee on Banking Supervision (2002): ‘Supervisory Guidance on Dealing with Weak Banks’, Basel: Bank for International Settlements.
[DD 1983] Diamond D and P Dybvig (1983) ‘Bank Runs, Deposit Insurance and Liquidity’, Journal of Political Economy, Vol. 91, pp. 401–19.
[DH 2002] 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.
With the same title as a working paper (2000), Washington, DC: IMF.
[F 2000] Fischer S (2000) 'On the Need for an International Lender of Last Resort ' Essays in international economics, no. 220. Princeton University. http://www.princeton.edu/~ies/IES_Essays/E220.pdf
[FGHS 1999] Freixas X, C Giannini, G Hoggarth and F 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
[H 1989] Humphrey T (1989) ‘The Lender of Last Resort: The Concept in History’, Federal Reserve Bank of Richmond Economic Review, March/April, pp. 8-16. http://www.richmondfed.org/publications/research/economic_review/1989/er750202.cfm
[IMF 2007] International Monetary Fund (2007) ‘Turkey: Financial System Stability Assessment’, IMF Country Report Number 07/361, November, Washington DC: IMF.
62. The 2001 amendment of the CBRT Law gave the CBRT [the central bank] substantially greater independence in the implementation of monetary policy and freed it of any obligation to finance the public sector. [...] However, a lacuna in the CBRT Law is lack of specificity concerning the removal from office of members of the governing bodies [...].
81. In practice the BRSA [very much like the FSA] lacks full operational independence in regulatory and budgetary matters. Before issuing a regulation, the BRSA must conduct consultations with the related Ministry and the Undersecretariat of the State Planning Organization. While nonbinding consultation is appropriate, the process is perceived as binding, thus raising the possibility of undue government interference. Moreover, the related Ministry is legally empowered to file a lawsuit for the cancellation of the Board’s regulatory decision. [...] All visits abroad by the BRSA management or staff, such as for on-site inspections or for training, must be approved by the government. [...]
125. The CMB [the Capital Markets Board] has adequate funding [...]. When markets are inactive, the potential shortfall must be covered by a budgetary transfer from the Ministry of Finance, which could have a bearing on its independence. [...]
[J 1991] James C (1991) ‘The Losses Realised in Bank Failures’, Journal of Finance, September, pp 1223–42. James-TheLossesRealisedinBankFailures1991.pdf
This paper examines the losses realized in bank failures. Losses are measured as the difference between the book value of assets and the recovery value net of the direct expenses associated with the failure. I find the loss on assets is substantial, averaging 30 percent of the failed bank's assets. Direct expenses associated with bank closures average 10 percent of assets. An empirical analysis of the determinants of these losses reveals a significant difference in the value of assets retained by the FDIC and similar assets assumed by acquiring banks.
[MS 1999] Stephen Morris and Hyun Song Shin: Coordination Risk and the Price of Debt. Cowles Foundation Discussion Paper no. 1241. December 1999
[R 2009] Rustomjee C (2009) 'Bank Regulation and the Resolution of Banking Crises, Unit 2'. London: School of Oriental and Management Studies-CeFiMS.
[S 2000] 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
[T 2009] Paul Tucker (2009) 'The crisis management menu'. Speech by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at the SUERF, CEPS and Belgian Financial Forum Conference: "Crisis Management at the Cross-Roads", Brussels, November 16, 2009.
[W-P 2009] Wickman-Parak B (2009): Financial stability in focus. Speech by Ms Barbro Wickman-Parak, Deputy Governor of the Sveriges Riksbank, at the Swedish Chambers, Gothenburg, October 29, 2009. Wickman-Parak-FinancialstabilityinfocusOct292009.pdf
Where U.S. Health Care Ranks Number One - Isn't 'responsiveness' what medicine is all about?
Where U.S. Health Care Ranks Number One. By MARK B. CONSTANTIAN
Isn't 'responsiveness' what medicine is all about?
WSJ, Jan 08, 2010
Last August the cover of Time pictured President Obama in white coat and stethoscope. The story opened: "The U.S. spends more to get less [health care] than just about every other industrialized country." This trope has dominated media coverage of health-care reform. Yet a majority of Americans opposes Congress's health-care bills. Why?
