Thomas Piketty reviu Marx per al segle XXI. By Daniel Shuchman
Wall Street Journal, Apr 21, 2014
http://online.wsj.com/news/articles/SB10001424052702303825604579515452952131592
Translated by Un Liberal Recalcitrant from Thomas Piketty Revives Marx for the 21st Century, below.
Thomas Piketty li agrada el capitalisme, ja que assigna eficientment els recursos. Però ell no li agrada com es distribueix la renda. No, pensa que pràcticament és una il·legitimitat moral qualsevol acumulació de riquesa, i és una qüestió de justícia que aquesta desigualtat pot radicar en la nostra economia. La manera de fer això és eliminar les rendes altes i reduir la riquesa existent a través d'impostos.
"El capital al segle XXI" és una densa exploració de Thomas Piketty en la història dels salaris i de la riquesa en els últims tres segles. Presenta un desgavell de dades sobre la distribució dels ingressos en molts països, provant de demostrar que la desigualtat ha augmentat dràsticament en les últimes dècades i que aviat tornarà a ser pitjor. Independentment de si un està convençut per les dades del Sr Piketty -i hi ha raons per a l'escepticisme, donat el cas de les pròpies advertències de l'autor i pel fet que moltes estadístiques es basen en mostres molt limitades dels registres de l'impost sobre béns de dubtosa extrapolació- en última instància aquest és un fet de poca importància. Conseqüentment aquest llibre no és tant un treball d'anàlisi econòmica com el d’una norma ideològica estranya.
Professor de l'Escola d'Economia de París, el Sr Piketty creu que només la productivitat dels treballadors de baixos ingressos pot ser mesurada de forma objectiva. Ell postula que quan un treball és replicable, com el d’un "treballador de la línia de muntatge o el d’un cambrer de menjar ràpid", es pot mesurar de forma relativament fàcil el valor aportat per cada treballador. Per tant, aquests treballadors tenen dret al que guanyen. Ell troba que la productivitat de les persones amb alts ingressos ´rd més difícil de mesurar i creu que els seus salaris es troben en el final de la "gran mesura arbitrària". Són el reflex d'una "construcció ideològica" més del mèrit.
Segons Piketty, els sous altíssims per "supermanagers" corporatius ha estat la major font d'augment de la desigualtat, i aquests executius només poden haver arribat a la seva recompensa gràcies a la sort o falles en el govern corporatiu. Es requereix només una mirada ocasional a aquest diari per confirmar això. No obstant, l'autor creu que cap CEO podria mai justificar el seu salari en funció del rendiment. Ell no diu que qualsevol professional –atletes, metges, professors d'economia, que venen llibres electrònics per 21,99$ de marge amb cost zero per còpia- tingui dret a majors ingressos perquè no vol "gaudir de la construcció d'una jerarquia moral de la riquesa".
Ell admet que els empresaris són "absolutament indispensables" per al desenvolupament econòmic, però el seu èxit, també, està generalment contaminat. Mentre que alguns tenen èxit gràcies al "treball per part del veritable emprenedor," altres tenen senzillament sort o aconsegueixen l’èxit a través del "robatori descarat". Fins i tot seria el cas de les fortunes fetes del treball empresarial que evolucionen ràpidament cap a una "concentració excessiva i duradora del capital". Això és una injustícia d'auto-reforç, perquè "la propietat a vegades comença amb el robatori, i el retorn arbitrari sobre el capital pot perpetuar fàcilment el delicte inicial. "De fet tot el llibre incorpora com a una hostilitat gairebé medieval la idea de que el capital financer tingui un retorn o benefici.
El Sr Piketty creu que com més rica es torna una societat, més gent va a la recerca de la millor posició social relativa, condicionant més desigualtat. Rememora les atemporals autoritats econòmiques com Jane Austen i Honoré de Balzac en la cartografia del nostre futur. Al llarg del llibre es divaga amb les maquinacions inadequades, perseguint de personatges de novel·les com "Sentit i sensibilitat", i obsessivament, amb el calculador "Papà Goriot": Són els fruits del treball dur superiors a les intencions per casar-se i aconseguir una fortuna? Si no és així, "per què treballar, i per què comportar-se moralment bé?"
