Our New Paymasters. WSJ Editorial
Wage controls are politically easier than genuine reforms.
The Wall Street Journal, page A20, Oct 23, 2009
In the annals of what used to be known as American capitalism, yesterday will go down as a sorry day: The Treasury and Federal Reserve announced wage controls on private American companies. So once again our politicians are blaming bankers, rather than addressing the incentives the politicians themselves created for bankers to take excessive risks.
President Obama cheered the pay reductions as "an important step forward" and urged Congress to "continue moving forward on financial reform to help prevent the crisis we saw last fall from happening again." The pay curbs are intended to feed the official political narrative that the bankers caused the entire crisis, and that cutting their future pay will prevent the next one. Only a politician could really believe this, or at least pretend to.
We certainly have no sympathy for bankers who've been bailed out, and the most defensible of yesterday's pay curbs are those announced by Treasury "pay czar" Ken Feinberg. He was handed the task of determining compensation for 175 executives at seven companies that are still using money from the Troubled Asset Relief Program: Citigroup, AIG, Bank of America, General Motors, Chrysler, GMAC and Chrysler Financial. These companies—and executives—owe their survival to political intervention, and the price of such taxpayer help is inevitably some populist retribution.
Mr. Feinberg thus has the impossible job of navigating between Congress's desire for revenge and the incentives needed to motivate business success at companies that still need to repay taxpayers. His strategy seems to be to slash cash compensation to $500,000 or less for most of the affected workers, while the bulk of their compensation will come in the form of stock tied to future corporate performance. This seems reasonable enough in principle. But the danger is that these pay limits will drive the most talented people at these firms to other companies without such onerous pay limits.
Far more dangerous is yesterday's announcement that the Fed plans to impose new pay guidelines on all of the banks it regulates. While the Fed imposed no pay cap, and it was at pains to say it didn't want to impose a "one size fits all" standard, the implication is that any large single-year payouts will be frowned upon by regulators. The Fed wants what it refers to as more "balanced" pay standards, which in practice is likely to mean smaller bonuses up front and longer time frames to see if "risks" pay off over several years.
The irony is that judgments about what constitutes "excessive risk" at banks will presumably be made by the same Fed regulators who let Citigroup put hundreds of billions in SIVs off its balance sheet. That certainly looks "excessive" now, though apparently it didn't amid the credit mania. The point is that Fed officials aren't likely to have a clue what kind of risks warrant tighter compensation rules. And these new guidelines may also drive the best and brightest out of the banks and into less regulated institutions.
Paul Volcker must be smiling at that one. Like Bank of England Governor Mervyn King (see below), the former Fed Chairman argued in Obama circles that a better way to regulate banks is to separate the riskiest trading activities from those that accept taxpayer guaranteed deposits. That reform would have moved the riskiest proprietary trading out of taxpayer-protected institutions. But the White House and Treasury deemed this too politically difficult, so instead they are now regulating the pay of bankers as an alternative way to diminish those risks. Good luck.
Meanwhile, the Administration still hasn't done anything to change the incentives for excessive risk-taking that are embedded in its own "too big to fail" doctrine. As long as bankers and their creditors believe they have a federal safety net, they will have a cheaper cost of capital that will encourage them to take greater risks. New pay rules will quickly be worked around or through.
As Mr. King put it this week, "The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the 'too important to fail' question. The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion." The same can be said for pay curbs.
The most profound mistake in these rules is the terrible precedent they set for wage controls
across the economy. The Obama Administration will say that banks are a special case, and that is true. But once politicians feel free to regulate executive pay for one industry, it is no great leap to do it for everyone. Our guess is that these pay rules will prove to be both ineffectual and destructive—a perfect Washington combination.
Thursday, October 22, 2009
Brown v. King - Politicians hate hearing their subsidies contributed to the crisis
Brown v. King. WSJ Editorial
Politicians hate hearing their subsidies contributed to the crisis.
WSJ, Oct 22, 2009
Gordon Brown gave the Bank of England its independence 12 years ago, but this week he seemed to be looking for someone to rid him of his troublesome central banker. Bank of England Governor Mervyn King gave a speech in Edinburgh Tuesday in which he said, in effect, that if a bank is too big to fail, it's just too big. On Wednesday, The British Prime Minister shot back that breaking up the largest financial institutions wasn't the answer, adding the now obligatory call for global regulation of banker pay.
One can disagree with Governor King's contention Tuesday that the banking system, and the economy, would be better served by a stricter division between investment banking and commercial or retail banking. But more important than Mr. King's solution was his diagnosis of the problem, which shows more understanding of what caused last year's panic than the usual pabulum about magic bonuses.
"Why," Mr. King asked, "were banks willing to take risks that proved so damaging both to themselves and the rest of the economy?" His answer: "One of the key reasons . . . is that the incentives to manage risk and to increase leverage were distorted by the implicit support or guarantee provided by government to creditors of banks that were seen as 'too important to fail.'" Politicians hate hearing that it was their subsidies for credit and for the biggest banks that contributed to the problem.
Mr. King wasn't done: "Such banks could raise funding more cheaply and expand faster than other institutions. They had less incentive than others to guard against tail risk. Banks and their creditors knew that if they were sufficiently important to the economy or the rest of the financial system, and things went wrong, the government would always stand behind them." He concluded: "And they were right."
On this essential point, Mr. King is on target, and it's heartening to hear an important public official put his finger on the real problem so succinctly. Mr. Brown would prefer to point to inadequate "global regulation" of finance. But show us the regulator who could have prevented the panic, even with unlimited power, and we'll show you a world without the freedom to succeed or fail.
Politicians hate hearing their subsidies contributed to the crisis.
WSJ, Oct 22, 2009
Gordon Brown gave the Bank of England its independence 12 years ago, but this week he seemed to be looking for someone to rid him of his troublesome central banker. Bank of England Governor Mervyn King gave a speech in Edinburgh Tuesday in which he said, in effect, that if a bank is too big to fail, it's just too big. On Wednesday, The British Prime Minister shot back that breaking up the largest financial institutions wasn't the answer, adding the now obligatory call for global regulation of banker pay.
One can disagree with Governor King's contention Tuesday that the banking system, and the economy, would be better served by a stricter division between investment banking and commercial or retail banking. But more important than Mr. King's solution was his diagnosis of the problem, which shows more understanding of what caused last year's panic than the usual pabulum about magic bonuses.
"Why," Mr. King asked, "were banks willing to take risks that proved so damaging both to themselves and the rest of the economy?" His answer: "One of the key reasons . . . is that the incentives to manage risk and to increase leverage were distorted by the implicit support or guarantee provided by government to creditors of banks that were seen as 'too important to fail.'" Politicians hate hearing that it was their subsidies for credit and for the biggest banks that contributed to the problem.
Mr. King wasn't done: "Such banks could raise funding more cheaply and expand faster than other institutions. They had less incentive than others to guard against tail risk. Banks and their creditors knew that if they were sufficiently important to the economy or the rest of the financial system, and things went wrong, the government would always stand behind them." He concluded: "And they were right."
On this essential point, Mr. King is on target, and it's heartening to hear an important public official put his finger on the real problem so succinctly. Mr. Brown would prefer to point to inadequate "global regulation" of finance. But show us the regulator who could have prevented the panic, even with unlimited power, and we'll show you a world without the freedom to succeed or fail.
Tuesday, October 20, 2009
Industry views: The U.S. doubles down on solar subsidies while Europe retreats
The U.S. doubles down on solar subsidies while Europe retreats
IER, Oct 19, 2009
The cap and trade bills circulating in Congress (such as H.R. 2454, the Waxman-Markey bill) not only “tax” the people of the nation for the right to reduce greenhouse gas emissions in this country, but they contain additional energy-related “tax” provisions.[i] One of these is a Renewable Portfolio Standard (RPS) that requires 20 percent of electricity generation to come from qualified renewable technologies by 2020.[ii] This is a “tax” because it requires those utilities unable to meet the required percentage to purchase renewable credits from those that can exceed the targeted amount. The higher generating costs incurred from constructing and operating the renewable technologies, or buying renewable credits, will be passed on to the users of the electricity. These “taxes” are in addition to the generous tax-funded subsidies already provided to many qualified renewables.
The concept of an RPS is not new. Twenty-nine states and the District of Columbia currently have some form of RPS[iii], but few states are meeting their mandates,[iv] and these states have often tailored their “qualified renewables” liberally to what makes sense to their area. Texas, a state that has met its mandates mainly from wind-generated power, the least-cost qualified renewable, is now considering expanding into more costly renewables, such as solar power. Houston, for example, is considering using solar to generate 1.5 percent of its government’s needs from a 10-megawatt plant to be built by NRG and to be operating by July 2010. When the sun is not visible, the plant will be backed-up by the city’s natural gas-fired generating units.
The proposed 10-megawatt Houston plant is estimated to cost $40 million[v], $4,000 per kilowatt, which is a smaller cost figure than many other solar project estimates and most probably speculative. And, that $4,000 per kilowatt is also far more costly than other generating technologies that are more reliable to boot. For example, the Energy information Administration (EIA), an independent agency within the U.S. Department of Energy, is estimating the cost to build a coal-fired plant at about half the estimated cost in Houston, or just over $2,000 per kilowatt, and a natural-gas fired plant at less than a quarter of that cost, at below $1,000 per kilowatt. [vi] EIA’s estimate for a photovoltaic plant, which is what is being proposed in Houston, is just over $6,000 per kilowatt, 50 percent higher than the NRG cost estimate.[vii] In fact, photovoltaic solar is the highest-cost generating technology of EIA’s slate of 20 potential technologies for generating this country’s future electricity needs.[viii]
European Experience
However, we do not have to use EIA’s cost figures to know that solar is non-competitive with conventional grid generation. Several countries in Europe have already implemented RPS type programs with hefty subsidies funded by the country’s taxpayers. They include Spain, Germany, and Denmark. For example, in Alvarado, Spain, the energy firm Acciona inaugurated a 50-MW concentrating solar power plant in late July. The cost is €236 million, about $350 million U.S., or about $7,000 per kilowatt.[ix] Construction of the plant began in February 2008, with an average of 350 people working throughout the 18-month construction period. The plant will be run by a 31-person operation and maintenance team. This is the second solar plant of this type built in Spain. Its predecessor has been operating since June 2007.[x]
Spain ranks second in the world in installed solar capacity, second only to Germany.[xi] To achieve that ranking, Spain initiated legislation that requires 20 percent of its electricity generation to be from renewable energy by 2010. To make renewable energy attractive to investors, Spain also subsidized its renewable technologies. In 2008, for instance, when solar power generated less than 1 percent of Spain’s electricity, its cost was over 7 times higher than the average electricity price. Due to feed-in tariffs, utility companies were forced to buy the renewable power at its higher cost. And not only is solar power more expensive, jobs that could have been fostered and continued elsewhere in the Spanish economy were foregone to meet the government’s renewable mandates. A Spanish researcher found that while solar energy employs many workers in the plant’s construction, it consumes a great amount of capital that would have created many more jobs in other parts of the economy. In fact, for each megawatt of solar energy installed in Spain, 12.7 jobs were lost elsewhere in the Spanish economy.[xii] Recently, the Spanish government decided to slash subsidies to solar power. Spain will subsidize just 500 megawatts of solar projects this year, down sharply from 2,400 megawatts last year.[xiii]
Germany—the world’s highest ranking country for installed solar capacity and the largest market for solar products—is also slashing its subsidies for solar power in order to ease costs for electricity users. Owners of solar panels receive as much as 43 euro cents (64 U.S. cents) per kilowatt hour of power they generate.[xiv] The Energy Information Administration calculates the levelized cost of electricity[xv] from solar photovoltaic power to be 39.57 cents per kilowatt hour (2007 dollars) in 2016,[xvi] far less than the German subsidy. According to some German researchers, the feed-in tariff for solar is 43 euro cents per kilowatt hour (kWh), making solar electricity by far the most subsidized technology among all forms of renewable energy. This feed-in tariff for solar photovoltaic power is more than eight times higher than the electricity price at the power exchange and more than four times the feed-in tariff paid for electricity produced by on-shore wind turbines. Because of solar power’s low capacity factor, solar generated only 0.6 percent of Germany’s electricity in 2008.[xvii] Since the sun doesn’t always shine on solar plants, solar power cannot compete with more mature generating technologies. The EIA estimates the capacity factor for solar in 2008 to be 17 percent.[xviii]
U.S. Subsidies
While the U.S. does not have feed-in tariffs at this time, it does subsidize solar power through investment tax credits that are as high as 30 percent currently and until 2016. Solar also benefits from a permanent investment tax credit of 10 percent in the U.S., and a 5-year accelerated depreciation write-off. The Energy information Administration estimates that total federal subsidies for electric production from solar power for fiscal year 2007 were $24.34 per megawatt hour, compared to 25 cents per megawatt hour for natural gas and petroleum fueled technologies—98 times higher.[xix] Yet, even with these subsidies, solar generated only 0.02 percent of U.S. electricity in 2008.[xx] That is because solar at around 40 cents per kilowatt hour is more than 4 times as expensive on a levelized cost basis than its fossil competitors. (EIA estimates that levelized costs for conventional coal are 9.46 cents per kilowatt hour and those for natural gas combined cycle are 8.39 cents per kilowatt hour (in 2007 dollars) for 2016.[xxi])
Of course, the U.S. is slow in learning from Europe’s experiences. On October 12, 2009, California Governor Arnold Schwarzenegger signed into law S.B. 32, a feed-in tariff that requires California utilities to buy all renewable generation under 3 megawatts within their service territories, until they hit a state-wide total cap of 750 megawatts.[xxii] How California will monitor this program is yet to be seen. It has yet to achieve its renewable generating mandates from its RPS program.[xxiii]
Conclusion
Solar power has it place in certain applications. As always, the individual citizen or company should be able to choose if solar works for their energy needs. But using solar power to generate electricity for the electrical grid is very expensive. Requiring ratepayers to buy solar power, either through renewable energy mandates or through feed-in tariffs, will only increase the price of electricity. The last thing the economy needs is higher energy prices, but that is exactly what solar energy’s supporters are promoting.
References
[i] Robert J. Michaels, The Other Half of Waxman-Markey: An Examination of the non-Cap-and-Trade Provisions, http://www.instituteforenergyresearch.org/pdf/Other_Half_of_Waxman-Markey–FINAL.pdf
[ii] H.R. 2454, section 101
[iii] Database of State Incentives for Renewables and Efficiency (DSIRE), North Carolina State University, http://www.dsireusa.org/incentives/index.cfm?SearchType=RPS&&EE=0&RS=1
[iv] Traci Watson, States not meeting renewable energy goals, USA Today, Oct. 8, 2009, http://www.usatoday.com/money/industries/energy/2009-10-08-altenergy_N.htm.
[v] “Solar forecast: expensive”, Loren Steffy, Houston Chronicle, September 29, 2009, http://www.chron.com/disp/story.mpl/business/steffy/6643904.html
[vi] Energy information Administration, Assumptions to the Annual Energy outlook 2009, Table 8.2.
[vii] Ibid.
[viii] Ibid.
[ix] Sonal Patel, Power Digest, Power Magazine, Sept. 2009, http://powermag.com/business/2144.html.
[x] Sonal Patel, Interest in Solar Tower Technology Rising, Power Magazine, http://powermag.com/renewables/solar/Interest-in-Solar-Tower-Technology-Rising_1876.html.
[xi] Solar Energy Industries Association, http://www.seia.org/cs/about_solar_energy/industry_data
[xii] Study of the effects on employment of public aid to renewable energy sources, Universidad Rey Juan Carlos, March 2009, http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf
[xiii] Wall Street journal, “Darker Times for Solar-Power Industry”, May 11, 2009, http://online.wsj.com/article/SB124199500034504717.html .
[xiv] “Merkel’s Coalition to “Definitely” Cut German Solar subsidies”, Brian Parker and Nicholas Comfort, Bloomberg, October 12, 2009, http://www.bloomberg.com/apps/news?pid=206011
[xv] The levelized cost of a generating technology is the present value of the total cost of building and operating the generating plant over its financial life.