The comparative ranking system that most critics cite comes from the U.N.'s World Health Organization (WHO). The ranking most often quoted is Overall Performance, where the U.S. is rated No. 37. The Overall Performance Index, however, is adjusted to reflect how well WHO officials believe that a country could have done in relation to its resources.
The scale is heavily subjective: The WHO believes that we could have done better because we do not have universal coverage. What apparently does not matter is that our population has universal access because most physicians treat indigent patients without charge and accept Medicare and Medicaid payments, which do not even cover overhead expenses. The WHO does rank the U.S. No. 1 of 191 countries for "responsiveness to the needs and choices of the individual patient." Isn't responsiveness what health care is all about?
Data assembled by Dr. Ronald Wenger and published recently in the Bulletin of the American College of Surgeons indicates that cardiac deaths in the U.S. have fallen by two-thirds over the past 50 years. Polio has been virtually eradicated. Childhood leukemia has a high cure rate. Eight of the top 10 medical advances in the past 20 years were developed or had roots in the U.S.
The Nobel Prizes in medicine and physiology have been awarded to more Americans than to researchers in all other countries combined. Eight of the 10 top-selling drugs in the world were developed by U.S. companies. The U.S. has some of the highest breast, colon and prostate cancer survival rates in the world. And our country ranks first or second in the world in kidney transplants, liver transplants, heart transplants, total knee replacements, coronary artery bypass, and percutaneous coronary interventions.
We have the shortest waiting time for nonemergency surgery in the world; England has one of the longest. In Canada, a country of 35 million citizens, 1 million patients now wait for surgery and another million wait to see specialists.
When my friend, cardiac surgeon Peter Alivizatos, returned to Greece after 10 years heading the heart transplantation program at Baylor University in Dallas, the one-year heart transplant survival rate there was 50%—five-year survival was only 35%. He soon increased those numbers to 94% one-year and 90% five-year survival, which is what we achieve in the U.S. So the next time you hear that the U.S. is No. 37, remember that Greece is No. 14. Cuba, by the way, is No. 39.
But the issue is only partly about quality. As we have all heard, the U.S. spends a higher percentage of its gross domestic product for health care than any other country.
Actually, health-care spending now increases more moderately than it has in previous decades. Food, energy, housing and health care consume the same share of American spending today (55%) that they did in 1960 (53%).
So what does this money buy? Certainly some goes to inefficiencies, corporate profits, and costs that should be lowered by professional liability reform and national, free-market insurance access by allowing for competition across state lines. But the majority goes to a long list of advantages that American citizens now expect: the easiest access, the shortest waiting times the widest choice of physicians and hospitals, and constant availability of health care to elderly Americans. What we need now is insurance and liability reform—not health-care reform.
Who determines how much a nation should pay for its health? Is 17% too much, or too little? What better way could there be to dedicate our national resources than toward the health and productivity of our citizens?
Perhaps it's not that America spends too much on health care, but that other nations don't spend enough.
Dr. Constantian is a plastic and reconstructive surgeon in New Hampshire.
Isn't 'responsiveness' what medicine is all about?
WSJ, Jan 08, 2010
Last August the cover of Time pictured President Obama in white coat and stethoscope. The story opened: "The U.S. spends more to get less [health care] than just about every other industrialized country." This trope has dominated media coverage of health-care reform. Yet a majority of Americans opposes Congress's health-care bills. Why?
The comparative ranking system that most critics cite comes from the U.N.'s World Health Organization (WHO). The ranking most often quoted is Overall Performance, where the U.S. is rated No. 37. The Overall Performance Index, however, is adjusted to reflect how well WHO officials believe that a country could have done in relation to its resources.
The scale is heavily subjective: The WHO believes that we could have done better because we do not have universal coverage. What apparently does not matter is that our population has universal access because most physicians treat indigent patients without charge and accept Medicare and Medicaid payments, which do not even cover overhead expenses. The WHO does rank the U.S. No. 1 of 191 countries for "responsiveness to the needs and choices of the individual patient." Isn't responsiveness what health care is all about?
