Leszek Balcerowicz on America's mistakes and the better way to heal from a financial crisis

Leszek Balcerowicz: The Anti-Bernanke. By Matthew Kaminski
Leszek Balcerowicz, the man who saved Poland's economy, on America's mistakes and the better way to heal from a financial crisis.The Wall Street Journal, December 15, 2012, on page A15
http://online.wsj.com/article/SB10001424127887323981504578179310418828782.html

Warsaw

As an economic crisis manager, Leszek Balcerowicz has few peers. When communism fell in Europe, he pioneered "shock therapy" to slay hyperinflation and build a free market. In the late 1990s, he jammed a debt ceiling into his country's constitution, handcuffing future free spenders. When he was central-bank governor from 2001 to 2007, his hard-money policies avoided a credit boom and likely bust.

Poland was the only country in the European Union to avoid recession in 2009 and has been the fastest-growing EU economy since. Mr. Balcerowicz dwells little on this achievement. He sounds too busy in "battle"—his word—against bad policy.

"Most problems are the result of bad politics," he says. "In a democracy, you have lots of pressure groups to expand the state for reasons of money, ideology, etc. Even if they are angels in the government, which is not the case, if there is not a counterbalance in the form of proponents of limited government, then there will be a shift toward more statism and ultimately into stagnation and crisis."

Looking around the world, there is no shortage of questionable policies. A series of bailouts for Greece and others has saved the euro, but who knows for how long. EU leaders closed their summit in Brussels on Friday by deferring hard decisions on entrenching fiscal discipline and pro-growth policies. Across the Atlantic, Washington looks no closer to a "fiscal cliff" deal. And the Federal Reserve on Wednesday made a fourth foray into "quantitative easing" to keep real interest rates low by buying bonds and printing money.

As a former central banker, Mr. Balcerowicz struggles to find the appropriate word for Fed Chairman Ben Bernanke's latest invention: "Unprecedented," "a complete anathema," "more uncharted waters." He says such "unconventional" measures trap economies in an unvirtuous cycle. Bankers expect lower interest rates to spur growth. When that fails, as in Japan, they have no choice but to stick with easing.

"While the benefits of non-conventional [monetary] policies are short lived, the costs grow with time," he says. "The longer you practice these sorts of policies, the more difficult it is to exit it. Japan is trapped." Anemic Japan is the prime example, but now the U.S., Britain and potentially the European Central Bank are on the same road.

If he were in Mr. Bernanke's shoes, Mr. Balcerowicz says he'd rethink the link between easy money and economic growth. Over time, he says, lower interest rates and money printing presses harm the economy—though not necessarily or primarily through higher inflation.

First, Bernanke-style policies "weaken incentives for politicians to pursue structural reforms, including fiscal reforms," he says. "They can maintain large deficits at low current rates." It indulges the preference of many Western politicians for stimulus spending. It means they don't have to grapple as seriously with difficult choices, say, on Medicare.

Another unappreciated consequence of easy money, according to Mr. Balcerowicz, is the easing of pressure on the private economy to restructure. With low interest rates, large companies "can just refinance their loans," he says. Banks are happy to go along. Adjustments are delayed, markets distorted.

By his reading, the increasingly politicized Fed has in turn warped America's political discourse. The Lehman collapse did help clean up the financial sector, but not the government. Mr. Balcerowicz marvels that federal spending is still much higher than before the crisis, which isn't the case in Europe. "The greatest neglect in the U.S. is fiscal," he says. The dollar lets the U.S. "get a lot of cheap financing to finance bad policies," which is "dangerous to the world and perhaps dangerous to the U.S."

The Fed model is spreading. Earlier this fall, the European Central Bank announced an equally unprecedented plan to buy the bonds of distressed euro-zone countries. The bank, in essence, said it was willing to print any amount of euros to save the single currency.

Mr. Balcerowicz sides with the head of Germany's Bundesbank, the sole dissenter on the ECB board to the bond-buying scheme. He says it violates EU treaties. "And second, when the Fed is printing money, it is not buying bonds of distressed states like California—it's more general, it's spreading it," he says. "The ECB is engaging in regional policy. I don't think you can justify this."

"So they know better," says Mr. Balcerowicz, about the latest fads in central banking. "Risk premiums are too high—according to them! They are above the judgments of the markets. I remember this from socialism: 'We know better!'"