[xvi]“Levelized Cost of New Electricity Generating Technologies” , Institute for Energy Research, May 12, 2009, http://www.instituteforenergyresearch.org/2009/05/12/levelized-cost-of-new-generating-technologies/
[xvii] “Economic impacts from the promotion of renewable energies”, Rheinisch-Westfälisches Institut für Wirtschaft sforschung
[xviii] “Solar forecast: expensive”, Loren Steffy, Houston Chronicle, September 29, 2009, http://www.chron.com/disp/story.mpl/business/steffy/6643904.html
[xix] Energy information Administration, Federal Financial interventions and Subsidies in Energy markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html .
[xx] Energy Information Administration, Monthly Energy Review, Table 7.2a, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec7_5.pdf
[xxi]“Levelized Cost of New Electricity Generating Technologies” , Institute for Energy Research, May 12, 2009, http://www.instituteforenergyresearch.org/2009/05/12/levelized-cost-of-new-generating-technologies/
[xxii] Greenwire, “California: Schwarzenegger signs feed-in tariff, spate of enviro bills”, October 12, 2009, http://www.eenews.net/Greenwire/2009/10/12/4/
[xxiii] Robert J. Michaels, “A National Renewable Portfolio Standard: Politically Correct, Economically Suspect,” Electricity Journal 21 (April 2008)
IER, Oct 19, 2009
The cap and trade bills circulating in Congress (such as H.R. 2454, the Waxman-Markey bill) not only “tax” the people of the nation for the right to reduce greenhouse gas emissions in this country, but they contain additional energy-related “tax” provisions.[i] One of these is a Renewable Portfolio Standard (RPS) that requires 20 percent of electricity generation to come from qualified renewable technologies by 2020.[ii] This is a “tax” because it requires those utilities unable to meet the required percentage to purchase renewable credits from those that can exceed the targeted amount. The higher generating costs incurred from constructing and operating the renewable technologies, or buying renewable credits, will be passed on to the users of the electricity. These “taxes” are in addition to the generous tax-funded subsidies already provided to many qualified renewables.
The concept of an RPS is not new. Twenty-nine states and the District of Columbia currently have some form of RPS[iii], but few states are meeting their mandates,[iv] and these states have often tailored their “qualified renewables” liberally to what makes sense to their area. Texas, a state that has met its mandates mainly from wind-generated power, the least-cost qualified renewable, is now considering expanding into more costly renewables, such as solar power. Houston, for example, is considering using solar to generate 1.5 percent of its government’s needs from a 10-megawatt plant to be built by NRG and to be operating by July 2010. When the sun is not visible, the plant will be backed-up by the city’s natural gas-fired generating units.
The proposed 10-megawatt Houston plant is estimated to cost $40 million[v], $4,000 per kilowatt, which is a smaller cost figure than many other solar project estimates and most probably speculative. And, that $4,000 per kilowatt is also far more costly than other generating technologies that are more reliable to boot. For example, the Energy information Administration (EIA), an independent agency within the U.S. Department of Energy, is estimating the cost to build a coal-fired plant at about half the estimated cost in Houston, or just over $2,000 per kilowatt, and a natural-gas fired plant at less than a quarter of that cost, at below $1,000 per kilowatt. [vi] EIA’s estimate for a photovoltaic plant, which is what is being proposed in Houston, is just over $6,000 per kilowatt, 50 percent higher than the NRG cost estimate.[vii] In fact, photovoltaic solar is the highest-cost generating technology of EIA’s slate of 20 potential technologies for generating this country’s future electricity needs.[viii]
European Experience
However, we do not have to use EIA’s cost figures to know that solar is non-competitive with conventional grid generation. Several countries in Europe have already implemented RPS type programs with hefty subsidies funded by the country’s taxpayers. They include Spain, Germany, and Denmark. For example, in Alvarado, Spain, the energy firm Acciona inaugurated a 50-MW concentrating solar power plant in late July. The cost is €236 million, about $350 million U.S., or about $7,000 per kilowatt.[ix] Construction of the plant began in February 2008, with an average of 350 people working throughout the 18-month construction period. The plant will be run by a 31-person operation and maintenance team. This is the second solar plant of this type built in Spain. Its predecessor has been operating since June 2007.[x]
Spain ranks second in the world in installed solar capacity, second only to Germany.[xi] To achieve that ranking, Spain initiated legislation that requires 20 percent of its electricity generation to be from renewable energy by 2010. To make renewable energy attractive to investors, Spain also subsidized its renewable technologies. In 2008, for instance, when solar power generated less than 1 percent of Spain’s electricity, its cost was over 7 times higher than the average electricity price. Due to feed-in tariffs, utility companies were forced to buy the renewable power at its higher cost. And not only is solar power more expensive, jobs that could have been fostered and continued elsewhere in the Spanish economy were foregone to meet the government’s renewable mandates. A Spanish researcher found that while solar energy employs many workers in the plant’s construction, it consumes a great amount of capital that would have created many more jobs in other parts of the economy. In fact, for each megawatt of solar energy installed in Spain, 12.7 jobs were lost elsewhere in the Spanish economy.[xii] Recently, the Spanish government decided to slash subsidies to solar power. Spain will subsidize just 500 megawatts of solar projects this year, down sharply from 2,400 megawatts last year.[xiii]
Germany—the world’s highest ranking country for installed solar capacity and the largest market for solar products—is also slashing its subsidies for solar power in order to ease costs for electricity users. Owners of solar panels receive as much as 43 euro cents (64 U.S. cents) per kilowatt hour of power they generate.[xiv] The Energy Information Administration calculates the levelized cost of electricity[xv] from solar photovoltaic power to be 39.57 cents per kilowatt hour (2007 dollars) in 2016,[xvi] far less than the German subsidy. According to some German researchers, the feed-in tariff for solar is 43 euro cents per kilowatt hour (kWh), making solar electricity by far the most subsidized technology among all forms of renewable energy. This feed-in tariff for solar photovoltaic power is more than eight times higher than the electricity price at the power exchange and more than four times the feed-in tariff paid for electricity produced by on-shore wind turbines. Because of solar power’s low capacity factor, solar generated only 0.6 percent of Germany’s electricity in 2008.[xvii] Since the sun doesn’t always shine on solar plants, solar power cannot compete with more mature generating technologies. The EIA estimates the capacity factor for solar in 2008 to be 17 percent.[xviii]
U.S. Subsidies
While the U.S. does not have feed-in tariffs at this time, it does subsidize solar power through investment tax credits that are as high as 30 percent currently and until 2016. Solar also benefits from a permanent investment tax credit of 10 percent in the U.S., and a 5-year accelerated depreciation write-off. The Energy information Administration estimates that total federal subsidies for electric production from solar power for fiscal year 2007 were $24.34 per megawatt hour, compared to 25 cents per megawatt hour for natural gas and petroleum fueled technologies—98 times higher.[xix] Yet, even with these subsidies, solar generated only 0.02 percent of U.S. electricity in 2008.[xx] That is because solar at around 40 cents per kilowatt hour is more than 4 times as expensive on a levelized cost basis than its fossil competitors. (EIA estimates that levelized costs for conventional coal are 9.46 cents per kilowatt hour and those for natural gas combined cycle are 8.39 cents per kilowatt hour (in 2007 dollars) for 2016.[xxi])
Of course, the U.S. is slow in learning from Europe’s experiences. On October 12, 2009, California Governor Arnold Schwarzenegger signed into law S.B. 32, a feed-in tariff that requires California utilities to buy all renewable generation under 3 megawatts within their service territories, until they hit a state-wide total cap of 750 megawatts.[xxii] How California will monitor this program is yet to be seen. It has yet to achieve its renewable generating mandates from its RPS program.[xxiii]
Conclusion
Solar power has it place in certain applications. As always, the individual citizen or company should be able to choose if solar works for their energy needs. But using solar power to generate electricity for the electrical grid is very expensive. Requiring ratepayers to buy solar power, either through renewable energy mandates or through feed-in tariffs, will only increase the price of electricity. The last thing the economy needs is higher energy prices, but that is exactly what solar energy’s supporters are promoting.
References
[i] Robert J. Michaels, The Other Half of Waxman-Markey: An Examination of the non-Cap-and-Trade Provisions, http://www.instituteforenergyresearch.org/pdf/Other_Half_of_Waxman-Markey–FINAL.pdf
[ii] H.R. 2454, section 101
[iii] Database of State Incentives for Renewables and Efficiency (DSIRE), North Carolina State University, http://www.dsireusa.org/incentives/index.cfm?SearchType=RPS&&EE=0&RS=1
[iv] Traci Watson, States not meeting renewable energy goals, USA Today, Oct. 8, 2009, http://www.usatoday.com/money/industries/energy/2009-10-08-altenergy_N.htm.
[v] “Solar forecast: expensive”, Loren Steffy, Houston Chronicle, September 29, 2009, http://www.chron.com/disp/story.mpl/business/steffy/6643904.html
[vi] Energy information Administration, Assumptions to the Annual Energy outlook 2009, Table 8.2.
[vii] Ibid.
[viii] Ibid.
[ix] Sonal Patel, Power Digest, Power Magazine, Sept. 2009, http://powermag.com/business/2144.html.
[x] Sonal Patel, Interest in Solar Tower Technology Rising, Power Magazine, http://powermag.com/renewables/solar/Interest-in-Solar-Tower-Technology-Rising_1876.html.
[xi] Solar Energy Industries Association, http://www.seia.org/cs/about_solar_energy/industry_data
[xii] Study of the effects on employment of public aid to renewable energy sources, Universidad Rey Juan Carlos, March 2009, http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf
[xiii] Wall Street journal, “Darker Times for Solar-Power Industry”, May 11, 2009, http://online.wsj.com/article/SB124199500034504717.html .
[xiv] “Merkel’s Coalition to “Definitely” Cut German Solar subsidies”, Brian Parker and Nicholas Comfort, Bloomberg, October 12, 2009, http://www.bloomberg.com/apps/news?pid=206011
[xv] The levelized cost of a generating technology is the present value of the total cost of building and operating the generating plant over its financial life.
[xvi]“Levelized Cost of New Electricity Generating Technologies” , Institute for Energy Research, May 12, 2009, http://www.instituteforenergyresearch.org/2009/05/12/levelized-cost-of-new-generating-technologies/
[xvii] “Economic impacts from the promotion of renewable energies”, Rheinisch-Westfälisches Institut für Wirtschaft sforschung
[xviii] “Solar forecast: expensive”, Loren Steffy, Houston Chronicle, September 29, 2009, http://www.chron.com/disp/story.mpl/business/steffy/6643904.html
[xix] Energy information Administration, Federal Financial interventions and Subsidies in Energy markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html .
[xx] Energy Information Administration, Monthly Energy Review, Table 7.2a, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec7_5.pdf
[xxi]“Levelized Cost of New Electricity Generating Technologies” , Institute for Energy Research, May 12, 2009, http://www.instituteforenergyresearch.org/2009/05/12/levelized-cost-of-new-generating-technologies/
[xxii] Greenwire, “California: Schwarzenegger signs feed-in tariff, spate of enviro bills”, October 12, 2009, http://www.eenews.net/Greenwire/2009/10/12/4/
[xxiii] Robert J. Michaels, “A National Renewable Portfolio Standard: Politically Correct, Economically Suspect,” Electricity Journal 21 (April 2008)
Monday, October 19, 2009
Calomiris: We can solve the too-big-to-fail problem without losing the benefits of a global financial system
In the World of Banks, Bigger Can Be Better. By CHARLES CALOMIRIS
We can solve the too-big-to-fail problem without losing the benefits of a global financial system.
WSJ, Oct 20, 2009
Legitimate concern about the risks to taxpayers and the economy posed by banks that are "too-big-to-fail" has prompted some observers, among them Simon Johnson, former chief economist of the International Monetary Fund, to favor draconian limits on financial institution size. This is misguided. There are sizable gains from retaining large, complex, global financial institutions—and other ways to credibly protect taxpayers from the cost of government bailouts.
Governments currently have trouble allowing large, complex financial institutions to enter bankruptcy, or receivership in the case of banks, because there is no orderly means for transferring control of assets and operations, including the completion of complex transactions with many counterparties perhaps in scores of countries via thousands of affiliates. The problem is important to resolve. The inability of regulators to agree on who had claim to which assets in the case of the Lehman bankruptcy, for example, has substantially prolonged the resolution of that bankruptcy.
Yet the challenge of coordinating the efforts among different countries' regulators can be met through prearranged, loss-sharing arrangements that assign assets to particular subsidiaries based on clear rules. This would make it possible to transfer control over the assets and operations of a large international financial institution in an orderly fashion, in case of its failure. This process could be handled by the courts for nonbank failures and the Federal Deposit Insurance Corp. for banks. With such arrangements in place, governments will have no reason (or excuse) to bail out large, international institutions.
But is it worth the trouble to preserve large financial institutions? Emphatically, it is.
Oliver Williamson, an economist at the University of California, Berkeley, just won the Nobel Prize for his pathbreaking work on the "boundaries of the firm," specifically for arguing that it can be more efficient to extend the boundaries of a single firm than for independent firms to contract with each other in the market. That theory explains why nonbank corporations operate world-wide supply chains.
International trade today, unlike the 19th and early 20th centuries, is largely driven by those supply chains. Intermediate goods, not final goods, account for most of international trade, and the same firms that import the bulk of goods into the U.S. also account for the bulk of exports. This underlying reality is the background factor that helps explain why some financial firms also need to be large.
First and foremost, they need to be large to operate on a global scale—and they need to do so because their clients are large and operate globally. Small, local banks simply could not provide global corporations the same physical capabilities for trade finance, foreign exchange contracting, and global capital access that large global financial institutions can.
Second, there are economies of scope when financial firms combine different products within the same firm (lending and foreign-exchange swaps, for example). A financial firm able to offer multiple products to a customer means savings in marketing costs and in the costs of information production (about the creditworthiness of clients, for example). Economies of scope among products also imply economies of scale within finance suppliers, since small financial firms cannot afford the overhead costs of building platforms with many complex products.
True, some empirical studies in the field of finance have failed to find big gains from mergers. But those studies measured gains to banks only, and measured only the performance improvements of recently consolidated institutions against other institutions, many of which had improved their performance due to previous consolidation.
Yet even unconsolidated banks have improved their performance under the pressure of increased competition following the removal of branching restrictions, which permitted the consolidation wave in banking. And when an entire industry is involved in a protracted consolidation wave, the best indicator of the gains from consolidation is the performance of the industry as a whole. One study of bank productivity growth during the heart of the merger wave (1991-1997), by Kevin Stiroh, an economist at the New York Federal Reserve, found that it rose more than 0.4% per year.
Third, many of the gains of consolidation accrued to customers, not banks, in the form of cheaper and better financial services. For example, my research shows that from 1980 to 1999, after controlling for changes in the mix of firms, the underwriting costs of accessing the public equity market fell by more than 20%. These declining costs encouraged an expanded use of the market particularly by young, growing firms.
Large-scale global finance has also expanded the supply of credit to emerging market economies. That's transformed the political economy of those economies very much for the better, by undermining domestic crony-capitalist networks. Indeed, perhaps the greatest accomplishment of global finance in the past two decades has been the replacement of crony banking networks in emerging market countries with branches of large global banks.
Fourth, global financial institutions also have made stock, bond and foreign exchange markets globally integrated and more efficient. Global financial institutions are the institutions that provide the funds for arbitrage across markets, which ensure global market integration.
Research in the 1970s and early 1980s by international economists like Stanford University's Ron McKinnon bemoaned the inefficiency of foreign exchange markets due to the lack of arbitrage funding, which promoted exchange rate volatility and limited the ability of exporters and importers to hedge their risks. Today the foreign exchange markets for most currencies are extremely active for a wide variety of currencies. Important developing countries now enjoy deep markets for currency trading against the major currencies, which promotes greater access to trade and international capital markets.
Limiting the size, complexity and global reach of financial institutions is fraught with downsides for the international economy. We can solve the too-big-to-fail problem without destroying global finance. It certainly is worth a try.
Mr. Calomiris is a professor of finance at Columbia Business School and a research associate of the National Bureau of Economic Research.
We can solve the too-big-to-fail problem without losing the benefits of a global financial system.