Data assembled by Dr. Ronald Wenger and published recently in the Bulletin of the American College of Surgeons indicates that cardiac deaths in the U.S. have fallen by two-thirds over the past 50 years. Polio has been virtually eradicated. Childhood leukemia has a high cure rate. Eight of the top 10 medical advances in the past 20 years were developed or had roots in the U.S.
The Nobel Prizes in medicine and physiology have been awarded to more Americans than to researchers in all other countries combined. Eight of the 10 top-selling drugs in the world were developed by U.S. companies. The U.S. has some of the highest breast, colon and prostate cancer survival rates in the world. And our country ranks first or second in the world in kidney transplants, liver transplants, heart transplants, total knee replacements, coronary artery bypass, and percutaneous coronary interventions.
We have the shortest waiting time for nonemergency surgery in the world; England has one of the longest. In Canada, a country of 35 million citizens, 1 million patients now wait for surgery and another million wait to see specialists.
When my friend, cardiac surgeon Peter Alivizatos, returned to Greece after 10 years heading the heart transplantation program at Baylor University in Dallas, the one-year heart transplant survival rate there was 50%—five-year survival was only 35%. He soon increased those numbers to 94% one-year and 90% five-year survival, which is what we achieve in the U.S. So the next time you hear that the U.S. is No. 37, remember that Greece is No. 14. Cuba, by the way, is No. 39.
But the issue is only partly about quality. As we have all heard, the U.S. spends a higher percentage of its gross domestic product for health care than any other country.
Actually, health-care spending now increases more moderately than it has in previous decades. Food, energy, housing and health care consume the same share of American spending today (55%) that they did in 1960 (53%).
So what does this money buy? Certainly some goes to inefficiencies, corporate profits, and costs that should be lowered by professional liability reform and national, free-market insurance access by allowing for competition across state lines. But the majority goes to a long list of advantages that American citizens now expect: the easiest access, the shortest waiting times the widest choice of physicians and hospitals, and constant availability of health care to elderly Americans. What we need now is insurance and liability reform—not health-care reform.
Who determines how much a nation should pay for its health? Is 17% too much, or too little? What better way could there be to dedicate our national resources than toward the health and productivity of our citizens?
Perhaps it's not that America spends too much on health care, but that other nations don't spend enough.
Dr. Constantian is a plastic and reconstructive surgeon in New Hampshire.
Thursday, January 7, 2010
Wahid and the Voice of Moderate Islam - Indonesia's first democratic president espoused a philosophy of religious and ethnic tolerance
Wahid and the Voice of Moderate Islam. By Paul Wolfowitz
Indonesia's first democratic president espoused a philosophy of religious and ethnic tolerance.
WSJ, Jan 07, 2010
Abdurrahman Wahid, who died last week at the age of 69, was the first democratically elected president of Indonesia, the world's fourth largest country and third largest democracy. It has the largest Muslim population of any country in the world. Although he was forced from office after less than two years, he nevertheless helped to set the course of what has been a remarkably successful transition to democracy.
Even more important than his role as a politician, Wahid was the spiritual leader of Nahdlatul Ulama, the largest Muslim organization in Indonesia, and probably in the world, with 40 million members. He was a product of Indonesia's traditionally tolerant and humane practice of Islam, and he took that tradition to a higher level and shaped it in ways that will last long after his death.
Wahid recognized that the world's Muslim community is engaged in what he called in a 2005 op-ed for this newspaper "nothing less than a global struggle for the soul of Islam" and he understood the danger for Indonesia, for Islam and for all of us from this "crisis of misunderstanding that threatens to engulf our entire world."
Wahid was one of the most impressive leaders I have known. Although his formal higher education was limited to Islamic studies in Cairo and Arabic literature in Baghdad, his breadth of knowledge was astounding. With a voracious appetite for knowledge and a remarkably retentive memory, he seemed to know all of the important Islamic religious and philosophical texts. He also loved reading a wide range of Western literature (including most of William Faulkner's novels) as well as Arabic poetry. He enjoyed French movies, and cinema in general, and could identify the conductor of a Beethoven symphony simply by listening to a recording. He was an avid soccer fan and once compared the different styles of two German soccer teams to illustrate two alternative strategies for economic development. He loved jokes, particularly political ones. During Suharto's autocratic rule he published a collection of Soviet political humor in Indonesian, with the obvious purpose of teaching his own people how to laugh at their rulers.
