Remarks of Under Secretary for Domestic Finance Mary Miller at the Office of Financial Research (OFR) and Financial Stability Oversight Council (FSOC) Conference on “Assessing Financial Intermediation: Measurement and Analysis”

Remarks of Under Secretary for Domestic Finance Mary Miller at the Office of Financial Research (OFR) and Financial Stability Oversight Council (FSOC) Conference on "Assessing Financial Intermediation: Measurement and Analysis"
Dec 6, 2012
http://www.treasury.gov/press-center/press-releases/Pages/tg1789.aspx

As Prepared for Delivery
WASHINGTON – Good morning and thank you to the OFR and the Council for the opportunity to join you here today.

It is a pleasure for me to note that this is the second annual conference hosted by the OFR and the Council.  These two organizations have come a long way since their creation in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Conferences like this one are a key way that the OFR and the Council are leveraging their expertise by calling on experts from academia, industry, and elsewhere in government to bring diverse perspectives on questions related to system-wide financial stability.

The Dodd-Frank Act designed the OFR to act as a catalyst to foster a broad examination of questions related to financial stability.  One of the OFR’s goals involves cultivating a virtual network of academics, researchers, and others to enrich and expand the OFR’s reach in fulfilling its mission.

The Council and the OFR work together to produce important and timely research and analysis on a range of issues—for example, on the risks presented by money market funds.  In addition, the OFR plays a central role in the international initiative to implement a global data standard to identify uniquely the entities in financial transactions.  This legal entity identifier, or LEI, is essential for governments and the financial industry to assess exposures and interconnections within the vast network of financial market participants.  And both the Council and the OFR have published detailed annual reports to engage the public with their work.

Today’s conference provides an opportunity to build on those accomplishments and to continue a discussion on the best ways to promote financial stability. 

The financial services marketplace is constantly changing, as market participants seek new and better ways to do business, as technology and techniques evolve, and as government adjusts the regulatory and supervisory framework.

This process of evolution creates exciting opportunities, but it also represents a moving target of possible risks that can grow into potential threats to financial stability.  That is where the Council and the OFR come in and that is where this conference will turn its focus.

Before the Dodd-Frank Act, the United States did not have one single agency tasked with looking at systemic risk across the financial system and considering how to respond to it – what we call a macroprudential approach.  That shortcoming resulted in a critical blind spot to risks building in the financial system and, once the crisis began, blocked a clear view of what was happening as the nation plummeted into the financial crisis.

The Council and the OFR are designed to correct that lack of comprehensive vision – to provide visibility across the financial services marketplace and across the areas of the compartmentalized responsibility of federal and state financial regulators.  It also allows us to inspect the inner workings of the financial system for an understanding of the interconnections that can transmit and compound systemic risks.

As 2012 draws to a close and Dodd-Frank implementation continues, our resolve is stronger than ever to resist any attempt to roll back these reforms and return our country to the precarious environment of misplaced incentives and inadequate controls that got us into such serious trouble.

We must also be mindful that, as the economy continues to recover, we must remain vigilant about detecting emerging risks and taking appropriate action.

In my experience, you are never handed the same script for a financial crisis or shock.  The next financial crisis is unlikely to look like the last.  Innovative thinking is essential as we recognize that the past approaches for assessing and managing system-wide risks are inadequate for facing the challenges of today and tomorrow.  New ideas must be applied to these problems and government cannot generate all of the good new ideas on its own.  There must be a partnership with academics, industry, and others—and conferences like this one are incubators for new ideas to emerge and begin to develop.

I would like to thank all of the conference participants for contributing to this effort and for helping to expand our collective knowledge of financial stability.  Your time and energies are providing a valuable service to our country, its economy, and its citizens.

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Tracking Global Demand for Advanced Economy Sovereign Debt

Tracking Global Demand for Advanced Economy Sovereign Debt. Prepared by Serkan Arslanalp and Takahiro Tsuda
IMF Working Paper No. 12/284
December 2012
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40135.0

Recent events have shown that sovereign, just like banks, can be subject to runs, highlighting the importance of the investor base for their liabilities. This paper proposes a methodology for compiling internationally comparable estimates of investor holdings of sovereign debt. Based on this methodology, it introduces a dataset for 24 major advanced economies that can be used to track US$42 trillion of sovereign debt holdings on a quarterly basis over 2004-11. While recent outflows from euro periphery countries have received wide attention, most sovereign borrowers have continued to increase reliance on foreign investors. This may have helped reduce borrowing costs, but it can imply higher refinancing risks going forward. Meanwhile, advanced economy banks’ exposure to their own government debt has begun to increase across the board after the global financial crisis, strengthening sovereign-bank linkages. In light of these risks, the paper proposes a framework— sovereign funding shock scenarios (FSS)—to conduct forward-looking analysis to assess sovereigns’ vulnerability to sudden investor outflows, which can be used along with standard debt sustainability analyses (DSA). It also introduces two risk indices—investor base risk index (IRI) and foreign investor position index (FIPI)—to assess sovereigns’ vulnerability to shifts in investor behavior.

Operationalising the selection and application of macroprudential instruments

Operationalising the selection and application of macroprudential instruments
Committee on the Global Financial System
December 3, 2012
http://www.bis.org/press/p121203.htm

The recent financial crisis has accelerated efforts to develop macroprudential policy frameworks. As a result, new or strengthened mandates for macroprudential policies have been established in a growing range of jurisdictions. A report released today by the Committee on the Global Financial System (CGFS) provides practical guidance for policymakers on how macroprudential instruments should be chosen, combined and applied.

This report - prepared by a Working Group chaired by José-Manuel González-Páramo, formerly of the European Central Bank - aims to help policymakers in operationalising macroprudential policies.

Specifically, it identifies three high-level criteria that are key in determining the selection and application of macroprudential instruments:

1. the ability to determine the appropriate timing for the instrument's activation or deactivation;
2. the instrument's effectiveness in achieving the stated policy objective; and
3. the instrument's efficiency in terms of a cost-benefit assessment.

In trying to operationalise these criteria, the report proposes a number of practical tools that can help when choosing and implementing macroprudential instruments.

William C Dudley, CGFS Chairman and President of the Federal Reserve Bank of New York, says in the preface of the report: "We hope that the practical approaches described in this report will prove to be a relevant and timely input to the macroprudential policy frameworks that are currently being established in a large range of jurisdictions."

Human Nature: Jim Sinegal Dividend Tax Decision - Costco Will Borrow To Pay Dividends

Costco's Dividend Tax Epiphany. WSJ Editorial
Obama's fans in the 1% vote to beat Obama's tax increase.The Wall Street Journal, November 30, 2012, on page A14
http://online.wsj.com/article/SB10001424127887324705104578149012514177372.html

When President Obama needed a business executive to come to his campaign defense, Jim Sinegal was there. The Costco COST +2.07% co-founder, director and former CEO even made a prime-time speech at the Democratic Party convention in Charlotte. So what a surprise this week to see that Mr. Sinegal and the rest of the Costco board voted to give themselves a special dividend to avoid Mr. Obama's looming tax increase. Is this what the President means by "tax fairness"?

Specifically, the giant retailer announced Wednesday that the company will pay a special dividend of $7 a share this month. That's a $3 billion Christmas gift for shareholders that will let them be taxed at the current dividend rate of 15%, rather than next year's rate of up to 43.4%—an increase to 39.6% as the Bush-era rates expire plus another 3.8% from the new ObamaCare surcharge.

More striking is that Costco also announced that it will borrow $3.5 billion to finance the special payout. Dividends are typically paid out of earnings, either current or accumulated. But so eager are the Costco executives to get out ahead of the tax man that they're taking on debt to do so.

Shareholders were happy as they bid up shares by more than 5% in two days. But the rating agencies were less thrilled, as Fitch downgraded Costco's credit to A+ from AA-. Standard & Poor's had been watching the company for a potential upgrade but pulled the watch on the borrowing news.

We think companies can do what they want with their cash, but it's certainly rare to see a public corporation weaken its balance sheet not for investment in the future but to make a one-time equity payout. It's a good illustration of the way that Federal Reserve Chairman Ben Bernanke's near-zero interest rates are combining with federal tax policy to distort business decisions.

One of the biggest dividend winners will be none other than Mr. Sinegal, who owns about two million shares, while his wife owns another 84,669. At $7 a share, the former CEO will take home roughly $14 million. At a 15% tax rate he'll get to keep nearly $12 million of that windfall, while at next year's rate of 43.4% he'd take home only about $8 million. That's a lot of extra cannoli.

This isn't exactly the tone of, er, shared sacrifice that Mr. Sinegal struck on stage in Charlotte. He described Mr. Obama as "a President making an economy built to last," adding that "for companies like Costco to invest, grow, hire and flourish, the conditions have to be right. That requires something from all of us." But apparently $4 million less from Mr. Sinegal.

By the way, the Costco board also includes at least two other prominent tub-thumpers for higher taxes— William Gates Sr. and Charles Munger. Mr. Gates, the father of Microsoft's MSFT -1.22% Bill Gates, has campaigned against repealing the death tax and led the fight to impose an income tax via referendum in Washington state in 2010. It lost. Mr. Munger is Warren Buffett's longtime Sancho Panza at Berkshire Hathaway BRKB 0.00% and has spoken approvingly of a value-added tax that would stick it to the middle class.