Mr. Balcerowicz, who is 65, was raised in a state-planned Poland. He got a doctorate in economics, worked briefly at the Communist Party's Institute of Marxism-Leninism, and advised the Solidarity trade union before the imposition of martial law in 1981. He came to prominence in 1989 as the father of the "Balcerowicz Plan." Overnight, prices were freed, subsidies were slashed and the zloty currency was made convertible. It was harsh medicine, but the Polish economy recovered faster than more gradual reformers in the old Soviet bloc.

Shock or no, Mr. Balcerowicz remains adamant that fixes are best implemented as quickly as possible. Europe's PIGS—Portugal, Italy, Greece, Spain—moved slowly. By contrast, Mr. Balcerowicz offers the BELLs: Bulgaria, Estonia, Latvia and Lithuania.

These EU countries went through a credit boom-bust after 2009. Their economies tanked, Latvia's alone by nearly 20% that year. Denied EU bailouts, these governments were forced to adopt harsher measures than Greece. Public spending was slashed, including for government salaries. The adjustment hurt but recovery came by 2010. The BELL GDP growth curves are V-shaped. The PIGS decline was less steep, but prolonged and worse over time.

The systemic changes in the BELLs took a while to work, yet Mr. Balcerowicz says the radical approach has another, short-run benefit. He calls it the "confidence effect." When markets saw governments implement the reforms, their borrowing costs dropped fast, while the yields for the PIGS kept rising.

Greece focused on raising taxes, putting off expenditure cuts. They got it backward, says Mr. Balcerowicz. "If you reduce through reform current spending, which is too excessive, you are far more likely to be successful with fiscal consolidation than if you increase taxes, which are already too high."

He adds: "Somehow the impression for many people is that increasing taxes is correct and reducing spending is incorrect. It is ideologically loaded." This applies in Greece, most of Europe and the current debate in the U.S.

During his various stints in government in Poland, the name Balcerowicz was often a curse word. In the 1990s, he was twice deputy prime minister and led the Freedom Union party. As a pol, his cool and abrasive style won him little love and cost him votes, even as his policies worked. At the central bank, he took lots of political heat for his tight monetary policy and wasn't asked to stay on after his term ended in 2007.

Mr. Balcerowicz admits he was an easy scapegoat. "People tend to personalize reforms. I don't mind. I take responsibility for the reforms I launched." He says he "understands politicians when they give in [on reform], but I do not accept it." It's up to the proponents of the free market to fight for their ideas and make politicians aware of the electoral cost of not reforming.

On bailouts, Mr. Balcerowicz strikes an agnostic note. They can mitigate a crisis—as long as they don't reduce the pressure to reform. The BELL vs. PIGS comparison suggests the bailouts have slowed reform, but he notes recent movement in southern Europe to deregulate labor markets, privatize and cut spending—in other words, serious steps to spur growth.

"Once the euro has been created," Mr. Balcerowicz says, "it's worth keeping it." The single currency is no different than the gold standard, "which worked pretty well," he says. In both cases, member countries have to keep their budget deficits in check and labor markets flexible to stay competitive. Which makes him cautiously optimistic on the euro.

"It's important to remember that six, eight, 10 years ago Germany was like Italy, and it reformed," he says. Before Berlin pushed through an overhaul of the welfare state, Germany was called the "sick man of Europe." "There are no European solutions for the Italians' problem. But there are Italian solutions. Not bailouts, but better policies."

Why do some countries change for the better in a crisis and others don't? Mr. Balcerowicz puts the "popular interpretation of the root causes" of the crisis high on the list.

"There is a lot of intellectual confusion," he says. "For example, the financial crisis has happened in the financial sector. Therefore the reason for the crisis must be something in the financial sector. Sounds logical, but it's not. It's like saying the reason you sneeze through your nose is your nose."

The markets didn't "fail" but were distorted by bad policies. He mentions "too big to fail," the Fed's easy money, Fannie Mae FNMA 0.00% and the housing boom. Those are the hard explanations. "Many people like cheap moralizing," he says. "What a pleasant feeling to condemn greed. It's popular."

"Generally in the West, intellectuals like to blame the markets," he says. "There is a widespread belief that crises occur in capitalism mostly. The word crisis is associated with the word capitalism. While if you look in a comparative way, you see that the largest economic and also human catastrophes happen in non-market systems, when there's a heavy concentration of political power—Stalin, Mao, the Khmer Rouge, many other cases."