Despite all that learning, Wahid had a common touch that enabled him to express his thoughts in down-to-earth language. He thus gained broad legitimacy for a moderate and tolerant vision. He could speak to young Indonesians, grappling with the relationship between religion and science by explaining to them the thoughts of a medieval Arab philosopher like Ibn Rushd (known to Christian philosophers as Averroes). And he was all the more effective because he himself had grappled with controversial ideas.
Wahid had been somewhat attracted in his youth by the writings of Said Qutb and Hasan al Banna, the founders of the Muslim brotherhood, but his deep humanism led him to reject them. When I visited him recently he told me of a long-ago visit to a mosque in Morocco where an Arabic translation of Aristotle's "Nichomachean Ethics" was on display. Seeing that book had brought tears to his eyes and Wahid explained: "If I hadn't read the 'Nichomachean Ethics' as a young man, I might have joined the Muslim brotherhood."
No doubt, what had so impressed Wahid was that Aristotle could arrive at deep truths about matters of right and wrong without the aid of religion, based simply on the belief that "the human function is activity of the soul in accord with reason" (Nichomachean Ethics, Book I). But his tears must have reflected the thought of how close he had come to accepting a cramped and intolerant view of life and humanity.
Throughout his public career, three ideas were central to Wahid's thinking. First was that true belief required religious freedom. "The essence of Islam," he once wrote, is "encapsulated" in the words of the Quran, "For you, your religion; for me, my religion." Indonesia, he believed, needs "to develop a full religious tolerance based on freedom of faith." Second was his belief that the fundamental requirement for democracy—or any form of just government—is equal treatment for all citizens before the law. Third, that respect for minorities is essential for social stability and national unity, particularly for Indonesia with its extraordinary diversity.
Throughout his career Wahid spoke up forcefully for people with unpopular ideas—even ones he disagreed with—and for the rights of ethnic and religious minorities. He was admired by the Christian and Chinese minorities for his willingness to do so. One of his first acts as president was to participate in prayers at a Hindu temple in Bali where he had earlier spent several months studying Hindu philosophy. Later he removed a number of restrictions on ethnic Chinese and made Chinese New Year an optional national holiday.
Even after leaving office, Wahid's role as a defender of religious freedom was extremely important. Indonesian voters have rejected extremist politics at the polls—and the leadership of the current president, Susilo Bambang Yudhoyono deserves much credit for that. Nevertheless, extremist views and even violent extremism too often go unchallenged. A recent report from The Wahid Insitute (which he founded in 2004) notes that a minority with extremist views, now in control of the Indonesian Ulama Council, has issued religious rulings against "deviant" groups. An even smaller minority that espouses violence, particularly the Islamic Defender Front, has attacked Christian churches and the mosques of the small Muslim Ahmadiyah sect.
Wahid was one of the few prominent Indonesians to defend the rights of the Ahmadiyah or to speak out forcefully against the Islamic Defender Front. Doing so takes courage. But he was always courageous, whether in defying President Suharto at the height of his power or in his personal struggle against encroaching blindness and failing health.
Although optimistic that "true Islam" will prevail, as he wrote in his 2005 op-ed, Wahid did not underestimate the dangers facing the world from an "extreme . . . ideology in the minds of fanatics" who "pervert Islam into a dogma of intolerance, hatred and bloodshed" and who justify their brutality by declaring "Islam is above everything else." This fundamentalist ideology, he said, "has become a well-financed, multifaceted global movement that operates like a juggernaut in much of the developing world." What begins as a misunderstanding "of Islam by Muslims themselves" becomes a "crisis of misunderstanding" that afflicts "Muslims and non-Muslims alike, with tragic consequences."
No one who knew Abdurrahman Wahid can believe that those fanatics who preach hatred and violence speak for the world's Muslims. Even though the extremist ideology represents a distinct minority of Muslims, it is well-financed and well-organized. To confront it, Muslim leaders like himself need, as he wrote in 2005, "the understanding and support of like-minded individuals, organizations and governments throughout the world . . . to offer a compelling alternate vision of Islam, one that banishes the fanatical ideology of hatred to the darkness from which it emerged."