Costco's chief financial officer, Richard Galanti, confirms that every member of the board is also a shareholder. Based on the most recent publicly available data, they own more than 4.1 million shares and more than 1.3 million options to purchase additional shares. At $7 a share, the dividend will distribute roughly $29 million to the board, including Mr. Sinegal's $14 million—at a collective tax saving of about $8 million. Even more cannoli.

We emailed Mr. Sinegal for comment but didn't hear back. Mr. Galanti explained that while looming tax hikes are a factor in the December borrowing and payout, so are current low interest rates. Mr. Galanti adds that the company will still have a strong balance sheet and is increasing its capital expenditures and store openings this year.

As it happens, one of those new stores opened Thursday in Washington, D.C., and no less a political star than Joe Biden stopped by to join Mr. Sinegal and pose for photos as he did some Christmas shopping. It's nice to have friends in high places. We don't know if Mr. Biden is a Costco shareholder, but if he wants to get in on the special dividend there's still time before his confiscatory tax policy hits. The dividend is payable on December 18 to holders of record on December 10.

To sum up: Here we have people at the very top of the top 1% who preach about tax fairness voting to write themselves a huge dividend check to avoid the Obama tax increase they claim it is a public service to impose on middle-class Americans who work for 30 years and finally make $250,000 for a brief window in time.

If they had any shame, they'd send their entire windfall to the Treasury.

How dare Fannie and Freddie try to charge for their risks?

Senators for Housing Busts. WSJ Editorial
How dare Fannie and Freddie try to charge for their risks.The Wall Street Journal, December 1, 2012, on page A14
http://online.wsj.com/article/SB10001424127887324352004578139543792750584.html

For proof that politicians have learned nothing from the Federal Housing Administration's insolvency, look no further than a November 19 Senate letter to Edward DeMarco of the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae FNMA 0.00% and Freddie Mac FMCC 0.00% . Mr. DeMarco wants to let the toxic mortgage twins charge higher fees to cover their risks. Oh, the horror.

At issue is a little-noticed September FHFA proposal to discriminate between states with efficient foreclosure practices and those where judicial and regulatory burdens prolong the process. Specifically in Connecticut, Florida, Illinois, New Jersey and New York, foreclosures can take years.

Starting next year, Fannie and Freddie would charge borrowers in those states a one-time upfront fee of between 0.15% and 0.30%, which on a 30-year, $200,000 fixed-rate mortgage equates roughly to "an increase of approximately $3.50 to $7.00" on a monthly mortgage payment, according to FHFA.

The agency explained that the fees Fan and Fred charged before the housing crisis "proved inadequate to compensate for the level of actual credit losses" the duo sustained, which "contributed directly to substantial financial support being provided to the two companies by taxpayers." Total taxpayer cost so far: $138 billion. The change would relieve borrowers in low-cost states from subsidizing those in high-cost states. FHFA would lower or eliminate the levy if states sped up their foreclosure processes, which would also speed up the housing recovery.

Cue the outrage from Capitol Hill. "As you know, certain state and local governments have put in place increased regulatory and judicial scrutiny of foreclosures to protect consumers from mortgage loan servicing and foreclosure abuses," Democratic Senators from New York, New Jersey, Connecticut and Florida, plus Independent Joe Lieberman, declared. They want the higher fees withdrawn.

Translation: The Senators are embarrassed that FHFA is exposing the cost of their antiforeclosure crusade and are trying to pin the blame on bankers. Recall that the "robo-signing" scandal never unearthed a wave of current borrowers wrongly ejected from their homes. The politicians want Fan and Fred to keep churning out below-market-rate mortgage insurance, regardless of the eventual cost to taxpayers.

This is the kind of thinking that led Fan and Fred to supercharge the subprime lending boom and pushed the FHA into its money-losing expansion. As long as politicians run the housing markets, they will continue promoting such behavior. Kudos to Mr. DeMarco, a career civil servant, for trying to impose a more rational policy, but don't be surprised if the Obama Administration tries to replace him in a second term.

Debate: Progressives & Conservatives on Entitlements

Progressives

Sorry, Erskine, America Rejected Simpson-Bowles. By John Nichols
The Nation, November 29, 2012 - 8:46 AM ET
http://www.thenation.com/blog/171513/sorry-erskine-america-rejected-simpson-bowles

 

Erskine Bowles, who is sort of a Democrat, met Wednesday with House Speaker John Boehner to help Republicans promote proposals to cut entitlements, as part of the “fiscal cliff” negotiations.

This is the right place for Bowles, who has long maintained a mutual-admiration society with House Budget Committee chairman Paul Ryan, R-Wisconsin. The former Clinton White House chief of staff has always been in the corporate conservative camp when it comes to debates about preserving Social Security, Medicare and Medicaid.

It’s good that he and Boehner have found one another. Let the Republicans advocate for the cuts proposed by Bowles and his former Wyoming Senator Alan Simpson, his Republican co-conductor on the train wreck that produced the so-called “Simpson-Bowles” deficit reduction plan.

After all, despite the media hype, Simpson-Bowles has always been a non-starter with the American people.

Last summer, at the Democratic and Republican national conventions, so many nice things were said about the recommendations of the National Commission on Fiscal Responsibility and Reform that had been chaired by former Wyoming Senator Alan Simpson, a Republican, and Bowles that it was hard to understand why they were implemented. Paul Ryan went so far as to condemn President Obama for “doing nothing” to implement the Simpson-Bowles plan—only to have it noted that Ryan rejected the recommendations of the commission.

But, while a lot of politicians in both parties say a lot of nice things about the austerity program proposed by Simpson-Bowles, there is a reason why there was no rush before the election to embrace the blueprint for cutting Social Security, Medicare and Medicaid while imposing substantial new tax burdens on the middle class.

It’s a loser.

Before the November 6 election, Simpson and Bowles went out of their way to highlight the candidacies of politicians who supported their approach—New Hampshire Republican Congressman Charlie Bass, Rhode Island Republican US House candidate Brendan Doherty, Nebraska Democratic US Senate candidate Bob Kerrey. Bipartisan endorsements were made, statements were issued, headlines were grabbed and…

The Simpson-Bowles candidates all lost.

Americans are smart enough to recognize that Simpson-Bowles would stall growth. And they share the entirely rational view of economists like Paul Krugman.

“Simpson-Bowles is terrible,” argues Krugman, a Nobel Prize winner for his economic scholarship. “It mucks around with taxes, but is obsessed with lowering marginal rates despite a complete absence of evidence that this is important. It offers nothing on Medicare that isn’t already in the Affordable Care Act. And it raises the Social Security retirement age because life expectancy has risen—completely ignoring the fact that life expectancy has only gone up for the well-off and well-educated, while stagnating or even declining among the people who need the program most.”

On election night, Peter D. Hart Research Associates surveyed Americans with regard to key proposals from the commission. The reaction was uniformly negative.

By a 73-18 margin, those polled said that protecting Medicare and Social Security from benefit cuts is more important than bringing down the deficit.
By a 62-33 margin, the voters who were surveyed said that making the wealthy start paying their fair share of taxes is more important than reducing tax rates across the board (62 percent to 33 percent).

But that’s just the beginning of an outline of opposition to the Simpson-Bowles approach.

To wit:
* 84 percent of those surveyed oppose reducing Social Security benefits;
* 68 percent oppose raising the Medicare eligibility age;
* 69 percent oppose reductions in Medicaid benefits;
* 64 percent support addressing the deficit by increasing taxes on the rich—with more than half of those surveyed favoring the end of the Bush tax cuts for those making more than $250,000.

Americans want a strong government that responds to human needs:
• 88 percent support allowing Medicare to negotiate with drug companies to lower costs;
• 70 percent favor continuing extended federal unemployment insurance;
• 64 percent support providing federal government funding to local governments;
• 72 percent say that corporations and wealthy individuals have too much influence on the political system.

AFL-CIO president Richard Trumka is right. On November 6, “The American people sent a clear message.”

With their votes, with their responses to exit polls, with every signal they could send, the voters refused to buy the “fix” that Erskine Bowles is selling.

---
Conservatives

The Crisis of American Self-Government. By Sohrab Ahmari
Harvey Mansfield, Harvard's 'pet dissenter,' on the 2012 election, the real cost of entitlements, and why he sees reason for hope.
The Wall Street Journal, November 30, 2012, on page A13
http://online.wsj.com/article/SB10001424127887323751104578149292503121124.html

Cambridge, Mass.

'We have now an American political party and a European one. Not all Americans who vote for the European party want to become Europeans. But it doesn't matter because that's what they're voting for. They're voting for dependency, for lack of ambition, and for insolvency."

Few have thought as hard, or as much, about how democracies can preserve individual liberty and national virtue as the eminent political scientist Harvey Mansfield. When it comes to assessing the state of the American experiment in self-government today, his diagnosis is grim, and he has never been one to mince words.

Mr. Mansfield sat for an interview on Thursday at the Harvard Faculty Club. This year marks his 50th as a teacher at the university. It isn't easy being the most visible conservative intellectual at an institution that has drifted ever further to the left for a half-century. "I live in a one-party state and very much more so a one-party university," says the 80-year-old professor with a sigh. "It's disgusting. I get along very well because everybody thinks the fact that I'm here means the things I say about Harvard can't be true. I am a kind of pet—a pet dissenter."