Going back to the 19th century, industrializing economies recovered best after a crisis with no or limited intervention. Yet Keynesians continue to insist that only the state can compensate for the flaws of the market, he says.

"This idea that markets tend to fall into self-perpetuating crises and only wise government can extract the country out of this crisis implicitly assumes that you have two kinds of people. Normal people who are operating in the markets, and better people who work for the state. They deny human nature."

Gathering the essays for his new collection, "Discovering Freedom," Mr. Balcerowicz realized that "you don't need to read modern economists" to understand what's happening today. Hume, Smith, Hayek and Tocqueville are all there. He loves Madison's "angels" quote: "If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary."

This Polish academic sounds like he might not feel out of place at a U.S. tea party rally. He takes to the idea.

"Their essence is very good. Liberal media try to demonize them, but their instincts are good. Limited government. This is classic. This is James Madison. This is ultra-American! Absolutely."

Mr. Kaminski is a member of the Journal's editorial board.

Japan - Major political parties and their pledges

Japan - Major political parties and their pledges
Japan Today, Dec 16, 2012
http://www.japantoday.com/category/politics/view/major-political-parties-and-their-pledges

TOKYO — A dozen political parties and many independents will contest Sunday’s election. Here is a list of major parties and their campaign promises:

The Democratic Party of Japan is a centrist group that has governed Japan since 2009 after ousting long-governing conservatives from power.

Prime Minister Yoshihiko Noda serves as party president.

The DPJ is promising to:

—phase out nuclear power generation by the end of the 2030s.

—promote the Trans-Pacific Partnership free trade deal, along with a trilateral free trade pact with China and South Korea.

—work with the Bank of Japan to try to end deflation in fiscal 2014.

—boost measures to protect Japanese territory, including islands in disputes with neighbouring nations.

The Liberal Democratic Party is Japan’s main conservative force which ruled the nation almost continuously from 1955 to 2009.

LDP president Shinzo Abe is a hawkish ideologue who was prime minister in 2006-7.

The LDP has pledged to:

—review all nuclear reactors in three years to decide whether to restart them.

—decide within 10 years Japan’s new energy mix, which may or may not include nuclear power generation.

—achieve three-percent nominal economic growth.

—set an inflation target of two percent and may review the Bank of Japan law to push the central bank to take further easing measures.

—strengthen Japan’s administration of islands that China claims.

—expand the Self Defense Forces and rename them National Defense Forces.

—cut more than 2.8 trillion yen in public spending by reducing welfare and government personnel costs.

—conduct a 10-year program to make infrastructure disaster-resistant.

The Japan Restoration Party was launched this year, originally under reformist Osaka mayor Toru Hashimoto. It is now headed by controversial ex-governor of Tokyo Shintaro Ishihara.

The JRP was born out of a coalition of small parties with varying ideological backgrounds, and is united in its aim to take power from established parties.

The JRP has promised to:

—draft a new constitution to replace the current one written by the United States shortly after World War II.

—achieve three percent nominal growth and two percent inflation.

—join negotiations for the Trans-Pacific Partnership free trade talks.

—reduce parliamentarians’ salary and seats.

—end reliance on nuclear power.

—aggressively push for decentralisation of power.

The Japan Future Party was launched after the election was called in mid-November. It is headed by Shiga prefecture governor Yukiko Kada on an anti-nuclear platform.

Many pundits say Kada is a figurehead for a party that is really run by veteran backroom deal-maker Ichiro Ozawa.

Among its pledges, the party promises to:

—end nuclear power generation in 10 years.

—stop the consumption tax hike.

—offer special allowances to families with children.

The New Komeito is a party of lay Buddhists that enjoys a narrow but loyal support base. It advocates pacifist policies and social programs to help the vulnerable.

It formed a coalition government with the LDP between 1999 and 2009 and has worked with it in opposition.

The party has pledged to:

—phase out nuclear power “as soon as possible” by not approving plans to build new reactors.

—expand scholarships for high school and college students and freeze fees for pre-schools and nursery schools.

—get Japan out of deflation within two years, achieving nominal 3-4 percent growth.

—boost diplomacy to protect Japanese territory including islands in disputes with neighbouring nations.

—seeks to build a Free Trade Area of Asia-Pacific (FTAAP) through making free trade deals.