WSJ, Oct 20, 2009
Legitimate concern about the risks to taxpayers and the economy posed by banks that are "too-big-to-fail" has prompted some observers, among them Simon Johnson, former chief economist of the International Monetary Fund, to favor draconian limits on financial institution size. This is misguided. There are sizable gains from retaining large, complex, global financial institutions—and other ways to credibly protect taxpayers from the cost of government bailouts.
Governments currently have trouble allowing large, complex financial institutions to enter bankruptcy, or receivership in the case of banks, because there is no orderly means for transferring control of assets and operations, including the completion of complex transactions with many counterparties perhaps in scores of countries via thousands of affiliates. The problem is important to resolve. The inability of regulators to agree on who had claim to which assets in the case of the Lehman bankruptcy, for example, has substantially prolonged the resolution of that bankruptcy.
Yet the challenge of coordinating the efforts among different countries' regulators can be met through prearranged, loss-sharing arrangements that assign assets to particular subsidiaries based on clear rules. This would make it possible to transfer control over the assets and operations of a large international financial institution in an orderly fashion, in case of its failure. This process could be handled by the courts for nonbank failures and the Federal Deposit Insurance Corp. for banks. With such arrangements in place, governments will have no reason (or excuse) to bail out large, international institutions.
But is it worth the trouble to preserve large financial institutions? Emphatically, it is.
Oliver Williamson, an economist at the University of California, Berkeley, just won the Nobel Prize for his pathbreaking work on the "boundaries of the firm," specifically for arguing that it can be more efficient to extend the boundaries of a single firm than for independent firms to contract with each other in the market. That theory explains why nonbank corporations operate world-wide supply chains.
International trade today, unlike the 19th and early 20th centuries, is largely driven by those supply chains. Intermediate goods, not final goods, account for most of international trade, and the same firms that import the bulk of goods into the U.S. also account for the bulk of exports. This underlying reality is the background factor that helps explain why some financial firms also need to be large.
First and foremost, they need to be large to operate on a global scale—and they need to do so because their clients are large and operate globally. Small, local banks simply could not provide global corporations the same physical capabilities for trade finance, foreign exchange contracting, and global capital access that large global financial institutions can.
Second, there are economies of scope when financial firms combine different products within the same firm (lending and foreign-exchange swaps, for example). A financial firm able to offer multiple products to a customer means savings in marketing costs and in the costs of information production (about the creditworthiness of clients, for example). Economies of scope among products also imply economies of scale within finance suppliers, since small financial firms cannot afford the overhead costs of building platforms with many complex products.
True, some empirical studies in the field of finance have failed to find big gains from mergers. But those studies measured gains to banks only, and measured only the performance improvements of recently consolidated institutions against other institutions, many of which had improved their performance due to previous consolidation.
Yet even unconsolidated banks have improved their performance under the pressure of increased competition following the removal of branching restrictions, which permitted the consolidation wave in banking. And when an entire industry is involved in a protracted consolidation wave, the best indicator of the gains from consolidation is the performance of the industry as a whole. One study of bank productivity growth during the heart of the merger wave (1991-1997), by Kevin Stiroh, an economist at the New York Federal Reserve, found that it rose more than 0.4% per year.
Third, many of the gains of consolidation accrued to customers, not banks, in the form of cheaper and better financial services. For example, my research shows that from 1980 to 1999, after controlling for changes in the mix of firms, the underwriting costs of accessing the public equity market fell by more than 20%. These declining costs encouraged an expanded use of the market particularly by young, growing firms.
Large-scale global finance has also expanded the supply of credit to emerging market economies. That's transformed the political economy of those economies very much for the better, by undermining domestic crony-capitalist networks. Indeed, perhaps the greatest accomplishment of global finance in the past two decades has been the replacement of crony banking networks in emerging market countries with branches of large global banks.
Fourth, global financial institutions also have made stock, bond and foreign exchange markets globally integrated and more efficient. Global financial institutions are the institutions that provide the funds for arbitrage across markets, which ensure global market integration.
Research in the 1970s and early 1980s by international economists like Stanford University's Ron McKinnon bemoaned the inefficiency of foreign exchange markets due to the lack of arbitrage funding, which promoted exchange rate volatility and limited the ability of exporters and importers to hedge their risks. Today the foreign exchange markets for most currencies are extremely active for a wide variety of currencies. Important developing countries now enjoy deep markets for currency trading against the major currencies, which promotes greater access to trade and international capital markets.
Limiting the size, complexity and global reach of financial institutions is fraught with downsides for the international economy. We can solve the too-big-to-fail problem without destroying global finance. It certainly is worth a try.
Mr. Calomiris is a professor of finance at Columbia Business School and a research associate of the National Bureau of Economic Research.
Friday, October 16, 2009
Almost two-thirds of all bad mortgages in our financial system were bought by government agencies or required by government regulations
Barney Frank, Predatory Lender. By PETER J. WALLISON
Almost two-thirds of all bad mortgages in our financial system were bought by government agencies or required by government regulations.
WSJ, Oct 16, 2009
Recent reports that the Federal Housing Administration (FHA) will suffer default rates of more than 20% on the 2007 and 2008 loans it guaranteed has raised questions once again about the government's role in the financial crisis and its efforts to achieve social purposes by distorting the financial system.
The FHA's function is to guarantee mortgages of low-income borrowers (the mortgages are then sold through securitizations by Ginnie Mae) and thus to take reasonable credit risks in the interests of making mortgage credit available to the nation's low-income citizens. Accordingly, the larger than normal losses that will result from the 2007 and 2008 cohort could be justified by Barney Frank, the chairman of the House Financial Services Committee, as "policy"—an effort to ease the housing downturn through the application of government credit. The FHA, he argued, is buying more weak mortgages in order to help put a floor under the housing market. Eventually, the taxpayers will have to judge whether this policy was justified.
Far more interesting than the FHA's prospective losses on its 2007 and 2008 book are the agency's losses on its 2005 and 2006 guarantees, when the housing bubble was inflating at its fastest rate and there was no need for government support. FHA-backed loans during those years also have delinquency rates between 20% and 30%. These adverse results—not the result of a "policy" effort to shore up markets—pose a significant challenge to those who are trying to absolve the U.S. government of responsibility for the financial crisis.
When the crisis first arose, the left's explanation was that it was caused by corporate greed, primarily on Wall Street, and by deregulation of the financial system during the Bush administration. The implicit charge was that the financial system was flawed and required broader regulation to keep it out of trouble. As it became clear that there was no financial deregulation during the Bush administration and that the financial crisis was caused by the meltdown of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages—the narrative changed. The new villains were the unregulated mortgage brokers who allegedly earned enormous fees through a new form of "predatory" lending—by putting unsuspecting home buyers into subprime mortgages when they could have afforded prime mortgages. This idea underlies the Obama administration's proposal for a Consumer Financial Protection Agency. The link to the financial crisis—recently emphasized by President Obama—is that these mortgages would not have been made if regulators had been watching those fly-by-night mortgage brokers.
There was always a problem with this theory. Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.
The role of the FHA is particularly difficult to fit into the narrative that the left has been selling. While it might be argued that Fannie and Freddie and insured banks were profit-seekers because they were shareholder-owned, what can explain the fact that the FHA—a government agency—was guaranteeing the same bad mortgages that the unregulated mortgage brokers were supposedly creating through predatory lending?
The answer, of course, is that it was government policy for these poor quality loans to be made. Since the early 1990s, the government has been attempting to expand home ownership in full disregard of the prudent lending principles that had previously governed the U.S. mortgage market. Now the motives of the GSEs fall into place. Fannie and Freddie were subject to "affordable housing" regulations, issued by the Department of Housing and Urban Development (HUD), which required them to buy mortgages made to home buyers who were at or below the median income. This quota began at 30% of all purchases in the early 1990s, and was gradually ratcheted up until it called for 55% of all mortgage purchases to be "affordable" in 2007, including 25% that had to be made to low-income home buyers.
It was not easy to find candidates for traditional mortgages—loans to people with good credit records or the resources for a substantial downpayment—among home buyers who qualified under HUD's guidelines. To meet their affordable housing requirements, therefore, Fannie and Freddie reduced their lending standards and reached into the FHA's turf. The FHA, although it lost market share, continued to guarantee what it could, adding to the demand that the unregulated mortgage brokers filled. If they were engaged in predatory lending, it was ultimately driven by the government's own requirements. The mortgages that resulted are now problem loans for the GSEs, the FHA and the big banks that were required to make them in order to burnish their CRA credentials.
The significance of the FHA's troubles is that this agency had no profit motive. Yet it dipped into the same pool of subprime and other nontraditional mortgages that the GSEs and Wall Street were fishing in. The left cannot have it both ways, blaming the private sector for subprime lending while absolving the government policies that created the demand for subprime loans. If the financial crisis was caused by subprime mortgages and predatory lending, the government's own policies made it happen.
Mr. Walllison is a senior fellow at the American Enterprise Institute.
Almost two-thirds of all bad mortgages in our financial system were bought by government agencies or required by government regulations.
WSJ, Oct 16, 2009
Recent reports that the Federal Housing Administration (FHA) will suffer default rates of more than 20% on the 2007 and 2008 loans it guaranteed has raised questions once again about the government's role in the financial crisis and its efforts to achieve social purposes by distorting the financial system.
The FHA's function is to guarantee mortgages of low-income borrowers (the mortgages are then sold through securitizations by Ginnie Mae) and thus to take reasonable credit risks in the interests of making mortgage credit available to the nation's low-income citizens. Accordingly, the larger than normal losses that will result from the 2007 and 2008 cohort could be justified by Barney Frank, the chairman of the House Financial Services Committee, as "policy"—an effort to ease the housing downturn through the application of government credit. The FHA, he argued, is buying more weak mortgages in order to help put a floor under the housing market. Eventually, the taxpayers will have to judge whether this policy was justified.
Far more interesting than the FHA's prospective losses on its 2007 and 2008 book are the agency's losses on its 2005 and 2006 guarantees, when the housing bubble was inflating at its fastest rate and there was no need for government support. FHA-backed loans during those years also have delinquency rates between 20% and 30%. These adverse results—not the result of a "policy" effort to shore up markets—pose a significant challenge to those who are trying to absolve the U.S. government of responsibility for the financial crisis.
When the crisis first arose, the left's explanation was that it was caused by corporate greed, primarily on Wall Street, and by deregulation of the financial system during the Bush administration. The implicit charge was that the financial system was flawed and required broader regulation to keep it out of trouble. As it became clear that there was no financial deregulation during the Bush administration and that the financial crisis was caused by the meltdown of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages—the narrative changed. The new villains were the unregulated mortgage brokers who allegedly earned enormous fees through a new form of "predatory" lending—by putting unsuspecting home buyers into subprime mortgages when they could have afforded prime mortgages. This idea underlies the Obama administration's proposal for a Consumer Financial Protection Agency. The link to the financial crisis—recently emphasized by President Obama—is that these mortgages would not have been made if regulators had been watching those fly-by-night mortgage brokers.
There was always a problem with this theory. Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.
The role of the FHA is particularly difficult to fit into the narrative that the left has been selling. While it might be argued that Fannie and Freddie and insured banks were profit-seekers because they were shareholder-owned, what can explain the fact that the FHA—a government agency—was guaranteeing the same bad mortgages that the unregulated mortgage brokers were supposedly creating through predatory lending?
The answer, of course, is that it was government policy for these poor quality loans to be made. Since the early 1990s, the government has been attempting to expand home ownership in full disregard of the prudent lending principles that had previously governed the U.S. mortgage market. Now the motives of the GSEs fall into place. Fannie and Freddie were subject to "affordable housing" regulations, issued by the Department of Housing and Urban Development (HUD), which required them to buy mortgages made to home buyers who were at or below the median income. This quota began at 30% of all purchases in the early 1990s, and was gradually ratcheted up until it called for 55% of all mortgage purchases to be "affordable" in 2007, including 25% that had to be made to low-income home buyers.
It was not easy to find candidates for traditional mortgages—loans to people with good credit records or the resources for a substantial downpayment—among home buyers who qualified under HUD's guidelines. To meet their affordable housing requirements, therefore, Fannie and Freddie reduced their lending standards and reached into the FHA's turf. The FHA, although it lost market share, continued to guarantee what it could, adding to the demand that the unregulated mortgage brokers filled. If they were engaged in predatory lending, it was ultimately driven by the government's own requirements. The mortgages that resulted are now problem loans for the GSEs, the FHA and the big banks that were required to make them in order to burnish their CRA credentials.
The significance of the FHA's troubles is that this agency had no profit motive. Yet it dipped into the same pool of subprime and other nontraditional mortgages that the GSEs and Wall Street were fishing in. The left cannot have it both ways, blaming the private sector for subprime lending while absolving the government policies that created the demand for subprime loans. If the financial crisis was caused by subprime mortgages and predatory lending, the government's own policies made it happen.
Mr. Walllison is a senior fellow at the American Enterprise Institute.
Borrow from the Federal Reserve at zero and lend to Treasury for a profit. That's some racket
The Banking System Is Still Broken. By ANN LEE
Borrow from the Federal Reserve at zero and lend to Treasury for a profit. That's some racket.
WSJ, Oct 16, 2009
Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke have announced that the recession is over. Now that the Dow Jones Industrial Average has broken the 10,000 mark, we'll surely be hearing assurances that economic growth is here to stay. But the credit markets are in much worse shape than some indicators suggest.
First of all, not all U.S. banks are created equal. A few multinational banks such as Citigroup are officially too big to fail. Credit spreads in the markets reflect the relatively risk-free nature of these large companies, which now have implicit government guarantees.
But this protection doesn't apply to smaller banks, some of which are being shut down by the FDIC without much media attention. These smaller banks have done most of the lending to the many small and medium-sized enterprises that do the bulk of the hiring in our economy. They've now had to cut off the flow of credit to their clients.
According to Automatic Data Processing Inc.'s August employment report, large businesses shed 60,000 jobs, and employment at medium-sized and small businesses declined by 116,000 and 122,000, respectively, in August alone. Small businesses, defined as employing anywhere from one to 49 people, account for 48 million jobs in the U.S., and medium-sized businesses, between 50 and 499 employees, account for 42 million jobs. Large businesses account for just 17 million. Without access to capital, these small and medium-sized businesses will continue to lay off their employees, creating a vicious cycle of shrinking consumer credit and demand.
The volume of overall bank lending has not returned to pre-crisis levels. While credit spreads have contracted, not much debt has been underwritten. In fact, banks that received government bailout money reduced their average loan balance by $54 billion in July, compared to the previous month, according to the Treasury's Capital Purchase Program Monthly Lending report.
The first reason for this slowdown in lending is that underwriting standards have risen across the board, making it much more difficult for businesses to obtain loans. Institutional investors no longer tolerate the easy loans so characteristic of this latest credit bubble. Banks are now also being asked to retain a portion of any loans they underwrite in order to align their interests with their investors. As a result, credit has scaled back dramatically. According to reports issued by the major rating agencies, in 2007 $700 billion of asset-backed securities were underwritten. Only $10 billion has been issued in 2009. This has a significant knock-on effect across every sector of the economy.
The banks have no incentive to lend. Most of them still have a significant amount of bad loans sitting on their books that they don't want to recognize as nonperforming. If the banks recognize these bad loans, all the write-offs may force them into bankruptcy. Instead, they hope that over time renegotiated loan terms will eventually allow the borrowers to make their payments. This ordeal could last at least a decade if this cycle is similar to other crises, like Japan's lost decade of the 1990s. As the fed funds rate goes to zero and existing loans in technical default continue to sit in bank portfolios, why should banks make new loans when they can make money for free with the government? There is no longer a stigma associated with borrowing from the Fed, so banks can earn a huge spread by borrowing virtually unlimited amounts for nothing and lending that same money back to the Treasury.
Wall Street will most definitely get richer again. But a return to easy credit for the average consumer and business is not likely in the near future. The only reason that credit spreads have tightened is because of the extraordinary interventions by the Fed and the Treasury.
Such unprecedented actions by the government have led to speculation over when inflation might get out of control. But why not question whether our current banking system actually makes any sense? Rather than giving capital to businesses with real products and services, Wall Street plays a government-backed shell game, enriching bankers' pockets at everyone else's expense.