Mentre que els executius corporatius dels Estats Units són la seva “bèstia especial”, el Sr Piketty també està profundament preocupat per les desenes de milions de persones treballadores -un grup que ell anomena despectivament "petits rendistes"- que els seus ingressos els col·loca molt lluny de l’u per cent, però que encara tenen estalvis, comptes de jubilació i altres actius. Considera que aquest gran grup demogràfic es farà més gran i que el seu creixement de riquesa es transmetrà mitjançant les herències, essent això "una forma bastant preocupant de desigualtat". Es lamenta del difícil que és "corregir" tot això perquè es tracta d'un ampli segment de la població, no una petita elit, més fàcilment “satanitzable” .
Llavors, què cal fer ? El Sr Piketty insta a constituir una taxa impositiva del 80 % en els ingressos a partir del 500.000$ o 1 milió. "Això no és per recaptar diners per a l'educació o per augmentar les prestacions d'atur. Contràriament, no ho espera d’un impost d'aquest tipus perquè el seu propòsit és, simplement, "posar fi a aquest tipus d'ingressos”. També serà necessari imposar una taxa -del 50/60%- sobre els ingressos més baixos, com els de 200.000$. Afegeix també ha ha d'haver un impost a la riquesa anual de fins el 10 % sobre les fortunes més grans i una càrrega fiscal, d'una sola vegada, de fins el 20% sobre els nivells de riquesa més baixos. Ell, alegrement, ens assegura que res d'això reduiria el creixement econòmic, la productivitat, l'emprenedoria o la innovació.
No és que el creixement i la millora no estigui en la ment del senyor Piketty, sin´ó que es tracta com un assumpte econòmic i com un mitjà per a una major justícia distributiva. S'assumeix que l'economia és estàtica i de suma zero; si l'ingrés d'un grup de població augmenta, un altre necessàriament ha d’empobrir-se. Ell veu la igualtat de resultats com la finalitat última i exclusivament per al seu propi bé. Objectius -tals alternatives com la maximització de la riquesa general de la societat o l'augment de la llibertat econòmica o la recerca de la major igualtat possible d'oportunitats o fins i tot, com en la filosofia de John Rawls, el que garanteix que el benestar dels més desfavorits es maximitza -són ni mínimament esmentats.
No hi ha dubte que la pobresa, la desocupació i la desigualtat d'oportunitats són els principals reptes per a les societats capitalistes, i els diversos graus de la sort, el treball dur, la mandra i el mèrit són inherents a la humanitat. El Sr Piketty no és el primer visionari utòpic. Cita, per exemple, "l’experiment soviètic" que va permetre a l'home llançar "les seves cadenes juntament amb el jou de la riquesa acumulada." En el seu relat, només va portar el desastre humà perquè les societats necessiten mercats i propietat privada per tenir una economia que funcioni. Ell diu que les seves solucions ofereixen una "resposta menys violenta i més eficient per l'etern problema del capital privat i del seu benefici. En lloc d'Austen i Balzac, el professor hauria de llegir "Rebel·lió a la Granja” i "Darkness at Noon".
Shuchman és un gestor de fons de Nova York que escriu sovint sobre el dret i l'economia.
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Thomas Piketty Revives Marx for the 21st Century. By Daniel Schuman
An 80% tax rate on incomes above $500,000 is not meant to bring in money for education or benefits, but 'to put an end to such incomes.'
Wall Street Journal, April 21, 2014 7:18 p.m. ET
http://online.wsj.com/news/articles/SB10001424052702303825604579515452952131592
Thomas Piketty likes capitalism because it efficiently allocates resources. But he does not like how it allocates income. There is, he thinks, a moral illegitimacy to virtually any accumulation of wealth, and it is a matter of justice that such inequality be eradicated in our economy. The way to do this is to eliminate high incomes and to reduce existing wealth through taxation.
"Capital in the Twenty-First Century" is Mr. Piketty's dense exploration of the history of wages and wealth over the past three centuries. He presents a blizzard of data about income distribution in many countries, claiming to show that inequality has widened dramatically in recent decades and will soon get dangerously worse. Whether or not one is convinced by Mr. Piketty's data—and there are reasons for skepticism, given the author's own caveats and the fact that many early statistics are based on extremely limited samples of estate tax records and dubious extrapolation—is ultimately of little consequence. For this book is less a work of economic analysis than a bizarre ideological screed.
A professor at the Paris School of Economics, Mr. Piketty believes that only the productivity of low-wage workers can be measured objectively. He posits that when a job is replicable, like an "assembly line worker or fast-food server," it is relatively easy to measure the value contributed by each worker. These workers are therefore entitled to what they earn. He finds the productivity of high-income earners harder to measure and believes their wages are in the end "largely arbitrary." They reflect an "ideological construct" more than merit.