Partly his isolation on campus has to do with the nature of Mr. Mansfield's scholarship. At a time when his colleagues are obsessed with trendy quantitative methods and even trendier "identity studies," Mr. Mansfield holds steadfast to an older tradition that looks to the Western canon as the best guide to human affairs. For him, Greek philosophy and the works of thinkers such as Machiavelli and Tocqueville aren't historical curiosities; Mr. Mansfield sees writers grappling heroically with political and moral problems that are timeless and universally relevant.

"All modern social science deals with perceptions," he says, "but that is a misnomer because it neglects to distinguish between perceptions and misperceptions."

Consider voting. "You can count voters and votes," Mr. Mansfield says. "And political science does that a lot, and that's very useful because votes are in fact countable. One counts for one. But if we get serious about what it means to vote, we immediately go to the notion of an informed voter. And if you get serious about that, you go all the way to voting as a wise choice. That would be a true voter. The others are all lesser voters, or even not voting at all. They're just indicating a belief, or a whim, but not making a wise choice. That's probably because they're not wise."

By that measure, the electorate that granted Barack Obama a second term was unwise—the president achieved "a sneaky victory," Mr. Mansfield says. "The Democrats said nothing about their plans for the future. All they did was attack the other side. Obama's campaign consisted entirely of saying 'I'm on your side' to the American people, to those in the middle. No matter what comes next, this silence about the future is ominous."

At one level Mr. Obama's silence reveals the exhaustion of the progressive agenda, of which his presidency is the spiritual culmination, Mr. Mansfield says. That movement "depends on the idea that things will get better and better and progress will be made in the actualization of equality." It is telling, then, that during the 2012 campaign progressives were "confined to defending what they've already achieved or making small improvements—student loans, free condoms. The Democrats are the party of free condoms. That's typical for them."

But Democrats' refusal to address the future in positive terms, he adds, also reveals the party's intent to create "an entitlement or welfare state that takes issues off the bargaining table and renders them above politics." The end goal, Mr. Mansfield worries, is to sideline the American constitutional tradition in favor of "a practical constitution consisting of progressive measures the left has passed that cannot be revoked. And that is what would be fixed in our political system—not the Constitution."

It is a project begun at the turn of the previous century by "an alliance of experts and victims," Mr. Mansfield says. "Social scientists and political scientists were very much involved in the foundation of the progressive movement. What those experts did was find ways to improve the well-being of the poor, the incompetent, all those who have the right to vote but can't quite govern their own lives. And still to this day we see in the Democratic Party the alliance between Ph.D.s and victims."

The Obama campaign's dissection of the public into subsets of race, sex and class resentments is a case in point. "Victims come in different kinds," says Mr. Mansfield, "so they're treated differently. You push different buttons to get them to react."

The threat to self-government is clear. "The American founders wanted people to live under the Constitution," Mr. Mansfield says. "But the progressives want the Constitution to live under the American people."

Harvey Mansfield Jr. was born in 1932 in New Haven, Conn. His parents were staunch New Dealers, and while an undergraduate at Harvard Mr. Mansfield counted himself a liberal Democrat.

Next came a Fulbright year in London and a two-year stint in the Army. "I was never in combat," he says. "In fact I ended up in France for a year, pulling what in the Army they call 'good duty' at Orléans, which is in easy reach of Paris. So even though I was an enlisted man I lived the life of Riley."

A return to the academy and a Harvard doctorate were perhaps inevitable but Mr. Mansfield also underwent a decisive political transformation. "I broke with the liberals over the communist issue," he says. "My initiating forces were anticommunism and my perception that Democrats were soft on communism, to use a rather unpleasant phrase from the time—unpleasant but true." He also began to question the progressive project at home: "I saw the frailties of big government exposed, one after another. Everything they tried didn't work and in fact made us worse off by making us dependent on an engine that was getting weaker and weaker."

His first teaching post came in 1960 at the University of California, Berkeley. In California, he came to know the German-American philosopher Leo Strauss, who at the time was working at Stanford University. "Strauss was a factor in my becoming conservative," he says. "That was a whole change of outlook rather than a mere question of party allegiance."

Strauss had studied ancient Greek texts, which emphasized among other things that "within democracy there is good and bad, free and slave," and that "democracy can produce a slavish mind and a slavish country." The political task before every generation, Mr. Mansfield understood, is to "defend the good kind of democracy. And to do that you have to be aware of human differences and inequalities, especially intellectual inequalities."

American elites today prefer to dismiss the "unchangeable, undemocratic facts" about human inequality, he says. Progressives go further: "They think that the main use of liberty is to create more equality. They don't see that there is such a thing as too much equality. They don't see limits to democratic equalizing"—how, say, wealth redistribution can not only bankrupt the public fisc but corrupt the national soul.

"Americans take inequality for granted," Mr. Mansfield says. The American people frequently "protect inequalities by voting not to destroy or deprive the rich of their riches. They don't vote for all measures of equalization, for which they get condemned as suffering from false consciousness. But that's true consciousness because the American people want to make democracy work, and so do conservatives. Liberals on the other hand just want to make democracy more democratic."

Equality untempered by liberty invites disaster, he says. "There is a difference between making a form of government more like itself," Mr. Mansfield says, "and making it viable." Pushed to its extremes, democracy can lead to "mass rule by an ignorant, or uncaring, government."

Consider the entitlements crisis. "Entitlements are an attack on the common good," Mr. Mansfield says. "Entitlements say that 'I get mine no matter what the state of the country is when I get it.' So it's like a bond or an annuity. What the entitlement does is give the government version of a private security, which is better because the government provides a better guarantee than a private company can."

That is, until the government goes broke, as has occurred across Europe.

"The Republicans should want to recover the notion of the common good," Mr. Mansfield says. "One way to do that is to show that we can't afford the entitlements as they are—that we've always underestimated the cost. 'Cost' is just an economic word for the common good. And if Republicans can get entitlements to be understood no longer as irrevocable but as open to negotiation and to political dispute and to reform, then I think they can accomplish something."

The welfare state's size isn't what makes it so stifling, Mr. Mansfield says. "What makes government dangerous to the common good is guaranteed entitlements, so that you can never question what expenses have been or will be incurred." Less important at this moment are spending and tax rates. "I don't think you can detect the presence or absence of good government," he says, "simply by looking at the percentage of GDP that government uses up. That's not an irrelevant figure but it's not decisive. The decisive thing is whether it's possible to reform, whether reform is a political possibility."

Then there is the matter of conservative political practice. "Conservatives should be the party of judgment, not just of principles," he says. "Of course there are conservative principles—free markets, family values, a strong national defense—but those principles must be defended with the use of good judgment. Conservatives need to be intelligent, and they shouldn't use their principles as substitutes for intelligence. Principles need to be there so judgment can be distinguished from opportunism. But just because you give ground on principle doesn't mean you're an opportunist."

Nor should flexibility mean abandoning major components of the conservative agenda—including cultural values—in response to a momentary electoral defeat. "Democrats have their cultural argument, which is the attack on the rich and the uncaring," Mr. Mansfield says. "So Republicans need their cultural arguments to oppose the Democrats', to say that goodness or justice in our country is not merely the transfer of resources to the poor and vulnerable. We have to take measures to teach the poor and vulnerable to become a little more independent and to prize independence, and not just live for a government check. That means self-government within each self, and where are you going to get that except with morality, responsibility and religion?"

So is it still possible to pull back from the brink of America's Europeanization? Mr. Mansfield is optimistic. "The material for recovery is there," he says. "Ambition, for one thing. I teach at a university where all the students are ambitious. They all want to do something with their lives." That is in contrast to students he has met in Europe, where "it was depressing to see young people with small ambitions, very cultivated and intelligent people so stunted." He adds with a smile: "Our other main resource is the Constitution."

Mr. Ahmari is an assistant books editor at the Journal.

Systemic Risk from Global Financial Derivatives: A Network Analysis of Contagion and Its Mitigation with Super-Spreader Tax

Systemic Risk from Global Financial Derivatives: A Network Analysis of Contagion and Its Mitigation with Super-Spreader Tax. By Sheri M. Markose
IMF Working Paper No. 12/282
November 30, 2012
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40130.0

Summary: Financial network analysis is used to provide firm level bottom-up holistic visualizations of interconnections of financial obligations in global OTC derivatives markets. This helps to identify Systemically Important Financial Intermediaries (SIFIs), analyse the nature of contagion propagation, and also monitor and design ways of increasing robustness in the network. Based on 2009 FDIC and individually collected firm level data covering gross notional, gross positive (negative) fair value and the netted derivatives assets and liabilities for 202 financial firms which includes 20 SIFIs, the bilateral flows are empirically calibrated to reflect data-based constraints. This produces a tiered network with a distinct highly clustered central core of 12 SIFIs that account for 78 percent of all bilateral exposures and a large number of  financial intermediaries (FIs) on the periphery. The topology of the network results in the “Too- Interconnected-To-Fail” (TITF) phenomenon in that the failure of any member of the central tier will bring down other members with the contagion coming to an abrupt end when the ‘super-spreaders’ have demised. As these SIFIs account for the bulk of capital in the system, ipso facto no bank among the top tier can be allowed to fail, highlighting the untenable implicit socialized guarantees needed for these markets to operate at their current levels. Systemic risk costs of highly connected SIFIs nodes are not priced into their holding of capital or collateral. An eigenvector centrality based ‘super-spreader’ tax has been designed and tested for its capacity to reduce the potential socialized losses from failure of SIFIs.