If banks are being supported by taxpayer dollars as a public good, wouldn't it be logical to make Citigroup and Goldman part of the government so that they can serve the public like the Department of Motor Vehicles? The powerful banking lobby will likely prevent the nationalization of the entire banking system. But expect new challenges to our assumptions about the status quo if this recovery and the proposed regulatory reforms fail.
Ms. Lee, an adjunct professor at New York University, is a former investment banker and hedge-fund partner.
Borrow from the Federal Reserve at zero and lend to Treasury for a profit. That's some racket.
WSJ, Oct 16, 2009
Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke have announced that the recession is over. Now that the Dow Jones Industrial Average has broken the 10,000 mark, we'll surely be hearing assurances that economic growth is here to stay. But the credit markets are in much worse shape than some indicators suggest.
First of all, not all U.S. banks are created equal. A few multinational banks such as Citigroup are officially too big to fail. Credit spreads in the markets reflect the relatively risk-free nature of these large companies, which now have implicit government guarantees.
But this protection doesn't apply to smaller banks, some of which are being shut down by the FDIC without much media attention. These smaller banks have done most of the lending to the many small and medium-sized enterprises that do the bulk of the hiring in our economy. They've now had to cut off the flow of credit to their clients.
According to Automatic Data Processing Inc.'s August employment report, large businesses shed 60,000 jobs, and employment at medium-sized and small businesses declined by 116,000 and 122,000, respectively, in August alone. Small businesses, defined as employing anywhere from one to 49 people, account for 48 million jobs in the U.S., and medium-sized businesses, between 50 and 499 employees, account for 42 million jobs. Large businesses account for just 17 million. Without access to capital, these small and medium-sized businesses will continue to lay off their employees, creating a vicious cycle of shrinking consumer credit and demand.
The volume of overall bank lending has not returned to pre-crisis levels. While credit spreads have contracted, not much debt has been underwritten. In fact, banks that received government bailout money reduced their average loan balance by $54 billion in July, compared to the previous month, according to the Treasury's Capital Purchase Program Monthly Lending report.
The first reason for this slowdown in lending is that underwriting standards have risen across the board, making it much more difficult for businesses to obtain loans. Institutional investors no longer tolerate the easy loans so characteristic of this latest credit bubble. Banks are now also being asked to retain a portion of any loans they underwrite in order to align their interests with their investors. As a result, credit has scaled back dramatically. According to reports issued by the major rating agencies, in 2007 $700 billion of asset-backed securities were underwritten. Only $10 billion has been issued in 2009. This has a significant knock-on effect across every sector of the economy.
The banks have no incentive to lend. Most of them still have a significant amount of bad loans sitting on their books that they don't want to recognize as nonperforming. If the banks recognize these bad loans, all the write-offs may force them into bankruptcy. Instead, they hope that over time renegotiated loan terms will eventually allow the borrowers to make their payments. This ordeal could last at least a decade if this cycle is similar to other crises, like Japan's lost decade of the 1990s. As the fed funds rate goes to zero and existing loans in technical default continue to sit in bank portfolios, why should banks make new loans when they can make money for free with the government? There is no longer a stigma associated with borrowing from the Fed, so banks can earn a huge spread by borrowing virtually unlimited amounts for nothing and lending that same money back to the Treasury.
Wall Street will most definitely get richer again. But a return to easy credit for the average consumer and business is not likely in the near future. The only reason that credit spreads have tightened is because of the extraordinary interventions by the Fed and the Treasury.
Such unprecedented actions by the government have led to speculation over when inflation might get out of control. But why not question whether our current banking system actually makes any sense? Rather than giving capital to businesses with real products and services, Wall Street plays a government-backed shell game, enriching bankers' pockets at everyone else's expense.
If banks are being supported by taxpayer dollars as a public good, wouldn't it be logical to make Citigroup and Goldman part of the government so that they can serve the public like the Department of Motor Vehicles? The powerful banking lobby will likely prevent the nationalization of the entire banking system. But expect new challenges to our assumptions about the status quo if this recovery and the proposed regulatory reforms fail.
Ms. Lee, an adjunct professor at New York University, is a former investment banker and hedge-fund partner.
Al From: Democrats Don't Need the Public Option - Transformational reforms have always passed with bipartisan majorities
Democrats Don't Need the Public Option. By AL FROM
Transformational reforms have always passed with bipartisan majorities.
WSJ, Oct 16, 2009
Now that the Senate Finance Committee has voted for a health-care bill that does not include a government-run plan, it would be a mistake for Democrats to insist on adding the public option to reform legislation this year.
By insisting on the public option, liberal Democrats will allow the Republicans, who have no ideas of their own, to cloud the prospects for reform. If this happens, Republicans will be able to divert attention away from reforms most Americans want and instead focus on what Americans disagree on—whether we need a new government-run health plan.
As President Barack Obama has made clear, we need to reform. Right now, health insurance is too costly and the health-insurance market is not competitive enough. Too many people lack insurance or the chance to choose a plan that best suits their needs. Too many people are denied coverage because of pre-existing conditions or lose their coverage when they become sick. And our most successful public program—Medicare—is on the road to going broke. Doing nothing is not acceptable.
With control of the White House and Congress, the American people will rightly hold Democrats accountable for the outcome of the health debate. At the same time, the focus on the public option and level of discord it has generated is already taking a toll on the president's approval ratings and hurting the party more generally. In January, Democrats enjoyed a double digit lead on the "generic ballot"—a measure of support for a party. Last week, a Gallup poll showed that Democrats are now essentially in a dead heat with Republicans on the generic ballot. Particularly significant, the poll showed a nearly 20-point drop in Democratic support since the last election among independents, the key to our victories in 2006 and 2008. Insisting on the public option could cost many Blue Dogs in the House and a number of red-state moderates in the Senate their seats.
Now is the time for Mr. Obama to lead the way to historic health-care reform. He's the only one who can. I'd suggest he do so by taking these three steps:
• First, say unequivocally that he wants a plan that jettisons the public option and contains real reforms to cut health-care costs. As the Senate Finance Committee bill shows, a public option is unnecessary to expand coverage. Dropping it should win support of most centrist Democrats.
• Second, make clear that he does not want Congress to use parliamentary maneuvers, like the budget reconciliation process, to ram through a bill that can't command 60 votes in the Senate. Health-care reform needs broad support; it is too important and too controversial for Congress to pass by resorting to legislative chicanery or short-circuiting the legislative process.
• And finally, make one more effort to bring moderate Republicans along. Transformational reforms, such as civil rights legislation and Medicare in the 1960s, have always been passed with bipartisan majorities. Health-care reform should be no exception. The president promised a post-partisan politics. What better place to forge it than on his most important initiative?
If Mr. Obama takes these steps, I'm convinced Congress would pass a bill that requires every American to buy insurance, offers consumers a choice of plans through a new health exchange like the successful Commonwealth Connector in Massachusetts, provides subsidies that assure everyone can afford a basic plan, and prevents insurance companies from denying coverage to people with pre-existing conditions or dropping coverage for people who become sick. All of these are reforms most American can agree on.
I'd personally like to see health-care reform include fees (as the president proposed) on Cadillac health-care plans, incentives to replace fee-for-service payments with more cost-effective models (the best way to bring down health-care costs over the long haul), and measures to limit abuses in malpractice suits (which Republicans have long called for).
Such a plan would meet the objectives the president has already outlined—expanding coverage, lowering costs, and improving quality—without adding to the federal deficit. With centrist Democrats signed on, such a plan should garner the 60 votes necessary to pass the Senate. Even without a public option, it would achieve most of what liberals have long fought for. Open-minded Republicans might even find it hard to resist.
Mr. From, the principal of The From Company LLC, is the founder of the Democratic Leadership Council.
Transformational reforms have always passed with bipartisan majorities.
WSJ, Oct 16, 2009
Now that the Senate Finance Committee has voted for a health-care bill that does not include a government-run plan, it would be a mistake for Democrats to insist on adding the public option to reform legislation this year.
By insisting on the public option, liberal Democrats will allow the Republicans, who have no ideas of their own, to cloud the prospects for reform. If this happens, Republicans will be able to divert attention away from reforms most Americans want and instead focus on what Americans disagree on—whether we need a new government-run health plan.
As President Barack Obama has made clear, we need to reform. Right now, health insurance is too costly and the health-insurance market is not competitive enough. Too many people lack insurance or the chance to choose a plan that best suits their needs. Too many people are denied coverage because of pre-existing conditions or lose their coverage when they become sick. And our most successful public program—Medicare—is on the road to going broke. Doing nothing is not acceptable.
With control of the White House and Congress, the American people will rightly hold Democrats accountable for the outcome of the health debate. At the same time, the focus on the public option and level of discord it has generated is already taking a toll on the president's approval ratings and hurting the party more generally. In January, Democrats enjoyed a double digit lead on the "generic ballot"—a measure of support for a party. Last week, a Gallup poll showed that Democrats are now essentially in a dead heat with Republicans on the generic ballot. Particularly significant, the poll showed a nearly 20-point drop in Democratic support since the last election among independents, the key to our victories in 2006 and 2008. Insisting on the public option could cost many Blue Dogs in the House and a number of red-state moderates in the Senate their seats.
Now is the time for Mr. Obama to lead the way to historic health-care reform. He's the only one who can. I'd suggest he do so by taking these three steps:
• First, say unequivocally that he wants a plan that jettisons the public option and contains real reforms to cut health-care costs. As the Senate Finance Committee bill shows, a public option is unnecessary to expand coverage. Dropping it should win support of most centrist Democrats.
• Second, make clear that he does not want Congress to use parliamentary maneuvers, like the budget reconciliation process, to ram through a bill that can't command 60 votes in the Senate. Health-care reform needs broad support; it is too important and too controversial for Congress to pass by resorting to legislative chicanery or short-circuiting the legislative process.
• And finally, make one more effort to bring moderate Republicans along. Transformational reforms, such as civil rights legislation and Medicare in the 1960s, have always been passed with bipartisan majorities. Health-care reform should be no exception. The president promised a post-partisan politics. What better place to forge it than on his most important initiative?
If Mr. Obama takes these steps, I'm convinced Congress would pass a bill that requires every American to buy insurance, offers consumers a choice of plans through a new health exchange like the successful Commonwealth Connector in Massachusetts, provides subsidies that assure everyone can afford a basic plan, and prevents insurance companies from denying coverage to people with pre-existing conditions or dropping coverage for people who become sick. All of these are reforms most American can agree on.
I'd personally like to see health-care reform include fees (as the president proposed) on Cadillac health-care plans, incentives to replace fee-for-service payments with more cost-effective models (the best way to bring down health-care costs over the long haul), and measures to limit abuses in malpractice suits (which Republicans have long called for).
Such a plan would meet the objectives the president has already outlined—expanding coverage, lowering costs, and improving quality—without adding to the federal deficit. With centrist Democrats signed on, such a plan should garner the 60 votes necessary to pass the Senate. Even without a public option, it would achieve most of what liberals have long fought for. Open-minded Republicans might even find it hard to resist.
Mr. From, the principal of The From Company LLC, is the founder of the Democratic Leadership Council.
Thursday, October 15, 2009
Trading book quantitative impact study by the Basel Committee: results
Trading book quantitative impact study by the Basel Committee: results
BIS, October 15, 2009
The Basel Committee on Banking Supervision issued today the results of its recent trading book quantitative impact study, which assesses the impact of the revisions to the 1996 rules governing trading book capital. These revisions, which were originally published by the Committee in January 2009, were subsequently adopted in July 2009.
Excluding the so-called correlation trading portfolio, the study concludes that the changes to the market risk framework will increase average trading book capital requirements by two to three times their current levels, although the Committee noted significant dispersion around this average. Based on the results of the study, the Committee decided to maintain the original calibration as proposed in its January consultative package and as adopted in July 2009.
Mr Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, noted that "increasingly complex trading book exposures were a major driver of losses in the recent crisis". He added: "The reforms will ensure that these exposures are backed by a sufficient capital cushion, help address procyclicality of trading book capital requirements, and limit arbitrage opportunities between the trading book and the banking book."
The Committee will conduct a further impact study, which will evaluate a floor for the comprehensive risk capital charge for correlation trading portfolios. This impact study will be completed in 2010. The trading book requirements will be implemented no later than 31 December 2010.
Technical background
The Committee's new trading book rules set a multiplier of three for both the current and stressed value-at-risk measures as well as a three-month floor on the liquidity horizon used in incremental and comprehensive risk capital requirements. The incremental risk measure includes default risk as well as migration risk for unsecuritised credit products held in the trading book. The comprehensive risk measure can be applied to banks' correlation trading portfolios and captures not just incremental default and migration risks, but all price risks.
Full study: http://www.bis.org/publ/bcbs163.pdf
BIS, October 15, 2009
The Basel Committee on Banking Supervision issued today the results of its recent trading book quantitative impact study, which assesses the impact of the revisions to the 1996 rules governing trading book capital. These revisions, which were originally published by the Committee in January 2009, were subsequently adopted in July 2009.
Excluding the so-called correlation trading portfolio, the study concludes that the changes to the market risk framework will increase average trading book capital requirements by two to three times their current levels, although the Committee noted significant dispersion around this average. Based on the results of the study, the Committee decided to maintain the original calibration as proposed in its January consultative package and as adopted in July 2009.
Mr Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, noted that "increasingly complex trading book exposures were a major driver of losses in the recent crisis". He added: "The reforms will ensure that these exposures are backed by a sufficient capital cushion, help address procyclicality of trading book capital requirements, and limit arbitrage opportunities between the trading book and the banking book."
The Committee will conduct a further impact study, which will evaluate a floor for the comprehensive risk capital charge for correlation trading portfolios. This impact study will be completed in 2010. The trading book requirements will be implemented no later than 31 December 2010.
Technical background
The Committee's new trading book rules set a multiplier of three for both the current and stressed value-at-risk measures as well as a three-month floor on the liquidity horizon used in incremental and comprehensive risk capital requirements. The incremental risk measure includes default risk as well as migration risk for unsecuritised credit products held in the trading book. The comprehensive risk measure can be applied to banks' correlation trading portfolios and captures not just incremental default and migration risks, but all price risks.
Full study: http://www.bis.org/publ/bcbs163.pdf
US Support for the Arms Trade Treaty
Arms Control and International Security: U.S. Support for the Arms Trade Treaty. By Hillary Rodham Clinton, Secretary of State
Washington, DC, October 14, 2009
Conventional arms transfers are a crucial national security concern for the United States, and we have always supported effective action to control the international transfer of arms.
The United States is prepared to work hard for a strong international standard in this area by seizing the opportunity presented by the Conference on the Arms Trade Treaty at the United Nations. As long as that Conference operates under the rule of consensus decision-making needed to ensure that all countries can be held to standards that will actually improve the global situation by denying arms to those who would abuse them, the United States will actively support the negotiations. Consensus is needed to ensure the widest possible support for the Treaty and to avoid loopholes in the Treaty that can be exploited by those wishing to export arms irresponsibly.
On a national basis, the United States has in place an extensive and rigorous system of controls that most agree is the “gold standard” of export controls for arms transfers. On a bilateral basis, the United States regularly engages other states to raise their standards and to prohibit the transfer or transshipment of capabilities to rogue states, terrorist groups, and groups seeking to unsettle regions. Multilaterally, we have consistently supported high international standards, and the Arms Trade Treaty initiative presents us with the opportunity to promote the same high standards for the entire international community that the United States and other responsible arms exporters already have in place to ensure that weaponry is transferred for legitimate purposes.
The United States is committed to actively pursuing a strong and robust treaty that contains the highest possible, legally binding standards for the international transfer of conventional weapons. We look forward to this negotiation as the continuation of the process that began in the UN with the 2008 UN Group of Governmental Experts on the ATT and continued with the 2009 UN Open-Ended Working Group on ATT.
PRN: 2009/1022
Washington, DC, October 14, 2009
Conventional arms transfers are a crucial national security concern for the United States, and we have always supported effective action to control the international transfer of arms.
The United States is prepared to work hard for a strong international standard in this area by seizing the opportunity presented by the Conference on the Arms Trade Treaty at the United Nations. As long as that Conference operates under the rule of consensus decision-making needed to ensure that all countries can be held to standards that will actually improve the global situation by denying arms to those who would abuse them, the United States will actively support the negotiations. Consensus is needed to ensure the widest possible support for the Treaty and to avoid loopholes in the Treaty that can be exploited by those wishing to export arms irresponsibly.