Soaring pay for corporate "supermanagers" has been the largest source of increased inequality, according to Mr. Piketty, and these executives can only have attained their rewards through luck or flaws in corporate governance. It requires only an occasional glance at this newspaper to confirm that this can be the case. But the author believes that no CEO could ever justify his or her pay based on performance. He doesn't say whether any occupation—athletes? physicians? economics professors who sell zero-marginal-cost e-books for $21.99 a copy?—is entitled to higher earnings because he does not wish to "indulge in constructing a moral hierarchy of wealth."
He does admit that entrepreneurs are "absolutely indispensable" for economic development, but their success, too, is usually tainted. While some succeed thanks to "true entrepreneurial labor," some are simply lucky or succeed through "outright theft." Even the fortunes made from entrepreneurial labor, moreover, quickly evolve into an "excessive and lasting concentration of capital." This is a self-reinforcing injustice because "property sometimes begins with theft, and the arbitrary return on capital can easily perpetuate the initial crime." Indeed laced throughout the book is an almost medieval hostility to the notion that financial capital earns a return.
Mr. Piketty believes that the wealthier a society becomes, the more people will claw for the best relative social station and the more inequality will ensue. He turns to those timeless economic authorities Jane Austen and Honoré de Balzac in mapping our future. Throughout the book, he importunately digresses with the dowry-chasing machinations of characters in novels like "Sense and Sensibility" and " Père Goriot. " He is obsessed with the following calculus: Are the fruits of working hard greater than those attainable by marrying into a top fortune? If not, "why work? And why behave morally at all?"
While America's corporate executives are his special bête noire, Mr. Piketty is also deeply troubled by the tens of millions of working people—a group he disparagingly calls "petits rentiers"—whose income puts them nowhere near the "one percent" but who still have savings, retirement accounts and other assets. That this very large demographic group will get larger, grow wealthier and pass on assets via inheritance is "a fairly disturbing form of inequality." He laments that it is difficult to "correct" because it involves a broad segment of the population, not a small elite that is easily demonized.
So what is to be done? Mr. Piketty urges an 80% tax rate on incomes starting at "$500,000 or $1 million." This is not to raise money for education or to increase unemployment benefits. Quite the contrary, he does not expect such a tax to bring in much revenue, because its purpose is simply "to put an end to such incomes." It will also be necessary to impose a 50%-60% tax rate on incomes as low as $200,000 to develop "the meager US social state." There must be an annual wealth tax as high as 10% on the largest fortunes and a one-time assessment as high as 20% on much lower levels of existing wealth. He breezily assures us that none of this would reduce economic growth, productivity, entrepreneurship or innovation.
Not that enhancing growth is much on Mr. Piketty's mind, either as an economic matter or as a means to greater distributive justice. He assumes that the economy is static and zero-sum; if the income of one population group increases, another one must necessarily have been impoverished. He views equality of outcome as the ultimate end and solely for its own sake. Alternative objectives—such as maximizing the overall wealth of society or increasing economic liberty or seeking the greatest possible equality of opportunity or even, as in the philosophy of John Rawls, ensuring that the welfare of the least well-off is maximized—are scarcely mentioned.
There is no doubt that poverty, unemployment and unequal opportunity are major challenges for capitalist societies, and varying degrees of luck, hard work, sloth and merit are inherent in human affairs. Mr. Piketty is not the first utopian visionary. He cites, for instance, the "Soviet experiment" that allowed man to throw "off his chains along with the yoke of accumulated wealth." In his telling, it only led to human disaster because societies need markets and private property to have a functioning economy. He says that his solutions provide a "less violent and more efficient response to the eternal problem of private capital and its return." Instead of Austen and Balzac, the professor ought to read "Animal Farm" and "Darkness at Noon."
Mr. Shuchman is a New York fund manager who often writes on law and economics.
Friday, April 25, 2014
Thursday, April 10, 2014
Views from FYR of Macedonia: Russia, the West, America
Views from FYR of Macedonia: Russia, the West, America
After sharing with some people an article on new software for US military cargo helicopters to take more autonomous decisions*, a Macedonian in the group wrote (Spanish):
Translation: Yes we are lucky that the Russians defend us. If not, we would be [doomed] by the Americans and their Machines of Death.
---
The article: Navy Drones With a Mind of Their Own. WSJ, Apr 5, 2014. https://www.wsj.com/articles/navy-drones-with-a-mind-of-their-own-1396668616
WASHINGTON—Rear Adm. Matthew Klunder has positioned himself to become the
Jeff Bezos
of the Pentagon.