© 2012 AFP

Principles for financial market infrastructure: disclosure framework and assessment methodology

Principles for financial market infrastructure: disclosure framework and assessment methodology
December 2012
http://www.bis.org/publ/cpss106.htm

The Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) have published a disclosure framework and assessment methodology for their Principles for financial market infrastructures (PFMIs), the new international standards for financial market infrastructures:

• the disclosure framework is intended to promote consistent and comprehensive public disclosure by FMIs in line with the requirements of the PFMIs; and
• the assessment methodology provides guidance for monitoring and assessing observance with the PFMIs.

The disclosure framework and assessment methodology were issued for public consultation in April as two separate documents. The final versions being issued now as Principles for financial market infrastructures: disclosure framework and assessment methodology have been revised in light of the comments received during that consultation. Given that disclosure and assessment are closely related, the CPSS and IOSCO have revised the disclosure framework so that it more closely mirrors the assessment methodology and combined the two documents into one for the final versions. This is also in line with comments received during the consultation.

The disclosure framework and the assessment methodology promote consistent disclosures of information by FMIs and consistent assessments by international financial institutions and national authorities. The assessment methodology is primarily intended for use by external assessors at the international level, in particular the International Monetary Fund and the World Bank. It also provides a baseline for national authorities to assess observance of the principles by the FMIs under their oversight or supervision and to self-assess the way they discharge their own responsibilities as regulators, supervisors, and overseers.

The PFMIs are new international standards for payment, clearing and settlement systems, including central counterparties, that were published in April as  Principles for financial market infrastructures (PFMIs). The PFMIs are designed to ensure that the infrastructure supporting global financial markets is robust and thus well placed to withstand financial shocks.

The financial cycle and macroeconomics: What have we learnt?

The financial cycle and macroeconomics: What have we learnt? By Claudio Borio
BIS Working Papers No 395
December 2012
http://www.bis.org/publ/work395.htm

It is high time we rediscovered the role of the financial cycle in macroeconomics. In the environment that has prevailed for at least three decades now, it is not possible to understand business fluctuations and the corresponding analytical and policy challenges without understanding the financial cycle. This calls for a rethink of modelling strategies and for significant adjustments to macroeconomic policies. This essay highlights the stylised empirical features of the financial cycle, conjectures as to what it may take to model it satisfactorily, and considers its policy implications. In the discussion of policy, the essay pays special attention to the bust phase, which is less well explored and raises much more controversial issues.

JEL classification: E30, E44, E50, G10, G20, G28, H30, H50

Keywords: financial cycle, business cycle, medium term, financial crises, monetary economy, balance sheet recessions, balance sheet repair

Mobilizing Resources, Building Coalitions: Local Power in Indonesia

Mobilizing Resources, Building Coalitions: Local Power in Indonesia, by Ryan Tans
Honolulu: East-West Center, 2012
Policy Studies, No. 64
ISBN: 978-0-86638-220-5
http://www.eastwestcenter.org/publications/mobilizing-resources-building-coalitions-local-power-in-indonesia

What have been the local political consequences of Indonesia's decentralization and electoral reforms? Some recent scholarship has emphasized continuity with Suharto's New Order, arguing that under the new rules, old elites have used money and intimidation to capture elected office. Studies detail the widespread practice of "money politics," in which candidates exchange patronage for support from voters and parties. Yet significant variation characterizes Indonesia's local politics, which suggests the need for an approach that differentiates contrasting power arrangements.

This study of three districts in North Sumatra province compares local politicians according to their institutional resource bases and coalitional strategies. Even if all practice money politics, they form different coalition types that depend on diverse institutions for political resources. The three ideal types of coalitions are political mafias, party machines, and mobilizing coalitions. Political mafias have a resource base limited to local state institutions and businesses; party machines bridge local and supra-local institutions; and mobilizing coalitions incorporate social organizations and groups of voters. Due to contrasting resource bases, the coalitions have different strategic option "menus," and they may experiment with various political tactics.

The framework developed here plausibly applies in other Indonesian districts to the extent that similar resource bases--namely local state institutions, party networks, and strong social and business organizations--are available to elites in other places.

About the Author: Ryan Tans is a doctoral student in political science at Emory University. Previously, he received a Master of Arts in Southeast Asian Studies from the National University of Singapore.