On a national basis, the United States has in place an extensive and rigorous system of controls that most agree is the “gold standard” of export controls for arms transfers. On a bilateral basis, the United States regularly engages other states to raise their standards and to prohibit the transfer or transshipment of capabilities to rogue states, terrorist groups, and groups seeking to unsettle regions. Multilaterally, we have consistently supported high international standards, and the Arms Trade Treaty initiative presents us with the opportunity to promote the same high standards for the entire international community that the United States and other responsible arms exporters already have in place to ensure that weaponry is transferred for legitimate purposes.
The United States is committed to actively pursuing a strong and robust treaty that contains the highest possible, legally binding standards for the international transfer of conventional weapons. We look forward to this negotiation as the continuation of the process that began in the UN with the 2008 UN Group of Governmental Experts on the ATT and continued with the 2009 UN Open-Ended Working Group on ATT.
PRN: 2009/1022
Robert Reich, 2007: if you're very old, [i]t's too expensive, so we're going to let you die
Robert Reich, 2007: if you're very old, [i]t's too expensive, so we're going to let you die
WSJ, Oct 15, 2009
Robert Reich, who served as President Clinton's labor secretary, delivered on the subject in 2007:
I will actually give you a speech made up entirely--almost at the spur of the moment, of what a candidate for president would say if that candidate did not care about becoming president. In other words, this is what the truth is, and a candidate will never say, but what candidates should say if we were in a kind of democracy where citizens were honored in terms of their practice of citizenship, and they were educated in terms of what the issues were, and they could separate myth from reality in terms of what candidates would tell them:
"Thank you so much for coming this afternoon. I'm so glad to see you, and I would like to be president. Let me tell you a few things on health care. Look, we have the only health-care system in the world that is designed to avoid sick people. [laughter] That's true, and what I'm going to do is I am going to try to reorganize it to be more amenable to treating sick people. But that means you--particularly you young people, particularly you young, healthy people--you're going to have to pay more. [applause] Thank you.
"And by the way, we are going to have to--if you're very old, we're not going to give you all that technology and all those drugs for the last couple of years of your life to keep you maybe going for another couple of months. It's too expensive, so we're going to let you die. [applause]
"Also, I'm going to use the bargaining leverage of the federal government in terms of Medicare, Medicaid--we already have a lot of bargaining leverage--to force drug companies and insurance companies and medical suppliers to reduce their costs. But that means less innovation, and that means less new products and less new drugs on the market, which means you are probably not going to live that much longer than your parents. [applause] Thank you."
WSJ, Oct 15, 2009
Robert Reich, who served as President Clinton's labor secretary, delivered on the subject in 2007:
I will actually give you a speech made up entirely--almost at the spur of the moment, of what a candidate for president would say if that candidate did not care about becoming president. In other words, this is what the truth is, and a candidate will never say, but what candidates should say if we were in a kind of democracy where citizens were honored in terms of their practice of citizenship, and they were educated in terms of what the issues were, and they could separate myth from reality in terms of what candidates would tell them:
"Thank you so much for coming this afternoon. I'm so glad to see you, and I would like to be president. Let me tell you a few things on health care. Look, we have the only health-care system in the world that is designed to avoid sick people. [laughter] That's true, and what I'm going to do is I am going to try to reorganize it to be more amenable to treating sick people. But that means you--particularly you young people, particularly you young, healthy people--you're going to have to pay more. [applause] Thank you.
"And by the way, we are going to have to--if you're very old, we're not going to give you all that technology and all those drugs for the last couple of years of your life to keep you maybe going for another couple of months. It's too expensive, so we're going to let you die. [applause]
"Also, I'm going to use the bargaining leverage of the federal government in terms of Medicare, Medicaid--we already have a lot of bargaining leverage--to force drug companies and insurance companies and medical suppliers to reduce their costs. But that means less innovation, and that means less new products and less new drugs on the market, which means you are probably not going to live that much longer than your parents. [applause] Thank you."
Wednesday, October 14, 2009
The US dollar shortage in global banking and the international policy response
The US dollar shortage in global banking and the international policy response, by Goetz von Peter and Patrick McGuire
BIS Working Papers No 291, October 2009
Abstract:
Among the policy responses to the global financial crisis, the international provision of US dollars via central bank swap lines stands out. This paper studies the build-up of stresses on banks' balance sheets that led to this coordinated policy response. Using the BIS international banking statistics, we reconstruct the worldwide consolidated balance sheets of the major national banking systems. This allows us to investigate the structure of banks' global operations across their offices in various countries, shedding light on how their international asset positions are funded across currencies and counterparties. The analysis first highlights why a country's "national balance sheet", a residency-based measure, can be a misleading guide to where the vulnerabilities faced by that country's national banking system (or residents) lie. It then focuses on banking systems' consolidated balance sheets, and shows how the growth (since 2000) in European and Japanese banks' US dollar assets produced structural US dollar funding requirements, setting the stage for the dollar shortage when interbank and swap markets became impaired.
JEL Classification Numbers: F34, F55, G01, G21
Keywords: international banking, financial crises, funding risk, US dollar shortage, central bank swap lines
Full text: http://www.bis.org/publ/work291.pdf
BIS Working Papers No 291, October 2009
Abstract:
Among the policy responses to the global financial crisis, the international provision of US dollars via central bank swap lines stands out. This paper studies the build-up of stresses on banks' balance sheets that led to this coordinated policy response. Using the BIS international banking statistics, we reconstruct the worldwide consolidated balance sheets of the major national banking systems. This allows us to investigate the structure of banks' global operations across their offices in various countries, shedding light on how their international asset positions are funded across currencies and counterparties. The analysis first highlights why a country's "national balance sheet", a residency-based measure, can be a misleading guide to where the vulnerabilities faced by that country's national banking system (or residents) lie. It then focuses on banking systems' consolidated balance sheets, and shows how the growth (since 2000) in European and Japanese banks' US dollar assets produced structural US dollar funding requirements, setting the stage for the dollar shortage when interbank and swap markets became impaired.
JEL Classification Numbers: F34, F55, G01, G21
Keywords: international banking, financial crises, funding risk, US dollar shortage, central bank swap lines
Full text: http://www.bis.org/publ/work291.pdf
Tuesday, October 13, 2009
Deficits and the Chinese Challenge - Debt can become a real liability for a superpower. Recall what happened to postwar Britain
Deficits and the Chinese Challenge. By ZACHARY KARABELL
Debt can become a real liability for a superpower. Recall what happened to postwar Britain.
WSJ, Oct 13, 2009
The dollar's sharp drop over the past few weeks has led to considerable anxiety about the status of the United States as the dominant force in the global economy. Closely related to this fear is constant worry about the rise of China and the evermore complicated relationship between Beijing and Washington.
Most people are now aware that China is the largest creditor to a heavily indebted U.S. government. It holds close to a trillion dollars of U.S. Treasurys and has invested hundreds of billions more in private enterprises in America. Even though these facts are plainly acknowledged, policy makers and experts continue to underestimate the full ramifications of this relationship.
Consider what happened in 1946, when a cash-strapped Great Britain turned to the U.S. for a loan. For 30 years or more, the British had been consumed by the threat of a rising Germany. Two wars had been fought, millions of lives had been lost, and the British treasury was dramatically depleted in the process. Britain survived, but the costs were substantial.
In spite of its global empire, a powerful military, and an enviable position at the center of world-wide commerce, in early 1946 the British government faced a serious risk of defaulting on its financial obligations. So it did what it had done at various points over the previous decade and turned to its closest ally for assistance. It asked the U.S. for a loan of $5 billion at zero-interest repayable over 50 years. As generous as those terms seem today, such financing had been almost routine in years prior. To the surprise and shock of the British, Washington refused.
Unable to take no for answer, Britain explained that unless it received funds the government would be insolvent. The Americans came back with a series of conditions. They would lend Britain $3.7 billion at 2% interest, and the British government would have to abide by the 1944 Bretton Woods plan, which made the dollar rather than the pound sterling the reference point for global exchange rates and required Britain to make the pound freely convertible. Even more significantly, Britain had to end its system of imperial preferences, which meant no more tariffs and duties on goods to and from colonies such as India. These were not mere financial penalties: Taken together, they meant the end of the British Empire.
Within two years, Britain had left India and was on its way to decolonizing throughout Asia and Africa. Unable to compete with the United States economically and no longer able to reap the benefits of colonial trade, Britain's military shrank and its commerce contracted. It quickly receded from its dominant global position and entered several decades of economic malaise. In the 1980s, Britain finally emerged as a prosperous country, but it was a shadow of what it had been in its heyday.
The U.S. replaced Britain as the guardian of the West. As one British official, Evelyn Shuckburgh, remarked in the late 1940s, "it was impossible not to be conscious that we were playing second fiddle." And that was precisely what the U.S. desired. Having supported the British for decades and become its banker and manufacturer during two wars, at the end of World War II the U.S. fully intended to supplant the British Empire. The loan request provided the pretext, but by then the balance had already shifted and Britain could have done little to reverse the tide.
By 2030—if not sooner—China is likely to surpass the U.S. in the size of its economy, though it will remain on a per capita basis a much poorer society for many years after that. Trajectories can change, but the recent implosion of the American financial system has only accelerated China's rise.
Given the lesson of the British Empire's demise, it would be foolish to base current policy on the assumption that China will hit a fatal speed-bump before it is able to supplant the U.S. And while the level of current indebtedness is manageable for the U.S.—and in fact tethers the Chinese closely to the U.S. economy in ways that are arguably beneficial for both countries—the fact that these economies are currently bound together does not mean that their interests will always be in sync.
Here, too, the British analogy is sobering. For decades, the relationship between Britain and the U.S. was mutually beneficial, though the Americans resented being treated as junior partners. As tension festered, the British were consumed with the more immediate threat of Germany. But in the end it was the U.S. that delivered the knockout blow.
The Americans have not had to deal with a true economic rival since the British more than half a century ago. America today is as unaccustomed to global economic competition as the British were at their apex. The U.S. often seems lumbering and ill-suited to the demands of economic rivalry.
The only way to avoid Britain's fate and meet the challenge of China is to reinvigorate economic life. This is a multiyear endeavor that must be done primarily through innovation, not legislation. America needs to retool its domestic economy to build on the global success of many U.S. companies. It must focus on inventing new products and generating new ideas, rather than defending the rusty industries of yesterday. Fights over health care and climate change are the cultural equivalent of fiddling while Rome burns.
China thrives because it is hungry, dynamic, scared of failure and convinced that it should be a leading force in the world. That is why America thrived a century ago. Today, such hunger and dynamism seem less evident in American life than petulance that the world is not cooperating.
The U.S. is in danger of assuming that because it has been a dominant nation on the world stage, it must continue to be so. That is a recipe for becoming Britain.
Mr. Karabell is the author of "Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It," just published by Simon & Schuster.
Debt can become a real liability for a superpower. Recall what happened to postwar Britain.
WSJ, Oct 13, 2009
The dollar's sharp drop over the past few weeks has led to considerable anxiety about the status of the United States as the dominant force in the global economy. Closely related to this fear is constant worry about the rise of China and the evermore complicated relationship between Beijing and Washington.
Most people are now aware that China is the largest creditor to a heavily indebted U.S. government. It holds close to a trillion dollars of U.S. Treasurys and has invested hundreds of billions more in private enterprises in America. Even though these facts are plainly acknowledged, policy makers and experts continue to underestimate the full ramifications of this relationship.
Consider what happened in 1946, when a cash-strapped Great Britain turned to the U.S. for a loan. For 30 years or more, the British had been consumed by the threat of a rising Germany. Two wars had been fought, millions of lives had been lost, and the British treasury was dramatically depleted in the process. Britain survived, but the costs were substantial.
In spite of its global empire, a powerful military, and an enviable position at the center of world-wide commerce, in early 1946 the British government faced a serious risk of defaulting on its financial obligations. So it did what it had done at various points over the previous decade and turned to its closest ally for assistance. It asked the U.S. for a loan of $5 billion at zero-interest repayable over 50 years. As generous as those terms seem today, such financing had been almost routine in years prior. To the surprise and shock of the British, Washington refused.
Unable to take no for answer, Britain explained that unless it received funds the government would be insolvent. The Americans came back with a series of conditions. They would lend Britain $3.7 billion at 2% interest, and the British government would have to abide by the 1944 Bretton Woods plan, which made the dollar rather than the pound sterling the reference point for global exchange rates and required Britain to make the pound freely convertible. Even more significantly, Britain had to end its system of imperial preferences, which meant no more tariffs and duties on goods to and from colonies such as India. These were not mere financial penalties: Taken together, they meant the end of the British Empire.
Within two years, Britain had left India and was on its way to decolonizing throughout Asia and Africa. Unable to compete with the United States economically and no longer able to reap the benefits of colonial trade, Britain's military shrank and its commerce contracted. It quickly receded from its dominant global position and entered several decades of economic malaise. In the 1980s, Britain finally emerged as a prosperous country, but it was a shadow of what it had been in its heyday.
The U.S. replaced Britain as the guardian of the West. As one British official, Evelyn Shuckburgh, remarked in the late 1940s, "it was impossible not to be conscious that we were playing second fiddle." And that was precisely what the U.S. desired. Having supported the British for decades and become its banker and manufacturer during two wars, at the end of World War II the U.S. fully intended to supplant the British Empire. The loan request provided the pretext, but by then the balance had already shifted and Britain could have done little to reverse the tide.
By 2030—if not sooner—China is likely to surpass the U.S. in the size of its economy, though it will remain on a per capita basis a much poorer society for many years after that. Trajectories can change, but the recent implosion of the American financial system has only accelerated China's rise.
Given the lesson of the British Empire's demise, it would be foolish to base current policy on the assumption that China will hit a fatal speed-bump before it is able to supplant the U.S. And while the level of current indebtedness is manageable for the U.S.—and in fact tethers the Chinese closely to the U.S. economy in ways that are arguably beneficial for both countries—the fact that these economies are currently bound together does not mean that their interests will always be in sync.
Here, too, the British analogy is sobering. For decades, the relationship between Britain and the U.S. was mutually beneficial, though the Americans resented being treated as junior partners. As tension festered, the British were consumed with the more immediate threat of Germany. But in the end it was the U.S. that delivered the knockout blow.
The Americans have not had to deal with a true economic rival since the British more than half a century ago. America today is as unaccustomed to global economic competition as the British were at their apex. The U.S. often seems lumbering and ill-suited to the demands of economic rivalry.
The only way to avoid Britain's fate and meet the challenge of China is to reinvigorate economic life. This is a multiyear endeavor that must be done primarily through innovation, not legislation. America needs to retool its domestic economy to build on the global success of many U.S. companies. It must focus on inventing new products and generating new ideas, rather than defending the rusty industries of yesterday. Fights over health care and climate change are the cultural equivalent of fiddling while Rome burns.
China thrives because it is hungry, dynamic, scared of failure and convinced that it should be a leading force in the world. That is why America thrived a century ago. Today, such hunger and dynamism seem less evident in American life than petulance that the world is not cooperating.
The U.S. is in danger of assuming that because it has been a dominant nation on the world stage, it must continue to be so. That is a recipe for becoming Britain.
Mr. Karabell is the author of "Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It," just published by Simon & Schuster.
Thursday, October 8, 2009
Mutual guarantee institutions "are better than banks at screening and monitoring opaque borrowers"
Mutual guarantee institutions and small business finance, by Francesco Columba, Leonardo Gambacorta and Paolo Emilio Mistrulli
BIS Working Papers No 290
October 2009
Abstract:
A large body of literature has shown that small firms experience difficulties in accessing the credit market due to informational asymmetries. Banks can overcome these asymmetries through relationship lending, or at least mitigate their effects by asking for collateral. Small firms, especially if they are young, have little collateral and short credit histories, and thus may find it difficult to raise funds from banks. In this paper, we show that even in this case, small firms may improve their borrowing capacity by joining mutual guarantee institutions (MGIs).
Our empirical analysis shows that small firms affiliated with MGIs pay less for credit compared with similar firms which are not MGI members. We obtain this result for interest rates charged on loan contracts which are not backed by mutual guarantees. We then argue that our findings are consistent with the view that MGIs are better than banks at screening and monitoring opaque borrowers. Thus, banks benefit from the willingness of MGIs to post collateral since it implies that firms are better screened and monitored.