The Coming World Disorder - The Decline of American Power and the Westphalian World Order

World Order in the Age of Obama. By Charles Hill
November 30, 2012 | 2:30 am
http://www.advancingafreesociety.org/the-caravan/world-order-in-the-age-of-obama

Excerpts:

[...]

What ominous factors caused Kepler to shiver? Disturbances, uphealvals and conflicts. Merchants moaned about untrustworthy bankers. Diplomats strutted even as they wavered. The masses sullenly made deals they needed to survive when the gathering storm broke. Varieties of religious fervor caused many to prepare to be slain rather than submit to rule by others.

The 1648 settlement at Westphalia, though setbacks were many and vicious, enabled procedures fostering what eventually would be called “the international community,” a term that curled many a lip in the midst of twentieth-century world wars. Those wars were attempts to overthrow the established world order. Those wars failed, but in recent decades have become seemingly interminable, and have required the stewards of world order to confront what George Shultz labels “asymmetrical” warfare in which professional standards have been turned into self-imposed liabilities by enemies who reject civilized international conduct.


No international order has proved immortal. Kepler today might note that the world order shaped by the war he predicted, might now fail to survive to celebrate its 375^th anniversary. As President Obama ponders his Second Inaugural Address, what Keplerian factors are now “prepared” for war?
The causes of war as discerned ever since Thucydides’ time are three: wars of ideology, of fear, and of gain.

The ideology of Islamism has been on the rise for generations and now aims to expropriate the Arab Spring. The ambitions of the1979 Iranian Revolution and Sunni fanaticism are transmogrifying into the kind of major religious war that the Treaty of Westphalia sought to forestall.

Thucydides traced the war that ruined ancient Greece to Sparta’s fear that Athens’ growing power was crossing the line where it would be impossible to contain. Israel faces that threat from Iran, as today’s international structures for the maintenance of international security have failed to halt Iran’s drive, propelled by religious ideology, to possess nuclear weapons. Israel, bereft of its traditional sense of American support, is making ready to act against Iran’s menace to its existence. President Obama’s priority must repair relations with Israel by visiting the Jewish state and convincing its leaders that the U.S. understands Israel’s uniquely dangerous position.

And there now grows a deepening appetite for gain. America, perceived as eager to shed the burdens of world order in order to be “fundamentally transformed” through European-style social commitments, talks of engagement even when Iran’s “diplomacy” is a form of protracted warfare. The enemies of world order translate the American election results into the lexicon of abdication, telling themselves that their time has come: there is a world to be gained.

Only America’s return to world leadership can halt this deterioration. “Sequestration” will relegate the U.S. to a second rate power and must be reversed to enable American strength and diplomacy to be employed in tandem. Without this the prediction of a Kepler for today must be grim. As the biographer of Augustus Caesar wrote in the years just before the Second World War, “Once again the crust of civilization has worn thin, and beneath can be heard the muttering of primeval fires. Once again many accepted principles of government have been overthrown, and the world has become a laboratory where immature and feverish minds experiment with unknown forces. Once again problems cannot be comfortably limited, for science has brought the nations into an uneasy bondage to each other.”

In this maelstrom lie opportunities not for idealism but for the cold, austere use of power, soft and hard, in order to, as Augustus was advised, teach the arts of peace to all. The old platforms for the region, including the “peace process,” are gone. New structures must be built and only the US can lead the construction job. Peace is not at hand, but statesmen can see the possibility of laying foundations for a new Middle East in Syria-Lebanon, Egypt-Gaza, Saudi Arabia and the Gulf, and even, should we finally get serious, in Iran.

Charles Hill is the Brady-Johnson Distinguished Fellow in Grand Strategy at Yale University and co chair of the Herb and Jane Dwight Working Group on Islamism and the International Order, Hoover Institution.

These excerpts are from a post that is part of The Caravan, a periodic discussion on the contemporary dilemmas of the Greater Middle East. Other commentary in this symposium on Obama’s Second Term – Middle Eastern Memos is provided by Russell Berman, Itamar Rabinovich, Robert Satloff, Asli Aydintasbas, Habib Malik, Reuel Gerecht, Leon Wieseltier, Tammy Frisby, Abbas Milani, and Fouad Ajami.

INSA: Evolving Intel Sources Demand Fundamental Change for the IC

INSA: Evolving Intel Sources Demand Fundamental Change for the IC
Nov 30, 2012

ARLINGTON, VA – The Intelligence and National Security Alliance (INSA) today released its latest white paper, “Expectations of Intelligence in the Information Age.” Prepared by the INSA Rebalance Task Force, the white paper provides analysis about how evolving expectations of policy makers may impact the Intelligence Community (IC). Specifically, because policy makers now have access to rich, new sources of information and knowledge at their desktops and via mobile devices, they will expect the IC to develop techniques to quickly and accurately integrate these new sources of information with those upon which they have traditionally relied.

Chuck Alsup, INSA Acting President and Vice President for Policy, noted, “As the U.S. Intelligence Community shifts from supporting tactical operations in Iraq and Afghanistan to a more global, strategic focus associated with rebalancing, policy makers will demand timely, relevant information from the best possible sources, including new, rapidly evolving streams of information and knowledge. The Rebalance Task Force addresses this challenge for the IC and suggests that a significant cultural shift is in order for the IC to satisfy the demands of policy makers.”

The INSA Rebalance Task Force concluded that although the IC developed world-class capabilities for intelligence-driven tactical operations in the last decade, the sources for developing global situational awareness and providing strategic warning are rapidly changing. The IC will need to develop authorized and appropriate techniques that improve its ability to leverage the growing platforms and vast amounts of information that are now openly available. To successfully leverage openly sourced information, the IC will need to develop capabilities to quickly validate and analyze that information, accurately integrate it with that gleaned from traditional collection sources, and present the resulting knowledge to policy makers addressing national security issues of an urgent and critical nature.

Dr. Stephen Cambone, former Undersecretary of Defense for Intelligence and INSA Rebalance Task Force Chair, said, “The challenge moving forward will be for the IC to enlarge its sphere of collection and the foundation for its analysis beyond the information gained through traditional methods. In the new era of global access to diverse and burgeoning sources of data and information, the Congress will need to authorize appropriate techniques for use by the IC to allow it to extract value and knowledge from open sources.”

The key proposals presented at the conclusion of the white paper are:

1. Policy makers should engage the IC to better understand the relative roles of open source and traditional intelligence in meeting the policy makers’ demand for knowledge of national security issues and events.
2. The executive and legislative branches should act to ensure that privacy and civil liberty rights impacted by open source collection are protected.
3. A coalition of knowledgeable experts should be formed to consider and recommend ways to resolve the practical issues associated with the collection, analysis, validation, integration and dissemination of openly sourced intelligence.

The white paper was released in conjunction with last evening’s INSA Rebalance Leadership Dinner held at the Pentagon City Ritz-Carlton, in Arlington, VA, which featured Lieutenant General Michael Flynn, Director of the Defense Intelligence Agency. Click here to download a quick synopsis of the "Expectations of Intelligence in the Information Age."

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About INSA
The Intelligence and National Security Alliance (INSA) is the premier intelligence and national security organization that brings together the public, private and academic sectors to collaborate on the most challenging policy issues and solutions. As a non-profit, non-partisan, public-private organization, INSA’s ultimate goal is to promote and recognize the highest standards within the national security and intelligence communities. INSA has over 150 corporate members and several hundred individual members who are leaders and senior executives throughout government, the private sector and academia. To learn more about INSA visit www.insaonline.org.

About the INSA Rebalance Task Force
INSA established the Rebalance Task Force to assess the implications for the Intelligence Community of the new defense strategy and the adjustments in the broader national security policy agenda which it may require. The Task Force is chaired by former Undersecretary of Defense for Intelligence, Dr. Steve Cambone. He is joined on the Task Force by former CIA and NSA Director General (ret.) Michael Hayden; INSA’s Senior Intelligence Advisor and former Undersecretary for Intelligence/DHS, Charlie Allen; former Deputy Director of the CIA’s Counterterrorist Center/Deputy Director of the FBI’s National Security Branch, Phil Mudd; former Deputy Director of Intelligence/CIA, Carmen Medina; former Assistant Secretary of State for Intelligence and Research, Randall Fort; Executive Vice President and COO of Invertix, Craig Parisot; and Vice President and General Manager, Cyber Systems Division, of General Dynamics Advanced Information Systems, John Jolly. The purpose of the Task Force is to inquire whether, and in what ways, the national intelligence enterprise might need to adjust as an evolving national security strategy increases its focus in the coming decade toward Asia and other strategic interests and on threats to the national interest that include non-terror related issues.

This white paper is intended to help focus attention on the critical role of intelligence for planners and decision makers who will be anticipating, preparing for and protecting U.S. national interests in an era of dynamic change and to identify the complex demands the IC may confront as a result. The intended audience of this paper includes agencies within the Executive Branch, the Legislative Branch, and the interested public.