Much as the Amazon.com Inc. founder envisions mini-drones that deliver small packages across America, Adm. Klunder, the Navy's research chief, wants to create innovative unmanned helicopters able to perform tasks now carried out by humans: resupplying troops in remote areas and rescuing wounded Marines from the battlefield.
His plan is moving ahead, and Navy officials will unveil new technology Saturday that with the push of a button allows helicopters—manned or unmanned—to choose their own routes, take off and land.
The Navy views the five-year, $100 million program as a major advance in the Pentagon's hopes for taking the "manned out of unmanned" aircraft. Over the next decade, the military is aiming to create autonomous drones that can help soldiers carry out night raids, search oceans for trouble, and select targets for attack.
[photo removed: Lance Cpl. Cody Barss uses a tablet computer during a demonstration in Quantico, Va., of a system that could support forces on the front lines, as an alternative to convoys, manned aircraft or air drops. U.S. Navy]
This is "truly leap-ahead technology," Adm. Klunder said of the new autonomous helicopter advances.
"What we're talking about doing with full size helicopters—and we've done it—we're talking about delivering 5,000 pounds of cargo," he said.
The Navy program has put the system through successful test runs at the Marine Corps Base in Quantico, Va.
Using a special app and a tablet, operators given only a half-hour of training were able to direct small helicopters to land on their own. The helicopters can choose their own routes, pick landing sites and change their destination if they spot unexpected obstacles that emerge at the last minute.
Autonomous technology will make it easier for the military, which won't have to rely on highly trained operators to route and land helicopters.
But while it could mark the advent of an era in which the military operates more sophisticated equipment with fewer people, it also is likely to stir concern about an overreliance on technology.
"We're starting to move into an autonomous regime, and that's going to have hugely disruptive effects," said Shawn Brimley, a former Pentagon official who is now executive director of the Center for a New American Security. "I would almost call it a revolution."
To some, the foray into autonomous aircraft is a move that conjures images of killer drones, capable of choosing targets and hunting them down without human oversight.
To address those concerns, the Pentagon has devised special guidelines meant to ensure that the military won't allow drones to carry out "kill missions" without human involvement.
Autonomous drones that require less human oversight could also take some strain off the Pentagon as it cuts back the size of the military to deal with budget cuts.
The Pentagon's expanding drone fleet has limited ability to operate autonomously. The Navy's experimental combat drone, the X-47B, landed itself on an aircraft carrier last July. The Army wants to create a robot that can operate on its own in helping soldiers search for suspects.
The Navy and the Marine Corps envision using the autonomous helicopter technology to more easily fly tons of supplies to remote bases. Military developers are even talking about the prospect of using the system to carry out emergency battlefield evacuations for troops.
The new systems, developed by Lockheed Martin Corp. and Aurora Flight Sciences, are designed to be used on the Pentagon's biggest helicopters, officials said.
Development still has a way to go. The new drone capabilities still must face more challenging trials, such as flying at night and in difficult weather. But military officials expressed confidence they could begin using the system in a year.
"As far as innovative projects go, I can't think of one that's more important to the Marine Corps right now—or one that shows as much promise," said Brig. Gen. Kevin Killea, commander of the Marine Corps Warfighting Laboratory and Adm. Klunder's deputy.
After sharing with some people an article on new software for US military cargo helicopters to take more autonomous decisions*, a Macedonian in the group wrote (Spanish):
Si, tenemos suerte y los rusos nos defienden. Si no estamos j[xxx]dos con los americanos y sus maquinas de muerte
Translation: Yes we are lucky that the Russians defend us. If not, we would be [doomed] by the Americans and their Machines of Death.
---
The article: Navy Drones With a Mind of Their Own. WSJ, Apr 5, 2014. https://www.wsj.com/articles/navy-drones-with-a-mind-of-their-own-1396668616
Navy Drones With a Mind of Their Own
Newly Unveiled Technology Runs on Tablet App, Enables Unmanned Aircraft to Choose Flight Routes and Landing Sites
[photo removed: The U.S. Navy has unveiled new drone technology that allows
the craft to take off and plot its routes autonomously, without a
ground-based pilot. The drones carrying the new software will likely be
deployed within a year. Photo: Office of Naval Research]
Much as the Amazon.com Inc. founder envisions mini-drones that deliver small packages across America, Adm. Klunder, the Navy's research chief, wants to create innovative unmanned helicopters able to perform tasks now carried out by humans: resupplying troops in remote areas and rescuing wounded Marines from the battlefield.