That support includes material support, but it also includes the moral support that comes from international recognition and attention for Muslim leaders who speak out with the courage that Wahid did.
When Wahid was only 12 he was riding in a car with his father, Wahid Hasyim, himself a prominent Muslim leader at the time of Indonesian independence, when the car slid off a mountain road and his father suffered fatal injuries. What Wahid most remembered from that tragic event was the sight of thousands of people lining the roads as his father's casket traveled the 80 kilometers from Surabaya to his burial at Jombang. Overwhelmed by the affection people had for his father, he wondered "What could one man do that the people would love him so?"
As the funeral procession for Wahid himself traveled the same route on the last day of 2009, thousands of mourners, deeply moved, again lined the road. What had he done that Indonesians so loved him? Perhaps the question is answered by the words that he asked to have on his tomb: "Here lies a humanist." That he was and a great one as well. No one can replace him, but hopefully he has inspired others to follow in his path.
Mr. Wolfowitz, a former U.S. ambassador to Indonesia and assistant secretary of state for East Asia, is a visiting scholar at the American Enterprise Institute.
Indonesia's first democratic president espoused a philosophy of religious and ethnic tolerance.
WSJ, Jan 07, 2010
Abdurrahman Wahid, who died last week at the age of 69, was the first democratically elected president of Indonesia, the world's fourth largest country and third largest democracy. It has the largest Muslim population of any country in the world. Although he was forced from office after less than two years, he nevertheless helped to set the course of what has been a remarkably successful transition to democracy.
Even more important than his role as a politician, Wahid was the spiritual leader of Nahdlatul Ulama, the largest Muslim organization in Indonesia, and probably in the world, with 40 million members. He was a product of Indonesia's traditionally tolerant and humane practice of Islam, and he took that tradition to a higher level and shaped it in ways that will last long after his death.
Wahid recognized that the world's Muslim community is engaged in what he called in a 2005 op-ed for this newspaper "nothing less than a global struggle for the soul of Islam" and he understood the danger for Indonesia, for Islam and for all of us from this "crisis of misunderstanding that threatens to engulf our entire world."
Wahid was one of the most impressive leaders I have known. Although his formal higher education was limited to Islamic studies in Cairo and Arabic literature in Baghdad, his breadth of knowledge was astounding. With a voracious appetite for knowledge and a remarkably retentive memory, he seemed to know all of the important Islamic religious and philosophical texts. He also loved reading a wide range of Western literature (including most of William Faulkner's novels) as well as Arabic poetry. He enjoyed French movies, and cinema in general, and could identify the conductor of a Beethoven symphony simply by listening to a recording. He was an avid soccer fan and once compared the different styles of two German soccer teams to illustrate two alternative strategies for economic development. He loved jokes, particularly political ones. During Suharto's autocratic rule he published a collection of Soviet political humor in Indonesian, with the obvious purpose of teaching his own people how to laugh at their rulers.
Despite all that learning, Wahid had a common touch that enabled him to express his thoughts in down-to-earth language. He thus gained broad legitimacy for a moderate and tolerant vision. He could speak to young Indonesians, grappling with the relationship between religion and science by explaining to them the thoughts of a medieval Arab philosopher like Ibn Rushd (known to Christian philosophers as Averroes). And he was all the more effective because he himself had grappled with controversial ideas.
Wahid had been somewhat attracted in his youth by the writings of Said Qutb and Hasan al Banna, the founders of the Muslim brotherhood, but his deep humanism led him to reject them. When I visited him recently he told me of a long-ago visit to a mosque in Morocco where an Arabic translation of Aristotle's "Nichomachean Ethics" was on display. Seeing that book had brought tears to his eyes and Wahid explained: "If I hadn't read the 'Nichomachean Ethics' as a young man, I might have joined the Muslim brotherhood."