BIS, ECB and IMF Publish Third Part of Handbook on Securities Statistics

BIS, ECB and IMF Publish Third Part of Handbook on Securities Statistics
IMF Press Release No. 12/459
November 28, 2012
http://www.imf.org/external/np/sec/pr/2012/pr12459.htm

The Bank for International Settlements (BIS), the European Central Bank (ECB) and the International Monetary Fund (IMF) today jointly released the third and final part of the Handbook on Securities Statistics, which covers equity securities issues and holdings. The aim of the Handbook is to assist national and international agencies in the production of relevant, coherent and internationally comparable securities statistics for use in monetary policy formulation and financial stability analysis.

The Handbook is the first publication of its kind dealing exclusively with the conceptual framework for the compilation and presentation of securities statistics. As such, it directly addresses one of the recommendations endorsed by the Ministers of Finance and Central Bank Governors of the Group of Twenty Economies (G20) concerning the need to fill data gaps and to strengthen data collection. Recommendation 7 of the report The Financial Crisis and Information Gaps, prepared by the Financial Stability Board Secretariat and IMF staff, called on central banks and, where relevant, statistical offices, particularly those of the G20 economies, to participate in the BIS data collection on securities and to contribute to the further development of the Handbook.

Existing international statistical standards, such as the System of National Accounts 2008 and the IMF Balance of Payments and International Investment Position Manual, sixth edition, provided the foundations of the Handbook. It has also benefited from comments of experts from central banks, statistical institutions, and international organisations.

The first part of the Handbook, which covers debt securities issues, was released in May 2009 and the second part, covering debt securities holdings, was released in September 2010. The Handbook can be downloaded from the websites of the BIS, the ECB and the IMF, respectively.

Payment, clearing and settlement systems in the CPSS countries - Volume 2

Payment, clearing and settlement systems in the CPSS countries - Volume 2
CPSS, November 2012
http://www.bis.org/publ/cpss105.htm

The Committee on Payment and Settlement Systems (CPSS) publishes - under the aegis of the Bank for International Settlements (BIS) - reference works on payment systems and the other financial market infrastructures in various countries, both CPSS member and nonmember countries. These publications are widely known as Red Books.

Following the enlargement of the CPSS in 2009, this edition of the Red Book for the CPSS countries is in two volumes. The first volume, which covers 10 CPSS countries (Australia, Brazil, Canada, India, Korea, Mexico, Russia, Singapore, Sweden and Switzerland), was published in September 2011. This second volume covers the remaining 13 CPSS countries (Belgium, China, France, Germany, Hong Kong SAR, Italy, Japan, the Netherlands, Saudi Arabia, South Africa, Turkey, the United Kingdom and the United States) and the euro area and includes a chapter on international arrangements.

Financial market infrastructure that is resilient and effective enhances the stability of the financial system. It also reduces transaction costs in the economy, promotes the efficient use of financial resources, improves financial market liquidity and facilitates the conduct of monetary policy. I hope this new edition of the CPSS Red Book will contribute to the general understanding and awareness of these issues by providing information about arrangements in the CPSS countries.

I should like to thank all of those who contributed to the preparation of this Red Book.

Paul Tucker
Chairman, Committee on Payment and Settlement Systems 

Same-sex marriage debate

1  Making the Same-Sex Case. By Ken Mehlman
Legalizing marriage for gay couples will cultivate community stability and foster family values.The Wall Street Journal, November 21, 2012, on page A17
http://online.wsj.com/article/SB10001424127887323353204578128912554107172.html

They say demography is destiny, and in American politics destiny has belonged to those who best aligned their core beliefs with the rapidly changing and ever-improving citizenry.

Conservatives—and I count myself as one—succeed when we attract new supporters to timeless traditions. The Republican Party's loss in this month's presidential election resulted partly from a failure to embrace some of America's fastest-growing constituencies. One area of significant change is in attitudes toward legal equality for gay Americans.

Some misperceive the issue of marriage equality as exclusively progressive. Yet what could be more conservative than support for more freedom and less government? And what freedom is more basic than the right to marry the person you love? Smaller, less intrusive government surely includes an individual deciding whom to marry. Allowing civil marriage for same-sex couples will cultivate community stability, encourage fidelity and commitment, and foster family values.

Same-sex couples today lack the estate-tax protections, Social Security spousal benefits, and joint-filing options available to heterosexual couples. This can mean the difference between staying in the family home or losing it when a partner dies. In 29 states, individuals can be fired based on their sexual orientation. Conservatives believe that individuals should be judged at work based on performance, so shouldn't we fix this?

Conservatives don't need to change core convictions to embrace the growing support for equal rights for gay Americans. It is sufficient to recognize the inherent conservatism in citizens' desire to marry, to be judged on their work, and not to be singled out for higher taxes or bullying at school. These objectives can be achieved while also protecting religious liberty, as demonstrated by states enacting civil marriage with exemptions for religious institutions.

To help Republicans appreciate this changing environment, I helped establish Project Right Side, which commissioned leading GOP polling firm Target Point to survey 16,000 voters over the past year, over-sampling Republican and swing voters in battleground states, including 2,000 such voters on Election Night. Thanks to this and other polling, we know that:

• A majority of Americans favor civil marriage for same-sex couples. Election Day exit polls showed that Americans support marriage equality by 49% to 46%. Majorities of voters in Maine (53%-47%), Maryland (52%-48%), and Washington state (52%-48%) legalized same-sex marriage at the polls, and a majority in Minnesota (51%-49%) voted down a ban on same-sex marriage.

Walter Olson of the Cato Institute analyzed the Maryland data and found majority support for marriage equality in strong GOP precincts that voted for Mitt Romney. Our Election Night exit poll of 2,000 voters in battleground states (of whom 32% were Republican, 36% Democratic and 32% independent) showed a majority opposing the federal Defense of Marriage Act of 1996: 62% believe that if states recognize same-sex marriage, the federal government should grant same-sex couples the same benefits as heterosexual couples.

• These trends are growing quickly and across all demographics. According to Jan van Lohuizen, a former pollster for President George W. Bush, public support for civil-marriage rights for same-sex couples increased by 1% each year from 1993 through 2009, and by 5% per year in 2010 and 2011. Other polls over the past year show majority support for civil marriage among African-Americans (51%, according to Edison Research), Hispanics (52%, according to Pew) and voters between the ages of 18 and 39 (66%, according to the Washington Post/ABC News). The NBC/Wall Street Journal poll shows a 41% increase in support among Republicans over the past three years, to 31% from 22%.

• The marriage-equality issue is more important to supporters than to opponents. While this election focused on the economy, President Obama's support for marriage equality was a positive motivator for nearly three out of four Obama voters in battleground states, according to exit polls. Almost half of his voters (45%) said it made them "much more" likely to support him. Only 35% of Romney supporters said that the former governor's opposition made them "much more" likely to support him.

• A majority of independents favor marriage equality. Project Right Side's survey found that 58% of independents in target states support allowing gay couples to marry, with 22% calling it a very high or somewhat high priority. Eighty percent of independents agree that "the government should stay out of the private lives of adults, including gays and lesbians."

• Republicans are increasingly supportive of legal protections for gay Americans. Of the 7,000 Republicans we surveyed, 73% support employment nondiscrimination protections for gays and lesbians, 61% support safe-schools protections (such as those signed into law by New Jersey Gov. Chris Christie) and 46% support allowing same-sex couples to jointly file tax returns.

• Voters under 45 strongly favor marriage equality. In our Election Night survey, 60% of such voters said that the law should recognize the marriages of gay and lesbian couples as valid, with the same rights as traditional marriage. This is consistent with the shares of younger voters who, according to exit polls, supported marriage equality in Maine (60%) and Washington state (58%).

These trends are accelerating, not going away. And I hope and trust that they will accelerate even faster as conservatives, and all Americans who cherish freedom, commitment and stability, support equal rights under the law for all citizens.

Mr. Mehlman, a businessman in New York, served as chairman of the Republican National Committee from 2005-07. More polling information can be found at www.ProjectRightSide.com.


2  The Wisdom of Upholding Tradition. By
There is a reason why conjugal unions have been distinguished from all others since antiquity.
The Wall Street Journal, November 21, 2012, on page A17
http://online.wsj.com/article/SB10001424127887323353204578128841842931734.html

The U.S. Supreme Court decides next week whether to hear challenges to laws defining marriage as the conjugal union of a man and a woman. It does so after two different electoral outcomes. In May, North Carolinians voted to amend their state constitution to protect the conjugal definition of marriage, a definition that 41 states retain. But on Nov. 6, voters in Maine, Maryland and Washington state endorsed a revisionist view of marriage as the union of any two adults.

How should the Supreme Court decide? How should voters?

We can't move one inch toward an answer simply by appealing to equality. Every marriage policy draws lines, leaving out some types of relationships. Equality forbids arbitrary line-drawing. But we cannot know which lines are arbitrary without answering two questions: What is marriage, and why does it matter for policy?

The conjugal and revisionist views are two rival answers; neither is morally neutral. Each is supported by some religious and secular worldviews but rejected by others. Nothing in the Constitution bans or favors either. The Supreme Court therefore has no basis to impose either view of marriage. So voters must decide: Which view is right?

As we argue in our book "What is Marriage? Man and Woman: A Defense," marriage is a uniquely comprehensive union. It involves a union of hearts and minds; but also—and distinctively—a bodily union made possible by sexual-reproductive complementarity. Hence marriage is inherently extended and enriched by procreation and family life and objectively calls for similarly all-encompassing commitment, permanent and exclusive.