Unmitigated disasters? New evidence on the macroeconomic cost of natural catastrophes

Unmitigated disasters? New evidence on the macroeconomic cost of natural catastrophes. By Goetz von Peter, Sebastian von Dahlen and Sweta C Saxena

BIS Working Papers No 394
December 2012

http://www.bis.org/publ/work394.htm

 

Abstract: This paper presents a large panel study on the macroeconomic consequences of natural catastrophes and analyzes the extent to which risk transfer to insurance markets facilitates economic recovery. Our main results are that major natural catastrophes have large and signi cant negative e ects on economic activity, both on impact and over the longer run. However, it is mainly the uninsured losses that drive the subsequent macroeconomic cost, whereas sufficiently insured events are inconsequential in terms of foregone output. This result helps to disentangle conicting ndings in the literature, and puts the focus on risk transfer mechanisms to help mitigate the macroeconomic costs of natural catastrophes.

JEL classification: G22, O11, O44, Q54.

Keywords: Natural catastrophes, disasters, economic growth, insurance, risk transfer, reinsurance, recovery, development

Excerpts:

By using a novel and unique dataset, this paper measures the dynamic response of growth to major natural catastrophes, and examines the extent to which risk transfer to insurance markets facilitates economic recovery for a large cross-section of countries. With this aim, the paper makes three contributions to the literature. First, our analysis has a broader scope than other studies.  We construct a large panel with 8,252 country-year observations, covering 203 countries and jurisdictions between 1960 and 2011, matched with 2476 major natural catastrophes of four different physical types. Importantly, we make use of the most detailed statistics available on total and insured losses, obtained from industry sources. These unique data are better suited for the analysis than the public CRED database used in the existing literature.1 On the methodological side, we estimate the full time profile of economic growth in response to natural disasters in a dynamic specification. This allows us to present a more complete picture of growth dynamics than studies that focus on a particular time segment only.

Third, and most importantly, this is the first paper to make the link between natural catastrophes and economic growth conditional on risk transfer. This nuances the transmission channels, thereby helping to resolve the conflicting findings on catastrophe-related growth e ects in the literature.  In particular, we show that the uninsured part of disaster-related losses drives the subsequent macroeconomic cost in terms of foregone output. In focusing on economic activity, we recognize that disasters invariably diminish the wellbeing of affected populations even if growth rebounds.2 That said, there is little evidence that countries rebound from natural catastrophes when uninsured.  We nd that a typical (median) catastrophe causes a drop in growth of 0.6-1.0% on impact and results in a cumulative output loss of two to three times this magnitude, with higher estimates for larger (mean) catastrophes. Well insured catastrophes, by contrast, can be inconsequential or positive for growth over the medium term as insurance payouts help fund reconstruction efforts.

These fidings suggest that risk transfer to insurance markets has a macroeconomic value. This value may be particularly high for smaller nations that lack the capacity to (re)insure themselves against major natural disasters. The analysis thus contributes to the policy debate on different forms of post-disaster spending, as well as the balance between prevention ex ante and compensation ex post. Our finding that catastrophes have permanent output effects is also relevant for a growing literature that explains asset pricing puzzles through rare disasters. The extent to which risk transfer mitigates the macroeconomic cost of disasters is pertinent to the literature on finance and growth, which focuses on banks and stock markets but not on insurance. Considering the macroeconomic value of risk transfer could also enrich the macroprudential approach to the regulation and supervision of insurance companies.

The Need for "Un-consolidating" Consolidated Banks' Stress Tests

The Need for "Un-consolidating" Consolidated Banks' Stress Tests. By Eugenio Cerutti and Christian Schmieder
IMF, December 06, 2012
http://www.imf.org/external/pubs/cat/longres.aspx?sk=40151.0

Summary: The recent crisis has spurred the use of stress tests as a (crisis) management and early warning tool. However, a weakness is that they omit potential risks embedded in the banking groups’ geographical structures by assuming that capital and liquidity are available wherever they are needed within the group. This assumption neglects the fact that regulations differ across countries (e.g., minimum capital requirements), and, more importantly, that home/host regulators might limit flows of capital or liquidity within a group during periods of stress. This study presents a framework on how to integrate this risk element into stress tests, and provides illustrative calculations on the size of the potential adjustments needed in the presence of some limits on intragroup flows for banks included in the June 2011 EBA stress tests.

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.

###

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."

###

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