JEL Classification Numbers: D82, G21, G30, O16
Keywords: credit guarantee schemes, joint liability, microfinance, peer monitoring, small business finance
BIS Working Papers No 290
October 2009
Abstract:
A large body of literature has shown that small firms experience difficulties in accessing the credit market due to informational asymmetries. Banks can overcome these asymmetries through relationship lending, or at least mitigate their effects by asking for collateral. Small firms, especially if they are young, have little collateral and short credit histories, and thus may find it difficult to raise funds from banks. In this paper, we show that even in this case, small firms may improve their borrowing capacity by joining mutual guarantee institutions (MGIs).
Our empirical analysis shows that small firms affiliated with MGIs pay less for credit compared with similar firms which are not MGI members. We obtain this result for interest rates charged on loan contracts which are not backed by mutual guarantees. We then argue that our findings are consistent with the view that MGIs are better than banks at screening and monitoring opaque borrowers. Thus, banks benefit from the willingness of MGIs to post collateral since it implies that firms are better screened and monitored.
JEL Classification Numbers: D82, G21, G30, O16
Keywords: credit guarantee schemes, joint liability, microfinance, peer monitoring, small business finance
Has the economic stimulus program helped or hurt?
Stimulus Scam, by Richard W. Rahn
Cato
The Washington Times on October 8, 2009
Has the economic stimulus program helped or hurt? Administration officials keep saying the stimulus program has been beneficial, but where is the evidence?
There are several ways to see if it is working as advertised. First, what did the proponents say would happen when they were pushing the plan versus what has happened? Second, how has the United States fared compared to other nations that had smaller or no stimulus programs? Third, how have the results to date compared to what pro-stimulus, Keynesian-school economic theorists advocated versus what other theorists (principally Austrian-school) who largely opposed the stimulus plans said?
U.S. unemployment already has reached 9.8 percent, with 15.1 million Americans unemployed, and more than 7.1 million jobs have been eliminated since the beginning of the recession. President Obama's economic advisers said in the beginning of this year that the unemployment rate would rise to 9 percent with no stimulus package and would only rise to a maximum of 7.9 percent with the stimulus bill, peaking during this past summer. Stimulus proponents clearly have failed the first test (despite Vice President Joseph R. Biden Jr.'s revisionist statements) and there is zero evidence for their claims that more jobs would have been lost without the stimulus package.
One might argue that the stimulus had worked if the results in the United States were better than in other countries that had smaller or no stimulus packages. The recession has been global, and every country has been affected negatively. Only Great Britain attempted to put in a stimulus package that was relatively as large as the U.S. package. A crude measure of economic stimulus is the size of the deficit relative to gross domestic product. During recessions, tax revenues decline in all countries, so most will run a deficit whether they intend to or not. A stimulus package normally contains a mix of government spending increases and tax cuts, resulting in a deliberately larger deficit.
The United States and Britain have by far and away run the largest deficits as a percentage of GDP (i.e. the most stimulus), yet the U.S. and Britain, along with Italy and Russia, had not bottomed out in second-quarter 2009, while the rest of the 10 largest economies were showing real growth in the second quarter. Russia's poor performance is largely a function of relying very heavily on the export of raw materials rather than developing a broad-based economy as all the others in the Big 10 have done.
The three countries with the smallest deficits (the least stimulus) — Brazil, China and Germany — have all turned the corner rather quickly and are growing. German Chancellor Angela Merkel has just announced she is going to push tax cuts, which should give the German economy an additional shot in the arm.
While the data set is too small with the top 10 countries (which collectively account for a large majority of the world's GDP) to draw definitive conclusions, the existing evidence indicates that a big stimulus package seems to delay recovery, while little stimulus leads to a quick return to economic growth.
Finally, what do the competing economic theorists say? The Keynesians say that if the government increases spending to stimulate demand and create jobs for those who do not have them, this should lead to a less painful downturn and a quicker recovery. The Austrian (aka Hayekians) free-market sorts say recoveries occur on their own once asset and labor prices fall from inflated levels of the previous boom and excess inventories are worked off. This usually happens within 16 months unless government attempts to mitigate these necessary price adjustments, which will delay the recovery. (Apologies to both my Austrian and Keynesian friends for trying to summarize their views in one short paragraph.)
The Keynesians never really get a fair test of their theory because politicians always take the Keynesian notion that it is OK to increase government spending as a license to spend the extra money on themselves and their friends rather than on those who might actually benefit. (This self-dealing process is well explained by the public-choice school of economics.) A few examples from the current stimulus program should suffice. Congress increased spending on itself last year by 10.9 percent and by another 5.8 percent this year for a grand total of $4.7 billion. (Remember, it was just 15 years ago when the Gingrich Republicans ran against the "billion dollar Congress.") Given that the number of members of Congress remains fixed at 535, why should their budget go up any faster than inflation?
Congress and the administration also have gotten into the venture capital business, which enables them to dump infinite quantities of money into their rich friends' pockets. Bill Frezza, a principled venture capitalist, using Fox News and other venues, has been blowing the whistle on these unsavory and destructive practices. Did you know that Al Gore and friends just received almost $600 million to develop another expensive ($88,000) hybrid electric sports car with your tax money? The chances of taxpayers getting their money back are less than of General Motors Corp. and Chrysler paying off all their loans, which is close to zero. Paradise defined: being politically well-connected when stimulus money is around.
The only things one can say for sure about stimulus money is that it will add to the deficit, ultimately driving up interest rates and taxes; and much of it will be wasted and/or stolen, neither of which benefits the unemployed. By any objective measure, the stimulus program has been and will continue to be a failure — but don't expect the Washington politicos ever to admit it.
Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.
Cato
The Washington Times on October 8, 2009
Has the economic stimulus program helped or hurt? Administration officials keep saying the stimulus program has been beneficial, but where is the evidence?
There are several ways to see if it is working as advertised. First, what did the proponents say would happen when they were pushing the plan versus what has happened? Second, how has the United States fared compared to other nations that had smaller or no stimulus programs? Third, how have the results to date compared to what pro-stimulus, Keynesian-school economic theorists advocated versus what other theorists (principally Austrian-school) who largely opposed the stimulus plans said?
U.S. unemployment already has reached 9.8 percent, with 15.1 million Americans unemployed, and more than 7.1 million jobs have been eliminated since the beginning of the recession. President Obama's economic advisers said in the beginning of this year that the unemployment rate would rise to 9 percent with no stimulus package and would only rise to a maximum of 7.9 percent with the stimulus bill, peaking during this past summer. Stimulus proponents clearly have failed the first test (despite Vice President Joseph R. Biden Jr.'s revisionist statements) and there is zero evidence for their claims that more jobs would have been lost without the stimulus package.
One might argue that the stimulus had worked if the results in the United States were better than in other countries that had smaller or no stimulus packages. The recession has been global, and every country has been affected negatively. Only Great Britain attempted to put in a stimulus package that was relatively as large as the U.S. package. A crude measure of economic stimulus is the size of the deficit relative to gross domestic product. During recessions, tax revenues decline in all countries, so most will run a deficit whether they intend to or not. A stimulus package normally contains a mix of government spending increases and tax cuts, resulting in a deliberately larger deficit.
The United States and Britain have by far and away run the largest deficits as a percentage of GDP (i.e. the most stimulus), yet the U.S. and Britain, along with Italy and Russia, had not bottomed out in second-quarter 2009, while the rest of the 10 largest economies were showing real growth in the second quarter. Russia's poor performance is largely a function of relying very heavily on the export of raw materials rather than developing a broad-based economy as all the others in the Big 10 have done.
The three countries with the smallest deficits (the least stimulus) — Brazil, China and Germany — have all turned the corner rather quickly and are growing. German Chancellor Angela Merkel has just announced she is going to push tax cuts, which should give the German economy an additional shot in the arm.
While the data set is too small with the top 10 countries (which collectively account for a large majority of the world's GDP) to draw definitive conclusions, the existing evidence indicates that a big stimulus package seems to delay recovery, while little stimulus leads to a quick return to economic growth.
Finally, what do the competing economic theorists say? The Keynesians say that if the government increases spending to stimulate demand and create jobs for those who do not have them, this should lead to a less painful downturn and a quicker recovery. The Austrian (aka Hayekians) free-market sorts say recoveries occur on their own once asset and labor prices fall from inflated levels of the previous boom and excess inventories are worked off. This usually happens within 16 months unless government attempts to mitigate these necessary price adjustments, which will delay the recovery. (Apologies to both my Austrian and Keynesian friends for trying to summarize their views in one short paragraph.)
The Keynesians never really get a fair test of their theory because politicians always take the Keynesian notion that it is OK to increase government spending as a license to spend the extra money on themselves and their friends rather than on those who might actually benefit. (This self-dealing process is well explained by the public-choice school of economics.) A few examples from the current stimulus program should suffice. Congress increased spending on itself last year by 10.9 percent and by another 5.8 percent this year for a grand total of $4.7 billion. (Remember, it was just 15 years ago when the Gingrich Republicans ran against the "billion dollar Congress.") Given that the number of members of Congress remains fixed at 535, why should their budget go up any faster than inflation?
Congress and the administration also have gotten into the venture capital business, which enables them to dump infinite quantities of money into their rich friends' pockets. Bill Frezza, a principled venture capitalist, using Fox News and other venues, has been blowing the whistle on these unsavory and destructive practices. Did you know that Al Gore and friends just received almost $600 million to develop another expensive ($88,000) hybrid electric sports car with your tax money? The chances of taxpayers getting their money back are less than of General Motors Corp. and Chrysler paying off all their loans, which is close to zero. Paradise defined: being politically well-connected when stimulus money is around.
The only things one can say for sure about stimulus money is that it will add to the deficit, ultimately driving up interest rates and taxes; and much of it will be wasted and/or stolen, neither of which benefits the unemployed. By any objective measure, the stimulus program has been and will continue to be a failure — but don't expect the Washington politicos ever to admit it.
Richard W. Rahn is a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth.
Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis?
Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis?, by Jagadeesh Gokhale and Peter Van Doren
Cato, October 8, 2009
Many commentators have argued that if the Federal Reserve had followed a stricter monetary policy earlier this decade when the housing bubble was forming, and if Congress had not deregulated banking but had imposed tighter financial standards, the housing boom and bust—and the subsequent financial crisis and recession—would have been averted. In this paper, we investigate those claims and dispute them. We are skeptical that economists can detect bubbles in real time through technical means with any degree of unanimity. Even if they could, we doubt the Fed would have altered its policy in the early 21st century, and we suspect that political leaders would have exerted considerable pressure to maintain that policy. Concerning regulation, we find that the banking reform of the late 1990s had little effect on the housing boom and bust, and that the many reform ideas currently proposed would have done little or nothing to avert the crisis.
Commentators have also argued that the popularization of financial products such as teaser-rate hybrid loans for subprime homebuyers and credit default swaps for investors is to blame for the financial crisis. We find little evidence for this. Housing data indicate that the majority of subprime hybrid loans that have entered default had not undergone interest rate resets, and the default rate for subprime hybrid loans is not much higher than for subprime fixed rate loans. Concerning swaps, although their introduction may increase financial inflows into risky sectors, their execution through a clearing-house or regulation via other means would not necessarily have avoided the mispricing of risks in underlying contracts. Capital requirements for the credit default swaps that were used to insure mortgage-backed securities would have been low because housing investments were not considered risky.
Full text: http://www.cato.org/pubs/pas/pa648.pdf
Jagadeesh Gokhale is a senior fellow at the Cato Institute and the author of Social Security: A Fresh Look at Reform Alternatives (forthcoming). Peter Van Doren is a senior fellow at the Cato Institute and the editor of Cato's Regulation magazine.
Cato, October 8, 2009
Many commentators have argued that if the Federal Reserve had followed a stricter monetary policy earlier this decade when the housing bubble was forming, and if Congress had not deregulated banking but had imposed tighter financial standards, the housing boom and bust—and the subsequent financial crisis and recession—would have been averted. In this paper, we investigate those claims and dispute them. We are skeptical that economists can detect bubbles in real time through technical means with any degree of unanimity. Even if they could, we doubt the Fed would have altered its policy in the early 21st century, and we suspect that political leaders would have exerted considerable pressure to maintain that policy. Concerning regulation, we find that the banking reform of the late 1990s had little effect on the housing boom and bust, and that the many reform ideas currently proposed would have done little or nothing to avert the crisis.
Commentators have also argued that the popularization of financial products such as teaser-rate hybrid loans for subprime homebuyers and credit default swaps for investors is to blame for the financial crisis. We find little evidence for this. Housing data indicate that the majority of subprime hybrid loans that have entered default had not undergone interest rate resets, and the default rate for subprime hybrid loans is not much higher than for subprime fixed rate loans. Concerning swaps, although their introduction may increase financial inflows into risky sectors, their execution through a clearing-house or regulation via other means would not necessarily have avoided the mispricing of risks in underlying contracts. Capital requirements for the credit default swaps that were used to insure mortgage-backed securities would have been low because housing investments were not considered risky.
Full text: http://www.cato.org/pubs/pas/pa648.pdf
Jagadeesh Gokhale is a senior fellow at the Cato Institute and the author of Social Security: A Fresh Look at Reform Alternatives (forthcoming). Peter Van Doren is a senior fellow at the Cato Institute and the editor of Cato's Regulation magazine.
Grand Mufti on Islam, Israel and the United States
Islam, Israel and the United States. By Sheikh Ali Gomaa
Peace among the Abrahamic faiths will be built on respect and the law.
WSJ, Oct 08, 2009
America and the West have been victims of violent extremists acting in the name of Islam, the tragic events of 9/11 being only the most egregious of their attacks. Western officials and commentators are consumed by the question, "Where are the moderates?" Many, seeing only the extremism perpetuated by a radical few, despair of finding progressive and peaceful partners of standing in the Muslim world.
However, reconciling Islam with modernity has been an imperative for Muslims before it became a preoccupation for the West. In particular, the process dates back to the 19th century, when what became known as the Islamic reform movement was born in Al Azhar University in Cairo, Islam's premiere institution of learning.
At the Dar al Iftaa, Egypt's supreme body for Islamic legal edicts over which I preside, we wrestle constantly with the issue of applying Islam to the modern world. We issue thousands of fatwas or authoritative legal edicts—for example affirming the right of women to dignity, education and employment, and to hold political office, and condemning violence against them. We have upheld the right of freedom of conscience, and of freedom of expression within the bounds of common decency. We have promoted the common ground that exists between Islam, Christianity and Judaism. We have underscored that governance must be based on justice and popular sovereignty. We are committed to human liberty within the bounds of Islamic law. Nonetheless, we must make more tangible progress on these and other issues.
We unequivocally condemned violence against the innocent during Egypt's own struggle with terrorism in the 1980s and 90's, and after the heinous sin of 9/11. We continue to do so in public debates with extremists on their views of Islam, in our outreach to schools and youth organizations, in our training of students from all across the world at Egypt's theological institutions, and in our counseling of captured terrorists. As the head of the one of the foremost Islamic authorities in the world, let me restate: The murder of civilians is a crime against humanity and God punishable in this life and the next.
Yet, just as we recommit to reinforcing the values of moderation in our faith, we look to the United States to assume its responsibility for the sake of a better relationship between the West and Islam.
First, it is essential that the U.S. confront the fear and misunderstanding that has often pervaded the public discourse about Islam, especially in the media.
Second, while we must strive to reinforce the common principles that we share, we must also accept the reality of differences in our values and in our outlook. Islam and the West have distinct value systems. Respect for our differences is a foundation for coexistence, and never for conflict.
Finally, there must a true commitment to the rule of law, and to sovereign equality, as the legitimate basis for international relations. While some of the divide between Islam and the West lies in the realm of ideas, it lies mostly in the realm of politics. The violence and the aggression to which many Muslim countries have been subjected are the main sources of a deep and legitimate sense of grievance, and they must be addressed.