In short, marriage unites a man and woman holistically—emotionally and bodily, in acts of conjugal love and in the children such love brings forth—for the whole of life.

These insights require no particular theology. Ancient thinkers untouched by Judaism or Christianity—including Aristotle, Plato, Socrates, Musonius Rufus, Xenophanes and Plutarch—also distinguished conjugal unions from all others. Nor did animus against any group produce this conclusion, which arose everywhere quite apart from debates about same-sex unions. The conjugal view best fits our social practices and judgments about what marriage is.

After all, if two men can marry, or two women, then what sets marriage apart from other bonds must be emotional intensity or priority. But nothing about emotional union requires it to be permanent. Or limited to two. Or sexual, much less sexually exclusive. Or inherently oriented to family life and shaped by its demands. Yet as most people see, bonds that lack these features aren't marriages.

Far from being "slippery slope" predictions, these points show that the revisionist view gets marriage wrong: It conflates marriage and companionship, an obviously broader category. That conflation has consequences. Marriage law shapes behavior by promoting a vision of what marriage is and requires. Redefinition will deepen the social distortion of marriage—and consequent harms—begun by policies such as "no-fault" divorce. As marital norms make less sense, adherence to them erodes.

Conservative scaremongering? No. Same-sex marriage activist Victoria Brownworth, like other candid revisionists, says that redefinition "almost certainly will weaken the institution of marriage," and she welcomes that result.

Yet weakening marital norms will hurt children and spouses, especially the poorest. Rewriting the parenting ideal will also undermine in our mores and practice the special value of biological mothers and fathers. By marking support for the conjugal view as bigotry, it will curb freedoms of religion and conscience. Redefinition will do all this in the name of a basic error about what marriage is.

Some bonds remain unrecognized, and some people unmarried, under any marriage policy. If simply sharing a home creates certain needs, we can and should meet them outside civil marriage.

Moreover, if we reject the revisionist's bare equation of marriage with companionship—and the equation of marriage licenses with all-purpose personal approval—we'll see that conjugal marriage laws deprive no one of companionship or its joys, and mark no one as less worthy of fulfillment. (Indeed, using marriage law to express social inclusion might further marginalize whoever remains single.)

True compassion means extending authentic community to everyone, especially the marginalized, while using marriage law for the social goal that it serves best: to ensure that children know the committed love of the mother and father whose union brought them into being. Indeed, only that goal justifies regulating such intimate bonds in the first place.

Just as compassion for those attracted to the same sex doesn't require redefining marriage, neither does preserving the conjugal view mean blaming them for its erosion. What separated the various goods that conjugal marriage joins—sex, commitment, family life—was a sexual revolution among opposite-sex partners, with harmful rises in extramarital sex and nonmarital childbearing, pornography and easy divorce.

Only when sex and marriage were seen mainly as means to emotional satisfaction and expression did a more thorough and explicit redefinition of marriage become thinkable—for the first time in human history. The current debate just confronts us with the choice to entrench these trends—or to begin reversing them.

That debate certainly isn't about legalizing (or criminalizing) anything. In all 50 states, two men or women may have a wedding and share a life. Their employers and religious communities may recognize their unions. At issue here is whether government will effectively coerce other actors in the public square to do the same.

Also at issue is government expansion. Marital norms serve children, spouses, and hence our whole economy, especially the poor. Family breakdown thrusts the state into roles for which it is ill-suited: provider and discipliner to the orphaned and neglected, and arbiter of custody and paternity disputes.

For all these reasons, conservatives would be ill-advised to abandon support for conjugal marriage even if it hadn't won more support than Mitt Romney in every state where marriage was on the ballot.

They certainly shouldn't be duped into surrender by the circular argument that they've already lost. The ash-heap of history is filled with "inevitabilities." Conservatives—triumphant against once-unstoppable social tides like Marxism—should know this best. "History" has no mind. The future isn't fixed. It's chosen. The Supreme Court should let the people choose; and we should choose marriage, conjugal marriage.

Mr. Girgis is a Yale law student and doctoral student in philosophy at Princeton. Mr. Anderson is a fellow at the Heritage Foundation. Mr. George is professor of jurisprudence at Princeton and a visiting professor at Harvard Law School. Their book, "What Is Marriage? Man and Woman: A Defense," will be published in December by Encounter Books.

Basel III complexity: Third round of clarifications

Basel III counterparty credit risk - Frequently asked questions (update of FAQs published in July 2012)

November 2012

http://www.bis.org/publ/bcbs235.htm

 

The Basel Committee on Banking Supervision has received a number of interpretation questions related to the December 2010 publication of the Basel III regulatory frameworks for capital and liquidity and the 13 January 2011 press release on the loss absorbency of capital at the point of non-viability.

Today's publication sets out the third set of frequently asked questions (FAQs) that relate to counterparty credit risk, including the default counterparty credit risk charge, the credit valuation adjustment (CVA) capital charge and asset value correlations. FAQs that have been added since the publication of the second version of this document in July 2012 are shaded yellow.
These FAQs aim to promote consistent global implementation of Basel III.  
Translations in German, Spanish, French and Italian will be published soon

CBO: What Accounts for the Slow Growth of the Economy After the Recession? - Infographic

CBO, November 14, 2012

The U.S. economy has grown slowly since the deep recession in 2008 and 2009. In the three years following the recession, the cumulative growth of the nation’s output—real (inflation-adjusted) gross domestic product—was nearly 9 percentage points below the average seen in previous economic recoveries since the end of World War II, or less than half the average growth during those other recoveries.

http://www.cbo.gov/sites/default/files/cbofiles/attachments/43712-Infographic-SlowRecovery.pdf

The full report is here: http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-14-12-SlowRecovery.pdf

Fiscal Rules at a Glance: Country Details from a New Dataset

Fiscal Rules at a Glance: Country Details from a New Dataset. By Nina Budina, Tidiane Kinda, Andrea Schaechter, and Anke Weber
IMF Working Paper No. 12/273
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40101.0

Summary: This paper provides country-specific information on fiscal rules in use in 81 countries from 1985 to end-September 2012. It serves as background material and update of the July 2012 Working Paper “Fiscal Rules in Response to the Crisis—Toward the ‘Next Generation’ Rules: A New Dataset” and is also available in an easy accessible electronic data visualization tool (http://www.imf.org/external/datamapper/FiscalRules/map/map.htm). The dataset covers four types of rules: budget balance rules, debt rules, expenditure rules, and revenue rules, applying to the central or general government or the public sector. It also presents details on various characteristics of rules, such as their legal basis, coverage, escape clauses, as well as key supporting features such as independent monitoring bodies.

Excerpts:

This paper provides country-specific information on fiscal rules in use in 81 countries from 1985 to end-September 2012.1 It accompanies and updates the July 2012 Working Paper “Fiscal Rules in Response to the Crisis—Toward the ‘Next Generation’ Rules: A New Dataset” (Schaechter, Kinda, Budina, and Weber) and the electronic data visualization tool. The dataset covers four types of rules: budget balance rules, debt rules, expenditure rules, and revenue rules, applying to the central or general government or the public sector. It also presents country-specific details on various characteristics of rules, such as their legal basis, coverage, escape clauses, and takes stock of key supporting features that are in place, including independent monitoring bodies. The electronic dataset codes this information for easy cross-country comparisons and empirical analysis. It includes additionally information on institutional supporting arrangements, namely multi-year expenditure ceilings and fiscal responsibility laws.

A fiscal rule is a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates. This implies that boundaries are set for fiscal policy which cannot be frequently changed. That said the demarcation lines of what constitutes a fiscal rule are not always clear. For this dataset and paper, we followed the following principles:

• In addition to covering rules with targets fixed in legislation, we consider also those fiscal arrangements, as fiscal rules for which the targets can be revised, but only on a low-frequency basis (e.g., as part of the electoral cycle) as long as they are binding for a minimum of three years. Thus, medium-term budgetary frameworks or expenditure ceilings that provide multi-year projections but can be changed annually are not considered to be rules.
• We only consider those fiscal rules that set numerical targets on aggregates that capture a large share of public finances and at a minimum cover the central government level. Thus, rules for subnational governments or fiscal sub-aggregates are not included here.
• We focus on de jure arrangements and not to what degree rules have been adhered to in practice.

How to interpret the country-specific information? The tables in Section II contain all national rules and a cross-reference to Section III if the country also operates under supranational fiscal rules. The date when a rule took effect is shown in brackets. The most recent rules are show first. When a characteristic of the rule was changed over time, the year of the change is shown in the respective column. A description of each rule and the time period to which it applied is included in the bottom part of each table. Supranational fiscal rules are described in Section III.

Chinese Strategic Miscalculations in the South China Sea, by Hoang Anh Tuan

Chinese Strategic Miscalculations in the South China Sea, by Hoang Anh Tuan
Asia Pacific Bulletin, No. 181
Washington, D.C.: East-West Center
September 27, 2012
http://www.eastwestcenter.org/publications/chinese-strategic-miscalculations-in-the-south-china-sea

Hoang Anh Tuan is the Director-General of the Institute for Foreign Policy and Strategic Studies at the Diplomatic Academy of Vietnam.

Excerpts:

Regrettably, China does not yet recognize the extent to which its aggressive course in the South China Sea is damaging its diplomacy with neighboring countries.