No doubt, what had so impressed Wahid was that Aristotle could arrive at deep truths about matters of right and wrong without the aid of religion, based simply on the belief that "the human function is activity of the soul in accord with reason" (Nichomachean Ethics, Book I). But his tears must have reflected the thought of how close he had come to accepting a cramped and intolerant view of life and humanity.
Throughout his public career, three ideas were central to Wahid's thinking. First was that true belief required religious freedom. "The essence of Islam," he once wrote, is "encapsulated" in the words of the Quran, "For you, your religion; for me, my religion." Indonesia, he believed, needs "to develop a full religious tolerance based on freedom of faith." Second was his belief that the fundamental requirement for democracy—or any form of just government—is equal treatment for all citizens before the law. Third, that respect for minorities is essential for social stability and national unity, particularly for Indonesia with its extraordinary diversity.
Throughout his career Wahid spoke up forcefully for people with unpopular ideas—even ones he disagreed with—and for the rights of ethnic and religious minorities. He was admired by the Christian and Chinese minorities for his willingness to do so. One of his first acts as president was to participate in prayers at a Hindu temple in Bali where he had earlier spent several months studying Hindu philosophy. Later he removed a number of restrictions on ethnic Chinese and made Chinese New Year an optional national holiday.
Even after leaving office, Wahid's role as a defender of religious freedom was extremely important. Indonesian voters have rejected extremist politics at the polls—and the leadership of the current president, Susilo Bambang Yudhoyono deserves much credit for that. Nevertheless, extremist views and even violent extremism too often go unchallenged. A recent report from The Wahid Insitute (which he founded in 2004) notes that a minority with extremist views, now in control of the Indonesian Ulama Council, has issued religious rulings against "deviant" groups. An even smaller minority that espouses violence, particularly the Islamic Defender Front, has attacked Christian churches and the mosques of the small Muslim Ahmadiyah sect.
Wahid was one of the few prominent Indonesians to defend the rights of the Ahmadiyah or to speak out forcefully against the Islamic Defender Front. Doing so takes courage. But he was always courageous, whether in defying President Suharto at the height of his power or in his personal struggle against encroaching blindness and failing health.
Although optimistic that "true Islam" will prevail, as he wrote in his 2005 op-ed, Wahid did not underestimate the dangers facing the world from an "extreme . . . ideology in the minds of fanatics" who "pervert Islam into a dogma of intolerance, hatred and bloodshed" and who justify their brutality by declaring "Islam is above everything else." This fundamentalist ideology, he said, "has become a well-financed, multifaceted global movement that operates like a juggernaut in much of the developing world." What begins as a misunderstanding "of Islam by Muslims themselves" becomes a "crisis of misunderstanding" that afflicts "Muslims and non-Muslims alike, with tragic consequences."
No one who knew Abdurrahman Wahid can believe that those fanatics who preach hatred and violence speak for the world's Muslims. Even though the extremist ideology represents a distinct minority of Muslims, it is well-financed and well-organized. To confront it, Muslim leaders like himself need, as he wrote in 2005, "the understanding and support of like-minded individuals, organizations and governments throughout the world . . . to offer a compelling alternate vision of Islam, one that banishes the fanatical ideology of hatred to the darkness from which it emerged."
That support includes material support, but it also includes the moral support that comes from international recognition and attention for Muslim leaders who speak out with the courage that Wahid did.
When Wahid was only 12 he was riding in a car with his father, Wahid Hasyim, himself a prominent Muslim leader at the time of Indonesian independence, when the car slid off a mountain road and his father suffered fatal injuries. What Wahid most remembered from that tragic event was the sight of thousands of people lining the roads as his father's casket traveled the 80 kilometers from Surabaya to his burial at Jombang. Overwhelmed by the affection people had for his father, he wondered "What could one man do that the people would love him so?"
As the funeral procession for Wahid himself traveled the same route on the last day of 2009, thousands of mourners, deeply moved, again lined the road. What had he done that Indonesians so loved him? Perhaps the question is answered by the words that he asked to have on his tomb: "Here lies a humanist." That he was and a great one as well. No one can replace him, but hopefully he has inspired others to follow in his path.
Mr. Wolfowitz, a former U.S. ambassador to Indonesia and assistant secretary of state for East Asia, is a visiting scholar at the American Enterprise Institute.
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