Israel's occupation of Palestine must be brought to an end; its continuation is an affront to the fundamental tenets of justice and freedom that we all seek to uphold. In Iraq and Afghanistan, full sovereignty and independence must be restored to their people with the withdrawal of all foreign forces. President Barack Obama's historic address to the Muslim world from Cairo on June 4 was a landmark event that opened the door to a new relationship between Islam and the West, precisely because it acknowledged these imperatives. Yet much work needs to be done by both sides.
This week in Washington I am participating in the Common Word Initiative, a group of religious leaders hosted by Georgetown University's Center for Muslim-Christian Understanding. While the focus of this initiative has been to foster dialogue between Islam and Christianity, I will call for its expansion to include representatives of all the Abrahamic faiths. The road ahead will be difficult, but we can, God willing, arrive at a more peaceful future together.
Dr. Gomaa is the Grand Mufti of Egypt.
Peace among the Abrahamic faiths will be built on respect and the law.
WSJ, Oct 08, 2009
America and the West have been victims of violent extremists acting in the name of Islam, the tragic events of 9/11 being only the most egregious of their attacks. Western officials and commentators are consumed by the question, "Where are the moderates?" Many, seeing only the extremism perpetuated by a radical few, despair of finding progressive and peaceful partners of standing in the Muslim world.
However, reconciling Islam with modernity has been an imperative for Muslims before it became a preoccupation for the West. In particular, the process dates back to the 19th century, when what became known as the Islamic reform movement was born in Al Azhar University in Cairo, Islam's premiere institution of learning.
At the Dar al Iftaa, Egypt's supreme body for Islamic legal edicts over which I preside, we wrestle constantly with the issue of applying Islam to the modern world. We issue thousands of fatwas or authoritative legal edicts—for example affirming the right of women to dignity, education and employment, and to hold political office, and condemning violence against them. We have upheld the right of freedom of conscience, and of freedom of expression within the bounds of common decency. We have promoted the common ground that exists between Islam, Christianity and Judaism. We have underscored that governance must be based on justice and popular sovereignty. We are committed to human liberty within the bounds of Islamic law. Nonetheless, we must make more tangible progress on these and other issues.
We unequivocally condemned violence against the innocent during Egypt's own struggle with terrorism in the 1980s and 90's, and after the heinous sin of 9/11. We continue to do so in public debates with extremists on their views of Islam, in our outreach to schools and youth organizations, in our training of students from all across the world at Egypt's theological institutions, and in our counseling of captured terrorists. As the head of the one of the foremost Islamic authorities in the world, let me restate: The murder of civilians is a crime against humanity and God punishable in this life and the next.
Yet, just as we recommit to reinforcing the values of moderation in our faith, we look to the United States to assume its responsibility for the sake of a better relationship between the West and Islam.
First, it is essential that the U.S. confront the fear and misunderstanding that has often pervaded the public discourse about Islam, especially in the media.
Second, while we must strive to reinforce the common principles that we share, we must also accept the reality of differences in our values and in our outlook. Islam and the West have distinct value systems. Respect for our differences is a foundation for coexistence, and never for conflict.
Finally, there must a true commitment to the rule of law, and to sovereign equality, as the legitimate basis for international relations. While some of the divide between Islam and the West lies in the realm of ideas, it lies mostly in the realm of politics. The violence and the aggression to which many Muslim countries have been subjected are the main sources of a deep and legitimate sense of grievance, and they must be addressed.
Israel's occupation of Palestine must be brought to an end; its continuation is an affront to the fundamental tenets of justice and freedom that we all seek to uphold. In Iraq and Afghanistan, full sovereignty and independence must be restored to their people with the withdrawal of all foreign forces. President Barack Obama's historic address to the Muslim world from Cairo on June 4 was a landmark event that opened the door to a new relationship between Islam and the West, precisely because it acknowledged these imperatives. Yet much work needs to be done by both sides.
This week in Washington I am participating in the Common Word Initiative, a group of religious leaders hosted by Georgetown University's Center for Muslim-Christian Understanding. While the focus of this initiative has been to foster dialogue between Islam and Christianity, I will call for its expansion to include representatives of all the Abrahamic faiths. The road ahead will be difficult, but we can, God willing, arrive at a more peaceful future together.
Dr. Gomaa is the Grand Mufti of Egypt.
Islamists misrepresent the liberal legacy of the Ottoman Empire
Bring Back the Caliphate. By Soner Cagaptay
Islamists misrepresent the liberal legacy of the Ottoman Empire.
WSJ, Oct 08, 2009
The reaction in Turkey to the recent death of Ertugrul Osman, heir to the Ottoman throne and successor to the last Caliph, could not be more shocking. Islamists in kaftans and long beards gathered in Istanbul two weeks ago to bury the titular head of the world Muslim community, a scotch-drinking, classical music-listening Western Turk who until recently lived on New York City's Upper East Side.
The Islamists' embrace of Osman, a descendant of the westernized Ottoman sultans, provides a periscope into the Islamist mind: Islamism is not about religion or reality. Rather it is a myth and a subversion of reality intended to promote Islamism, a utopian ideology. Osman, raised by a line of West-leaning caliphs and sultans, loved Atatürk's Turkey, yet the Islamists abused his funeral and the memory of the caliphate, changing it into a symbol for their anti-Western, anti-secular and anti-liberal agenda.
Were Ertugrul Osman alive and were the Ottomans around today, he would be Sultan Osman V and no doubt, he would be going after the fundamentalists who abused his funeral in an attempt to distort his legacy.
Despite what the Islamists want the world to believe, the Ottoman caliphate was not anti-Western. The Ottoman Empire always interacted with the West—an interaction that goes all the way back to 16th-century Sultan Suleyman the Magnificent, who envisioned himself as the Holy Roman emperor. In the 18th and 19th centuries, the Ottoman sultans and caliphs embarked on a program of intense reforms to remake the Ottoman Empire in the Western image to match up with European powers. To this end, the caliphs launched institutions of secular education, and paved the way for women's emancipation by enrolling them in those schools. By the beginning of the 19th century, the sultans and caliphs of the Ottoman Empire embodied Western life and Western values. The last caliph, Abdulmecid Efendi, considered the Ottoman state a Western power with a Western destiny. An enlightened man and avid artist, the caliph's sought-after paintings, including nudes, are on exhibition at various museums, such as Istanbul's new museum of Modern Art.
It is therefore wrong to represent the Ottoman Empire as the antithesis to the secular republic Atatürk founded in 1923. True, when Atatürk turned Turkey into a secular republic in 1923 by abolishing the Ottoman state and the caliphate, Atatürk did noteradicate the sultan-caliphs' legacy. Rather, he fulfilled their dream of making Turkey a full-fledged Western society. Atatürk's reforms are a continuation of the late Ottoman Empire—he merely pursued Ottoman reforms to their logical conclusion.
Moreover, Atatürk was the product par excellence of the Ottoman Empire. He was raised in Salonika, the hub of cosmopolitanism and Western culture in the reforming empire. He studied in secular Ottoman schools, and he was trained in the Westernized Ottoman military.
The debate over the Ottoman caliphate's legacy has ramifications not only for Turkey, but also for contemporary Muslims and the Western world's desire to counter radical Islamists. Years before emergence of al Qaeda, the caliphs produced an antidote against radical jihadists, a progressive vision for a Western-oriented Muslim society. The sultan-caliphs built the institutional foundations of this society, including the first Ottoman parliament and constitution of 1876, and planted in it seeds of Western values, such as secular education and women's emancipation. Modern Turkey owes its existence as much to Atatürk as to the sultan-caliphs who were among the first to promote liberal and Western values in a Muslim society.
Now, the Islamists want to usurp the caliphate and its legacy. The fundamentalists first distort the caliphate's politics, reimagining it as an anti-Western institution. Then, they portray the revival of this invented caliphate as the ultimate political dream in an anti-Western ideology.
Eighty years ago, the Ottoman caliph-sultans imagined a Turkey that is more akin to modern Turkey than to the Islamist society envisioned by al Qaeda or others who dismiss Atatürk's dream of a Western Turkey and liberal values as anomalies. Ertugrul Osman himself told Turkish journalist Asli Aydintasbas shortly before his death that "the republic has been devastating for our family, but very good for Turkey."
Caliph Osman was Turkish by birth, Muslim by religion, and a Westerner by upbringing. I want my caliph back, and so should all Muslims who want deliverance from the distorted and illiberal world envisioned by the Islamists.
Mr. Cagaptay is a senior fellow at the Washington Institute for Near East Policy and author of "Islam Secularism and Nationalism in Modern Turkey: Who is a Turk?" (Routledge, 2006).
Islamists misrepresent the liberal legacy of the Ottoman Empire.
WSJ, Oct 08, 2009
The reaction in Turkey to the recent death of Ertugrul Osman, heir to the Ottoman throne and successor to the last Caliph, could not be more shocking. Islamists in kaftans and long beards gathered in Istanbul two weeks ago to bury the titular head of the world Muslim community, a scotch-drinking, classical music-listening Western Turk who until recently lived on New York City's Upper East Side.
The Islamists' embrace of Osman, a descendant of the westernized Ottoman sultans, provides a periscope into the Islamist mind: Islamism is not about religion or reality. Rather it is a myth and a subversion of reality intended to promote Islamism, a utopian ideology. Osman, raised by a line of West-leaning caliphs and sultans, loved Atatürk's Turkey, yet the Islamists abused his funeral and the memory of the caliphate, changing it into a symbol for their anti-Western, anti-secular and anti-liberal agenda.
Were Ertugrul Osman alive and were the Ottomans around today, he would be Sultan Osman V and no doubt, he would be going after the fundamentalists who abused his funeral in an attempt to distort his legacy.
Despite what the Islamists want the world to believe, the Ottoman caliphate was not anti-Western. The Ottoman Empire always interacted with the West—an interaction that goes all the way back to 16th-century Sultan Suleyman the Magnificent, who envisioned himself as the Holy Roman emperor. In the 18th and 19th centuries, the Ottoman sultans and caliphs embarked on a program of intense reforms to remake the Ottoman Empire in the Western image to match up with European powers. To this end, the caliphs launched institutions of secular education, and paved the way for women's emancipation by enrolling them in those schools. By the beginning of the 19th century, the sultans and caliphs of the Ottoman Empire embodied Western life and Western values. The last caliph, Abdulmecid Efendi, considered the Ottoman state a Western power with a Western destiny. An enlightened man and avid artist, the caliph's sought-after paintings, including nudes, are on exhibition at various museums, such as Istanbul's new museum of Modern Art.
It is therefore wrong to represent the Ottoman Empire as the antithesis to the secular republic Atatürk founded in 1923. True, when Atatürk turned Turkey into a secular republic in 1923 by abolishing the Ottoman state and the caliphate, Atatürk did noteradicate the sultan-caliphs' legacy. Rather, he fulfilled their dream of making Turkey a full-fledged Western society. Atatürk's reforms are a continuation of the late Ottoman Empire—he merely pursued Ottoman reforms to their logical conclusion.
Moreover, Atatürk was the product par excellence of the Ottoman Empire. He was raised in Salonika, the hub of cosmopolitanism and Western culture in the reforming empire. He studied in secular Ottoman schools, and he was trained in the Westernized Ottoman military.
The debate over the Ottoman caliphate's legacy has ramifications not only for Turkey, but also for contemporary Muslims and the Western world's desire to counter radical Islamists. Years before emergence of al Qaeda, the caliphs produced an antidote against radical jihadists, a progressive vision for a Western-oriented Muslim society. The sultan-caliphs built the institutional foundations of this society, including the first Ottoman parliament and constitution of 1876, and planted in it seeds of Western values, such as secular education and women's emancipation. Modern Turkey owes its existence as much to Atatürk as to the sultan-caliphs who were among the first to promote liberal and Western values in a Muslim society.
Now, the Islamists want to usurp the caliphate and its legacy. The fundamentalists first distort the caliphate's politics, reimagining it as an anti-Western institution. Then, they portray the revival of this invented caliphate as the ultimate political dream in an anti-Western ideology.
Eighty years ago, the Ottoman caliph-sultans imagined a Turkey that is more akin to modern Turkey than to the Islamist society envisioned by al Qaeda or others who dismiss Atatürk's dream of a Western Turkey and liberal values as anomalies. Ertugrul Osman himself told Turkish journalist Asli Aydintasbas shortly before his death that "the republic has been devastating for our family, but very good for Turkey."
Caliph Osman was Turkish by birth, Muslim by religion, and a Westerner by upbringing. I want my caliph back, and so should all Muslims who want deliverance from the distorted and illiberal world envisioned by the Islamists.
Mr. Cagaptay is a senior fellow at the Washington Institute for Near East Policy and author of "Islam Secularism and Nationalism in Modern Turkey: Who is a Turk?" (Routledge, 2006).
Down with capitalists, nations, bosses, families, etc. - Commonwealth
Brothers in Marx. By Brian C Anderson
Down with capitalists, nations, bosses, families, etc.
WSJ, Oct 08, 2009
Review of: Commonwealth
By Michael Hardt and Antonio Negri
Harvard University Press, 434 pages, $35
Astonishingly, given the ruin associated with his name, Karl Marx is back in fashion. The global economic downturn has spurred sales of "Das Kapital" to an all-time high; Michael Moore with his latest movie rivals the Original Communist in denouncing the evils of capitalism; and for the past year the news media seem to have delighted in running obituaries for the owners of the means of production. Michael Hardt and Antonio Negri, then, are nicely positioned to take advantage of Marx's revival with the publication of "Commonwealth," which re-imagines Marxism for the 21st century.
Mr. Hardt teaches literature at Duke University and is a postmodernism-steeped radical—that is to say, he is an American college professor. Mr. Negri, a political theorist, has a more unusual background. Three decades ago, the Italian government believed that he was the secret intellectual leader of the leftist terrorists called the Red Brigades and that he was the architect of the group's 1978 kidnapping and murder of Christian Democratic Party leader Aldo Moro. Unable to build a sufficient case to try Mr. Negri for murder—he has always denied the allegation—Italian authorities convicted him of "armed insurrection against the state." Facing 30 years in the slammer, Mr. Negri scooted to France, where he remained, a philosopher in exile, until 1997, when he returned to Italy to serve the remainder of a reduced sentence. He is a left-wing guru whose field work has occurred far from the faculty lounge.
"Commonwealth" completes a trilogy that began in 2000 with "Empire" and continued with "Multitude" in 2004. The book is a witch's brew of contemporary radicalism. Capitalism deserves to die, Messrs. Hardt and Negri believe, for it has abused and corrupted "the common." The common isn't just "the fruits of the soil, and all nature's bounty," they tell us; it is the universe of things necessary for social life—"knowledges, languages, codes, information, affects." Under capitalism, nature is ravaged, society brutalized.
Yet the conditions for people's emancipation are budding within capitalism, the authors believe (just as Marx believed in the mid-19th century). Unlike the factory laborer of yesterday, today's knowledge worker has less and less need for a boss. Companies extract the most value from the worker, we're told, when he is left alone to create, connect and collaborate as he sees fit. This is also true of "affective labor" that offers services to the public, "even in the most constrained and exploited circumstances, such as call centers."
Messrs. Hardt and Negri propose getting rid of bosses, of course, but they also target another bugaboo of the hard left, private property. The possession of property supports unjust power structures—why not agree that the "common wealth" of the human and natural worlds should be everyone's responsibility, everyone's resource? Welcome to The Communist Manifesto 2.0.
"Commonwealth" updates Marx's championing of the proletariat as the agent of revolution. The authors prefer "the multitude," which includes workers of all kinds, naturally, but also gathers the mighty forces of identity politics: black and Hispanic activists, radical feminists, "queer" transgressives and others purportedly harmed by global capitalism. They don't all get along, Messrs. Hardt and Negri admit, so the left must persuade this army-in-waiting to value the importance of "revolutionary parallelism." No Black Power movement that treats woman or homosexuals badly, for instance, will win the day. After the revolution, we're told, identity politics, like class warfare, will dissolve.
For the revolution to succeed, three supposedly corrupt forms of the common must be destroyed. Some of the harshest language in "Commonwealth" targets the family: Mom, dad and the kids might not know it, but they are part of a "pathetic" institution, a "machine" that "grinds down and crushes the common" with "the blindest egoism." Messrs. Hardt and Negri cry: "Down with the family!" The two other killers of the world's spirit: the corporation and the nation. When the multitude seizes "control of the means of production and reproduction," we're promised, the evil trio will wind up on Marx's ash heap of history.