China’s current assertiveness in the South China Sea is now slowly but surely eroding its positive image with its ASEAN neighbors as a peacefully rising power. Without exception, countries within Southeast Asia and beyond are very cautious of China’s rise. Even as China’s national economic and global stature increase, its influence, image and “soft power” abroad is declining dramatically.

China now sees “US hands” in both its internal and external affairs. Examples this year of US influence in China’s domestic affairs include Wang Lijun, Chongqing’s former police chief, applying to the US Consulate in Chengdu for political asylum and the blind lawyer, Chen Guangcheng, fleeing to the US Embassy in Beijing. Throughout the region, US allies including Japan, South Korea and the Philippines have all upgraded their already strong military cooperation with the United States. If China continues to ignore the interests or concerns of its neighbors who have a stake in the South China Sea, its aggressiveness is likely to galvanize increased regional cooperation with the United States.

Third, troubles with close neighbors also affect the image and position of China in the world. The most important condition for any country aspiring to ascend to global power status is to maintain good relations with its neighbors. However, if China is unable or unwilling to maintain a cordial relationship with its closest neighbors, how can countries further afield trust and respect this aspiring superpower? As long as China is unable to maintain a significant level of trust and friendship with its neighbors, benevolent global power status for China is likely to remain a pipe dream.

First and foremost, China should take constructive steps to bring about an amicable conclusion to negotiations on the Code of Conduct (COC) in the South China Sea, and implement a face-saving policy renouncing once and for all its U-shaped line. Obviously, this will be a difficult decision for China to take. However, the international dividend and return for China’s peaceful rise would ripple far beyond the neighborhood and confines of the South China Sea.

U2's Bono realizes the importance of capitalism

Notable & Quotable: U2 frontman and anti-poverty activist Bono realizes the importance of capitalism
The Wall Street Journal, October 30, 2012, on page A23
http://online.wsj.com/article/SB10001424052970203922804578080453358300198.html

Staff writer Parmy Olson writing at forbes.com, Oct. 22

Bono has learned much about music over more than three decades with U2. But alongside that has been a lifelong lesson in campaigning—the activist for poverty reduction in Africa spoke frankly on Friday about how his views about philanthropy had now stretched to include an appreciation for capitalism.

The Irish singer and co-founder of ONE, a campaigning group that fights poverty and disease in Africa, said it had been "a humbling thing for me" to realize the importance of capitalism and entrepreneurialism in philanthropy, particularly as someone who "got into this as a righteous anger activist with all the cliches."

"Job creators and innovators are just the key, and aid is just a bridge," he told an audience of 200 leading technology entrepreneurs and investors at the F.ounders tech conference in Dublin. "We see it as startup money, investment in new countries. A humbling thing was to learn the role of commerce."

Joseph Schumpeter on how a swelling mass of unemployable college graduates sets the stage for anticapitalist radicalism

Joseph Schumpeter in 1942 on how a swelling mass of unemployed and unemployable college graduates sets the stage for anticapitalist radicalism.
The Wall Street Journal, October 29, 2012, on page A21
http://online.wsj.com/article/SB10000872396390444897304578046520760656926.html

Joseph Schumpeter writing in "Capitalism, Socialism and Democracy," 1942:

The man who has gone through a college or university easily becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work. His failure to do so may be due either to lack of natural ability—perfectly compatible with passing academic tests—or to inadequate teaching; and both cases will . . . occur more frequently as ever larger numbers are drafted into higher education and as the required amount of teaching increases irrespective of how many teachers and scholars nature chooses to turn out.

The results of neglecting this and of acting on the theory that schools, colleges and universities are just a matter of money, are too obvious to insist upon. Cases in which among a dozen applicants for a job, all formally qualified, there is not one who can fill it satisfactorily, are known to everyone who has anything to do with appointments . . .

All those who are unemployed or unsatisfactorily employed or unemployable drift into the vocations in which standards are least definite or in which aptitudes and acquirements of a different order count. They swell the host of intellectuals in the strict sense of the term whose numbers hence increase disproportionately. They enter it in a thoroughly discontented frame of mind. Discontent breeds resentment. And it often rationalizes itself into that social criticism which as we have seen before is in any case the intellectual spectator's typical attitude toward men, classes and institutions especially in a rationalist and utilitarian civilization.

Well, here we have numbers; a well-defined group situation of proletarian hue; and a group interest shaping a group attitude that will much more realistically account for hostility to the capitalist order than could the theory—itself a rationalization in the psychological sense—according to which the intellectual's righteous indignation about the wrongs of capitalism simply represents the logical inference from outrageous facts. . . . Moreover our theory also accounts for the fact that this hostility increases, instead of diminishing, with every achievement of capitalist evolution.

Tax Composition and Growth: A Broad Cross-Country Perspective. By Santiago Acosta-Ormaechea and Jiae Yoo

Tax Composition and Growth: A Broad Cross-Country Perspective. By Santiago Acosta-Ormaechea and Jiae Yoo
IMF Working Paper No. 12/257
October 25, 2012
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40067.0

Summary: We investigate the relation between changes in tax composition and long-run economic growth using a new dataset covering a broad cross-section of countries with different income levels. We specifically consider 69 countries with at least 20 years of observations on total tax revenue during the period 1970-2009—21 high-income, 23 middle-income and 25 low-income countries. To our knowledge this is the most comprehensive and up-to-date dataset on tax composition and growth. We find that increasing income taxes while reducing consumption and property taxes is associated with slower growth over the long run. We also find that: (1) among income taxes, social security contributions and personal income taxes have a stronger negative association with growth than corporate income taxes; (2) a shift from income taxes to property taxes has a strong positive association with growth; and (3) a reduction in income taxes while increasing value added and sales taxes is also associated with faster growth.

Vienna 2 proposes enhancements in cross-border supervision to European authorities

Vienna 2 proposes enhancements in cross-border supervision to European authorities
IMF Press Release No. 12/399
October 26, 2012
http://www.imf.org/external/np/sec/pr/2012/pr12399.htm

Excerpts:

The Steering Committee of the Vienna Initiative 2 has submitted observations and proposals on cross-border supervisory practices to a number of European authorities. 1 These focus on critical aspects of home-host cooperation, which are of particular importance for host countries in Central, Eastern, and Southeastern Europe where locally systemic affiliates of foreign banks operate.

The aim is to provide input for the designing of the supervisory framework for Europe and to communicate systemic concerns of host countries. The proposals have been shared with the EBA, the ECB and the European Commission.

The document reflects the Steering Committee’s views on implementation of cooperation between national authorities in home and host countries during the crisis. It draws on discussions between home and host country supervisors, central banks, fiscal authorities and key parent banks, including at a workshop hosted by the EBRD in London on September 12, 2012. Frequent contacts with other national authorities and with the private banking sector have added further insights.²

Some issues in supervisory practices are particularly relevant to European countries in Central, Eastern, and Southeastern Europe which mainly host affiliates of the cross border banking groups from the EU that are systematically important for their financial sectors. The last years have shown that the viewpoint of home and host authorities can differ when assessing systemic risk of financial institutions, not least because subsidiaries may account only for a minor part of a banking group yet be systemic in host countries. These concerns can be even more pronounced in countries outside the EU where EU-based banks have systemic operations.

The proposals focus on:

1. Addressing potential conflicts of interest to ensure that supervisory colleges take a wider European perspective.
2. Ensuring that the EBA guidelines are observed and implemented in practice.
3. Fostering more open and active discussions in supervisory colleges.
4. Strengthening the position of the EBA as an “honest broker” in mediation and involving fiscal authorities when fiscal issues are relevant.
5. Bringing the relevant non-EU countries into the supervisory ccooperation framework.
6. Highlighting the need to ensure appropriate conditions for the non-Euro zone countries toparticipate in the banking union ("opting in").
7. Bringing the macro-prudential perspective into the discussion of cross border supervision, including in supervisory colleges.
The Vienna 2 is also preparing detailed comments on the new bank resolution proposal for submission to the relevant European authorities.

---
¹ The EBRD, EIB, IMF, World Bank, and European Commission are members of the Steering Committee as well as Italy and Romania, which represent home and host authorities respectively. The Committee is chaired by Marek Belka, President of the National Bank of Poland.
² The European Commission may have different views on the issues addressed in this document.

Everybody involved was, one, interested, two, dedicated, and, three, fascinated by the job they were doing

Notable & Quotable.
The Wall Street Journal, August 27, 2012, on page A15
http://online.wsj.com/article/SB10000872396390444506004577613080016153006.html

Astronaut Neil Armstrong, who died on Saturday at age 82, speaking about the 1969 Apollo 11 mission to the moon, from NASA'S Johnson Space Center Oral History Project:

I was certainly aware that this was a culmination of the work of 300,000 or 400,000 people over a decade and that the nation's hopes and outward appearance largely rested on how the results came out. With those pressures, it seemed the most important thing to do was focus on our job as best we were able to and try to allow nothing to distract us from doing the very best job we could. . . .

Each of the components of our hardware were designed to certain reliability specifications, and far the majority, to my recollection, had a reliability requirement of 0.99996, which means that you have four failures in 100,000 operations. I've been told that if every component met its reliability specifications precisely, that a typical Apollo flight would have about [1,000] separate identifiable failures.