The authors warn the rulers of the capitalist world that if they want to survive a little longer, they need to enact reforms, including global citizenship, a right to income for everyone and participatory democracy. But Messrs. Hardt and Negri don't think that their warning will be heeded. Revolution will erupt—and soon. It could be violent, a prospect that does not seem to trouble them: "What is the best weapon against the ruling powers—guns, peaceful street demonstrations, exodus, media campaigns, labor strikes, transgressing gender norms, silence, irony, or many others—depends on the situation." Pirates, the rioting Muslim banlieusards of Paris and the Black Panthers all are praised in "Commonwealth" as heroes of disruption.
Messrs. Hardt and Negri make little effort to build arguments in support of their wild assertions and predictions. They write as if ignorant of the 20th century and of much else, including economics and social science. (They still quote Lenin and Mao as if they were sources of wise political and economic analysis.) How would abolishing private property not lead to a threadbare totalitarian state, as it has in the past? The authors promise it will be different this time, without explaining why. If you abolish the family, how will children grow into flourishing adults? We must take it on faith that the post-family world will be just fine. (The word "children" almost never appears in the book.) How do the authors explain away capitalist globalization's record of elevating millions of people out of poverty? Answer: They don't.
"Commonwealth" is a dark, evil book, and it is troubling that it appears under the prestigious imprimaturof Harvard University Press. Countless millions were slaughtered by adherents of Karl Marx in the 20th century. God help us if the scourge returns in the 21st.
Mr. Anderson, the editor of City Journal, is the author of "Democratic Capitalism and Its Discontents" and, with Adam Thierer, "A Manifesto for Media Freedom."
Down with capitalists, nations, bosses, families, etc.
WSJ, Oct 08, 2009
Review of: Commonwealth
By Michael Hardt and Antonio Negri
Harvard University Press, 434 pages, $35
Astonishingly, given the ruin associated with his name, Karl Marx is back in fashion. The global economic downturn has spurred sales of "Das Kapital" to an all-time high; Michael Moore with his latest movie rivals the Original Communist in denouncing the evils of capitalism; and for the past year the news media seem to have delighted in running obituaries for the owners of the means of production. Michael Hardt and Antonio Negri, then, are nicely positioned to take advantage of Marx's revival with the publication of "Commonwealth," which re-imagines Marxism for the 21st century.
Mr. Hardt teaches literature at Duke University and is a postmodernism-steeped radical—that is to say, he is an American college professor. Mr. Negri, a political theorist, has a more unusual background. Three decades ago, the Italian government believed that he was the secret intellectual leader of the leftist terrorists called the Red Brigades and that he was the architect of the group's 1978 kidnapping and murder of Christian Democratic Party leader Aldo Moro. Unable to build a sufficient case to try Mr. Negri for murder—he has always denied the allegation—Italian authorities convicted him of "armed insurrection against the state." Facing 30 years in the slammer, Mr. Negri scooted to France, where he remained, a philosopher in exile, until 1997, when he returned to Italy to serve the remainder of a reduced sentence. He is a left-wing guru whose field work has occurred far from the faculty lounge.
"Commonwealth" completes a trilogy that began in 2000 with "Empire" and continued with "Multitude" in 2004. The book is a witch's brew of contemporary radicalism. Capitalism deserves to die, Messrs. Hardt and Negri believe, for it has abused and corrupted "the common." The common isn't just "the fruits of the soil, and all nature's bounty," they tell us; it is the universe of things necessary for social life—"knowledges, languages, codes, information, affects." Under capitalism, nature is ravaged, society brutalized.
Yet the conditions for people's emancipation are budding within capitalism, the authors believe (just as Marx believed in the mid-19th century). Unlike the factory laborer of yesterday, today's knowledge worker has less and less need for a boss. Companies extract the most value from the worker, we're told, when he is left alone to create, connect and collaborate as he sees fit. This is also true of "affective labor" that offers services to the public, "even in the most constrained and exploited circumstances, such as call centers."
Messrs. Hardt and Negri propose getting rid of bosses, of course, but they also target another bugaboo of the hard left, private property. The possession of property supports unjust power structures—why not agree that the "common wealth" of the human and natural worlds should be everyone's responsibility, everyone's resource? Welcome to The Communist Manifesto 2.0.
"Commonwealth" updates Marx's championing of the proletariat as the agent of revolution. The authors prefer "the multitude," which includes workers of all kinds, naturally, but also gathers the mighty forces of identity politics: black and Hispanic activists, radical feminists, "queer" transgressives and others purportedly harmed by global capitalism. They don't all get along, Messrs. Hardt and Negri admit, so the left must persuade this army-in-waiting to value the importance of "revolutionary parallelism." No Black Power movement that treats woman or homosexuals badly, for instance, will win the day. After the revolution, we're told, identity politics, like class warfare, will dissolve.
For the revolution to succeed, three supposedly corrupt forms of the common must be destroyed. Some of the harshest language in "Commonwealth" targets the family: Mom, dad and the kids might not know it, but they are part of a "pathetic" institution, a "machine" that "grinds down and crushes the common" with "the blindest egoism." Messrs. Hardt and Negri cry: "Down with the family!" The two other killers of the world's spirit: the corporation and the nation. When the multitude seizes "control of the means of production and reproduction," we're promised, the evil trio will wind up on Marx's ash heap of history.
The authors warn the rulers of the capitalist world that if they want to survive a little longer, they need to enact reforms, including global citizenship, a right to income for everyone and participatory democracy. But Messrs. Hardt and Negri don't think that their warning will be heeded. Revolution will erupt—and soon. It could be violent, a prospect that does not seem to trouble them: "What is the best weapon against the ruling powers—guns, peaceful street demonstrations, exodus, media campaigns, labor strikes, transgressing gender norms, silence, irony, or many others—depends on the situation." Pirates, the rioting Muslim banlieusards of Paris and the Black Panthers all are praised in "Commonwealth" as heroes of disruption.
Messrs. Hardt and Negri make little effort to build arguments in support of their wild assertions and predictions. They write as if ignorant of the 20th century and of much else, including economics and social science. (They still quote Lenin and Mao as if they were sources of wise political and economic analysis.) How would abolishing private property not lead to a threadbare totalitarian state, as it has in the past? The authors promise it will be different this time, without explaining why. If you abolish the family, how will children grow into flourishing adults? We must take it on faith that the post-family world will be just fine. (The word "children" almost never appears in the book.) How do the authors explain away capitalist globalization's record of elevating millions of people out of poverty? Answer: They don't.
"Commonwealth" is a dark, evil book, and it is troubling that it appears under the prestigious imprimaturof Harvard University Press. Countless millions were slaughtered by adherents of Karl Marx in the 20th century. God help us if the scourge returns in the 21st.
Mr. Anderson, the editor of City Journal, is the author of "Democratic Capitalism and Its Discontents" and, with Adam Thierer, "A Manifesto for Media Freedom."
Wednesday, October 7, 2009
Why Sustainability Standards for Biofuel Production Make Little Economic Sense
Why Sustainability Standards for Biofuel Production Make Little Economic Sense. By Harry de Gorter and David R. Just
Cato, October 7, 2009
The federal "sustainability standard" requires ethanol to emit at least 20 percent less carbon dioxide (CO2) than gasoline. Recent rulings by California and the Environmental Protection Agency, however, have cast doubt on the methodology of the sustainability calculus and whether those standards are being met. We show that the methodological debate is misplaced because sustainability standards for ethanol are, by definition, illogical and ineffective. Moreover, those standards divert attention from the contradictions and inefficiencies of ethanol import tariffs, tax credits, mandates, and subsidies, all of which exist whether ethanol is sustainable or not.
Ethanol is sustainable by definition. The CO2 sequestered by growing corn is exactly offset by the CO2 emissions that follow from burning the fuel in a car. The same observation applies to, say, consuming bourbon made from corn, but ethanol can replace energy — bourbon cannot. Hence, any sustainability standard should be applied to all corn and other crop products, and not just ethanol.
Sustainability standards are based on "lifecycle accounting," in which ethanol is assumed to replace gasoline; but in fact, it may be replacing coal or other energy sources. Life-cycle accounting also fails to recognize that if incentives are given for ethanol producers to use relatively "clean" inputs (e.g., natural gas), the "dirtier" inputs (e.g., coal) that might otherwise have been used for the ethanol production will simply be used by other producers to make products that are not covered by the sustainability standard. Sustainability standards reshuffle who is using what inputs — with no net reduction in national emissions.
Finally, sustainability standards are discriminatory under World Trade Organization law and are unlikely to survive a legal challenge from ethanol producers abroad. The United States will not be able to rely on the World Trade Organization's exception for trade laws protecting the environment because of lax U.S. policies dealing with greenhouse gas emissions relative to its trading partners. Moreover, the imposition of U.S. tariffs on more climate-friendly ethanol produced abroad weakens any U.S. defense of ethanol sustainability standards under the WTO.
Full text: http://www.cato.org/pubs/pas/pa647.pdf
Harry de Gorter and David R. Just are economists in the Department of Applied Economics and Management at Cornell University.
Cato, October 7, 2009
The federal "sustainability standard" requires ethanol to emit at least 20 percent less carbon dioxide (CO2) than gasoline. Recent rulings by California and the Environmental Protection Agency, however, have cast doubt on the methodology of the sustainability calculus and whether those standards are being met. We show that the methodological debate is misplaced because sustainability standards for ethanol are, by definition, illogical and ineffective. Moreover, those standards divert attention from the contradictions and inefficiencies of ethanol import tariffs, tax credits, mandates, and subsidies, all of which exist whether ethanol is sustainable or not.
Ethanol is sustainable by definition. The CO2 sequestered by growing corn is exactly offset by the CO2 emissions that follow from burning the fuel in a car. The same observation applies to, say, consuming bourbon made from corn, but ethanol can replace energy — bourbon cannot. Hence, any sustainability standard should be applied to all corn and other crop products, and not just ethanol.
Sustainability standards are based on "lifecycle accounting," in which ethanol is assumed to replace gasoline; but in fact, it may be replacing coal or other energy sources. Life-cycle accounting also fails to recognize that if incentives are given for ethanol producers to use relatively "clean" inputs (e.g., natural gas), the "dirtier" inputs (e.g., coal) that might otherwise have been used for the ethanol production will simply be used by other producers to make products that are not covered by the sustainability standard. Sustainability standards reshuffle who is using what inputs — with no net reduction in national emissions.
Finally, sustainability standards are discriminatory under World Trade Organization law and are unlikely to survive a legal challenge from ethanol producers abroad. The United States will not be able to rely on the World Trade Organization's exception for trade laws protecting the environment because of lax U.S. policies dealing with greenhouse gas emissions relative to its trading partners. Moreover, the imposition of U.S. tariffs on more climate-friendly ethanol produced abroad weakens any U.S. defense of ethanol sustainability standards under the WTO.
Full text: http://www.cato.org/pubs/pas/pa647.pdf
Harry de Gorter and David R. Just are economists in the Department of Applied Economics and Management at Cornell University.
Readout of the Presidents call and meeting with Iraqi President Talabani
Readout of the Presidents call and meeting with Iraqi President Talabani
WHITE HOUSE
Office of the Press Secretary
-------------------------------------------------------
For Immediate Release October 6, 2009
Readout of the President’s call and meeting with Iraqi President Talabani
President Obama called President Talabani on October 5, and spoke with him at the White House on October 6 when he dropped in on President Talabani’s meeting with National Security Advisor General Jim Jones. The President conveyed appreciation for the leadership that President Talabani has shown in promoting national unity in Iraq and encouraged him to continue his efforts in this regard. The President conveyed to President Talabani support for Iraqi efforts to adopt an election law soon. He also reaffirmed that the United States remains committed to working with Iraq to promote security, political progress, and economic development as Iraqis take responsibility for their future. The two leaders expressed support for further economic cooperation, and highlighted the upcoming October 20-21 U.S.-Iraq Business and Investment Conference in Washington.
WHITE HOUSE
Office of the Press Secretary
-------------------------------------------------------
For Immediate Release October 6, 2009
Readout of the President’s call and meeting with Iraqi President Talabani
President Obama called President Talabani on October 5, and spoke with him at the White House on October 6 when he dropped in on President Talabani’s meeting with National Security Advisor General Jim Jones. The President conveyed appreciation for the leadership that President Talabani has shown in promoting national unity in Iraq and encouraged him to continue his efforts in this regard. The President conveyed to President Talabani support for Iraqi efforts to adopt an election law soon. He also reaffirmed that the United States remains committed to working with Iraq to promote security, political progress, and economic development as Iraqis take responsibility for their future. The two leaders expressed support for further economic cooperation, and highlighted the upcoming October 20-21 U.S.-Iraq Business and Investment Conference in Washington.
Cato: The Government Robbed Chrysler Creditors
The Government Robbed Chrysler Creditors. By Ilya Shapirohttp://www.cato-at-liberty.org/2009/10/
In January 2009, Chrysler stood on the brink of insolvency. Purporting to act under the Emergency Economic Stabilization Act, the Treasury extended Chrysler a $4 billion loan using funds from the Troubled Asset Relief Program (TARP). Still in a bad financial situation, Chrysler initially proposed an out-of-court reorganization plan that would fully repay all of Chrysler’s secured debt. The Treasury rejected this proposal and instead insisted on a plan that would completely eradicate Chrysler’s secured debt, hinging billions of dollars in additional TARP funding on Chrysler’s acquiescence.
When Chrysler’s first lien lenders refused to waive their secured rights without full payment, the Treasury devised a scheme by which Chrysler, instead of reorganizing under a chapter 11 plan, would sell its assets free of all secured interests to a shell company, the New Chrysler. Chrysler was thus able to avoid the “absolute priority rule,” which provides that a court should not approve a bankruptcy plan unless it is “fair and equitable” to all classes of creditors.
Cato joined the Washington Legal Foundation, Allied Educational Foundation, and George Mason law professor Todd Zywicki on a brief supporting the creditors’ petition asking the Supreme Court to review the transaction’s validity. We argue that the forced reorganization amounted to the Treasury redistributing value from senior, secured creditors to debtors and junior, unsecured creditors.
The government should not be allowed, through its own self-dealing, to hand-pick certain creditors for favorable treatment at the expense of others who would otherwise enjoy first lien priority. Further, a lack of predictability and consistency with regard to creditors’ expectations in bankruptcy will result in a destabilization of existing and future credit markets.
The Court will be deciding whether to hear the case later this fall. Thanks very much to Cato legal associate Travis Cushman for his help with the brief.
In January 2009, Chrysler stood on the brink of insolvency. Purporting to act under the Emergency Economic Stabilization Act, the Treasury extended Chrysler a $4 billion loan using funds from the Troubled Asset Relief Program (TARP). Still in a bad financial situation, Chrysler initially proposed an out-of-court reorganization plan that would fully repay all of Chrysler’s secured debt. The Treasury rejected this proposal and instead insisted on a plan that would completely eradicate Chrysler’s secured debt, hinging billions of dollars in additional TARP funding on Chrysler’s acquiescence.
When Chrysler’s first lien lenders refused to waive their secured rights without full payment, the Treasury devised a scheme by which Chrysler, instead of reorganizing under a chapter 11 plan, would sell its assets free of all secured interests to a shell company, the New Chrysler. Chrysler was thus able to avoid the “absolute priority rule,” which provides that a court should not approve a bankruptcy plan unless it is “fair and equitable” to all classes of creditors.
Cato joined the Washington Legal Foundation, Allied Educational Foundation, and George Mason law professor Todd Zywicki on a brief supporting the creditors’ petition asking the Supreme Court to review the transaction’s validity. We argue that the forced reorganization amounted to the Treasury redistributing value from senior, secured creditors to debtors and junior, unsecured creditors.
The government should not be allowed, through its own self-dealing, to hand-pick certain creditors for favorable treatment at the expense of others who would otherwise enjoy first lien priority. Further, a lack of predictability and consistency with regard to creditors’ expectations in bankruptcy will result in a destabilization of existing and future credit markets.
The Court will be deciding whether to hear the case later this fall. Thanks very much to Cato legal associate Travis Cushman for his help with the brief.
Subscribe to:
Posts (Atom)
Posts