In fact, we had more like 150 failures per flight, [substantially] better than statistical methods would tell you that you might have. I can only attribute that to the fact that every guy in the project, every guy at the bench building something, every assembler, every inspector, every guy that's setting up the tests, cranking the torque wrench, and so on, is saying, man or woman, "If anything goes wrong here, it's not going to be my fault, because my part is going to be better than I have to make it." And when you have hundreds of thousands of people all doing their job a little better than they have to, you get an improvement in performance. And that's the only reason we could have pulled this whole thing off. . . .

When I was working here at the Johnson Space Center, then the Manned Spacecraft Center, you could stand across the street and you could not tell when quitting time was, because people didn't leave at quitting time in those days. People just worked, and they worked until whatever their job was done, and if they had to be there until five o'clock or seven o'clock or nine-thirty or whatever it was, they were just there. They did it, and then they went home. So four o'clock or four-thirty, whenever the bell rings, you didn't see anybody leaving. Everybody was still working.

The way that happens and the way that made it different from other sectors of the government to which some people are sometimes properly critical is that this was a project in which everybody involved was, one, interested, two, dedicated, and, three, fascinated by the job they were doing. And whenever you have those ingredients, whether it be government or private industry or a retail store, you're going to win.

Globalization and Corporate Taxation. By Manmohan Kumar, and Dennis Quinn

Globalization and Corporate Taxation. By Manmohan Kumar, and Dennis Quinn
IMF Working Paper No. 12/252
October 22, 2012
http://www.imfbookstore.org/IMFORG/9781557754752

Summary: This paper analyzes the extent to which the degree of international economic integration, both financial and trade, affects corporate tax rates. It explores this issue in the context of strategic behavior by countries, taking into account other global and domestic political economy factors. Tax rates are analyzed using a unique tax dataset for advanced and developing economies extending over five decades. We report a number of novel results: there is no general negative relationship between financial globalization and corporate tax rates and revenues—results vary according to country grouping with OECD countries showing a positive relationship; the United States exhibits a “Stackelberg” type of leadership on other countries; trade integration is inversely correlated with tax rates; and public sentiment and ideology affect tax rates. The policy implications of these findings, particularly given budgetary pressures in the aftermath of the global crisis, are noted.

http://www.imf.org/external/pubs/cat/longres.aspx?sk=40059.0

Russia's Ex-Finance Chief Has Grim Outlook for EU. By Alexander Kolyandr

Russia's Ex-Finance Chief Has Grim Outlook for EU. By ALEXANDER KOLYANDR
The Wall Street Journal, October 23, 2012, on page A11

MOSCOW—Just over a year ago, Alexei Kudrin came out of the Group of 20 meetings in Washington warning that the U.S. and Europe weren't doing enough to head off economic slowdown. Now, no longer in government but still highly respected for his fiscal prudence, the former Russian finance minister doesn't have to mince words. His message is even more dire.

Alexei Kudrin, left, spoke with Russia's Deputy Finance Minister Sergei Storchak during the VTB Capital investment conference in New York, April 2012.

Keeping Greece in the euro zone? "Already impossible," he says in an interview. Spain and Italy next for the exit? "The probability is very high." And creditors beware—Mr. Kudrin sees both Greece and Spain defaulting on their sovereign debt.

"Everything should be done to avoid it, but I don't feel that the process is under control," says the man who shepherded Russia from default to financial stability.

As if that weren't worrisome enough, the 52-year-old who was named finance minister of the year by various publications on four separate occasions during his tenure says he now fears that Europe's economic problems may turn into political ones.

Democracies, he says, don't always survive when their citizens are asked to make the kinds of economic sacrifices that Europe now faces. Already, some analysts are comparing Greece's shocked polity to the Weimar Republic.

Mr. Kudrin is more cautious, but plans to participate next month in a conference at St. Petersburg State University, where he is now a dean, on the question of how economic hardships can lead to political upheavals. The case studies aren't inspiring—from Communist Poland to the Soviet Union to Latin American dictatorships.

Mr. Kudrin thinks that citizens of the Western countries aren't ready to accept the steep drop in living standards they face, but that if governments fail to cut spending they will get even deeper collapses.

"Russia faced that in the 1990s, but due to [Russian President Boris] Yeltsin we've passed it peacefully," he says. "I'm not sure the Western countries would be able to pass through such hardships; it may be very painful."

Mr. Kudrin sees the recent decisions of the European Central Bank as only a temporary relief because its funds aren't limitless. However, he says, the euro would survive dropouts.

Mr. Kudrin expects European economies to contract further in the short term, before growth resumes, and he urges governments to reduce debt in order to be prepared for growth.

His outlook for the U.S. isn't much better. While the looming "fiscal cliff"—tax increases and spending cuts scheduled to take effect Jan. 1—worries analysts and economists, he said the size of the U.S. deficit is the real longer-term risk.

No matter which party wins the White House, the outlook is tough. "Both are in a very difficult position," he says. Even so, the dollar's future is secure, he says.

"Trust in the U.S. dollar is not shaken yet. If the U.S. administration meets the task of the budget consolidation in several years, the dollar will be firm, but even if it weakens, there would be no other currency to replace, given its scale and importance."

Bipartisan Agreement On Single-Sex Education

A Right to Choose Single-Sex Education. By Kay Bailey Hutchison and Barbara Mikulski
For some children, learning in girls-only or boys-only classes pays off. Opponents of the idea are irresponsible.October 16, 2012, 7:11 p.m. ET
http://online.wsj.com/article/SB10000872396390443768804578038191947302764.html

Education proponents across the political spectrum were dismayed by recent attempts to eradicate the single-gender options in public schools in Virginia, West Virginia, Alabama, Mississippi, Maine and Florida. We were particularly troubled at efforts to thwart education choice for American students and their families because it is a cause we have worked hard to advance.

Studies have shown that some students learn better in a single-gender environment, particularly in math and science. But federal regulations used to prevent public schools from offering that option. So in 2001 we joined with then-Sen. Hillary Clinton and Sen. Susan Collins to author legislation that allowed public schools to offer single-sex education. It was an epic bipartisan battle against entrenched bureaucracy, but well worth the fight.

Since our amendment passed, thousands of American children have benefited. Now, though, some civil libertarians are claiming that single-sex public-school programs are discriminatory and thus illegal.

To be clear: The 2001 law did not require that children be educated in single-gender programs or schools. It simply allowed schools and districts to offer the choice of single-sex schools or classrooms, as long as opportunities were equally available to boys and girls. In the vast and growing realm of education research, one central tenet has been confirmed repeatedly: Children learn in different ways. For some, single-sex classrooms make all the difference.

Critics argue that these programs promote harmful gender stereotypes. Ironically, it is exactly these stereotypes that the single-sex programs seek to eradicate.

As studies have confirmed—and as any parent can tell you—negative gender roles are often sharpened in coeducational environments. Boys are more likely, for instance, to buy into the notion that reading isn't masculine when they're surrounded by (and showing off for) girls.

Girls, meanwhile, have made so much progress in educational achievement that women are overrepresented in postgraduate education. But they still lag in the acquisition of bachelor's and graduate degrees in math and the sciences. It has been demonstrated time and again that young girls are more willing to ask and answer questions in classrooms without boys.

A 2008 Department of Education study found that "both principals and teachers believed that the main benefits of single-sex schooling are decreasing distractions to learning and improving student achievement." The gender slant—the math-is-for-boys, home-EC-is-for-girls trope—is eliminated.

In a three-year study in the mid-2000s, researchers at Florida's Stetson University compared the performance of single-gender and mixed-gender classes at an elementary school, controlling for the likes of class sizes, demographics and teacher training. When the children took the Florida Comprehensive Assessment Test (which measures achievement in math and literacy, for instance), the results were striking: Only 59% of girls in mixed classes were scored as proficient, while 75% of girls in single-sex ones achieved proficiency. Similarly, 37% of boys in coeducational classes scored proficient, compared with 86% of boys in the all-boys classes.

Booker T. Washington High School in Memphis, Tenn., the winner of the 2011 Race to the Top High School Commencement Challenge, went to a 81.6% graduation rate in 2010 from a graduation rate of 55% in 2007. Among the changes at the school? Implementing all-girls and all-boys freshman academies.

In Dallas, the all-boys Barack Obama Leadership Academy opened its doors last year. There is every reason to believe it will follow the success of the first all-girls public school, Irma Rangel Young Women's Leadership School, which started in 2004. Irma Rangel, which has been a Texas Education Agency Exemplary School since 2006, also took sixth place at the Dallas Independent School District's 30th Annual Mathematics Olympiad that year.

No one is arguing that single-sex education is the best option for every student. But it is preferable for some students and families, and no one has the right to deny them an option that may work best for a particular child. Attempts to eliminate single-sex education are equivalent to taking away students' and parents' choice about one of the most fundamentally important aspects of childhood and future indicators of success—a child's education.

America once dominated educational attainment among developed countries, but we have fallen disastrously in international rankings. As we seek ways to offer the best education for all our children, in ways that are better tailored to their needs, it seems not just counterproductive but damaging to reduce the options. single-sex education in public schools will continue to be a voluntary choice for students and their families. To limit or eliminate single-sex education is irresponsible. To take single-sex education away from students who stand to benefit is unforgivable.

Ms. Hutchison, a Republican, is the senior senator from Texas. Ms. Mikulski, a Democrat, is the senior senator from Maryland.