His plan is moving ahead, and Navy officials will unveil new technology Saturday that with the push of a button allows helicopters—manned or unmanned—to choose their own routes, take off and land.
The Navy views the five-year, $100 million program as a major advance in the Pentagon's hopes for taking the "manned out of unmanned" aircraft. Over the next decade, the military is aiming to create autonomous drones that can help soldiers carry out night raids, search oceans for trouble, and select targets for attack.
[photo removed: Lance Cpl. Cody Barss uses a tablet computer during a demonstration in Quantico, Va., of a system that could support forces on the front lines, as an alternative to convoys, manned aircraft or air drops. U.S. Navy]
This is "truly leap-ahead technology," Adm. Klunder said of the new autonomous helicopter advances.
"What we're talking about doing with full size helicopters—and we've done it—we're talking about delivering 5,000 pounds of cargo," he said.
The Navy program has put the system through successful test runs at the Marine Corps Base in Quantico, Va.
Using a special app and a tablet, operators given only a half-hour of training were able to direct small helicopters to land on their own. The helicopters can choose their own routes, pick landing sites and change their destination if they spot unexpected obstacles that emerge at the last minute.
Autonomous technology will make it easier for the military, which won't have to rely on highly trained operators to route and land helicopters.
But while it could mark the advent of an era in which the military operates more sophisticated equipment with fewer people, it also is likely to stir concern about an overreliance on technology.
"We're starting to move into an autonomous regime, and that's going to have hugely disruptive effects," said Shawn Brimley, a former Pentagon official who is now executive director of the Center for a New American Security. "I would almost call it a revolution."
To some, the foray into autonomous aircraft is a move that conjures images of killer drones, capable of choosing targets and hunting them down without human oversight.
To address those concerns, the Pentagon has devised special guidelines meant to ensure that the military won't allow drones to carry out "kill missions" without human involvement.
Autonomous drones that require less human oversight could also take some strain off the Pentagon as it cuts back the size of the military to deal with budget cuts.
The Pentagon's expanding drone fleet has limited ability to operate autonomously. The Navy's experimental combat drone, the X-47B, landed itself on an aircraft carrier last July. The Army wants to create a robot that can operate on its own in helping soldiers search for suspects.
The Navy and the Marine Corps envision using the autonomous helicopter technology to more easily fly tons of supplies to remote bases. Military developers are even talking about the prospect of using the system to carry out emergency battlefield evacuations for troops.
The new systems, developed by Lockheed Martin Corp. and Aurora Flight Sciences, are designed to be used on the Pentagon's biggest helicopters, officials said.
Development still has a way to go. The new drone capabilities still must face more challenging trials, such as flying at night and in difficult weather. But military officials expressed confidence they could begin using the system in a year.
"As far as innovative projects go, I can't think of one that's more important to the Marine Corps right now—or one that shows as much promise," said Brig. Gen. Kevin Killea, commander of the Marine Corps Warfighting Laboratory and Adm. Klunder's deputy.
Friday, March 21, 2014
The Responsible Way to Rein in Super-Fast Trading - by Gary Cohn
The Responsible Way to Rein in Super-Fast Trading. By Gary Cohn
At Goldman Sachs, we would back these measures to limit the risk and instability that technology gains brought.
WSJ, March 20, 2014 8:05 p.m. ET
http://online.wsj.com/news/articles/SB10001424052702303563304579447692855042948
Equity-market structure in the U.S. has made important advances over the past 20 years, promoting greater transparency and liquidity. Three powerful forces have been at work: technology, regulation and competition. The result has been narrower spreads, faster execution and lower overall explicit costs to trading stocks.
With the overwhelming majority of transactions now done over multiple electronic markets each with its own rule books, the equity-market structure is increasingly fragmented and complex. The risks associated with this fragmentation and complexity are amplified by the dramatic increase in the speed of execution and trading communications.
In the U.S., there are 13 public exchanges and nearly 50 alternative trading systems. Regulation NMS (National Market System), adopted in 2007, requires that market participants route their orders to the exchange that displays the best public price at any given time. This has increased both the number of linkages in the market and the speed at which transactions are done. The Securities and Exchange Commission has correctly called for an "assessment of whether market structure rules have kept pace with, among other things, changes in trading technology and practices."
In the past year alone, multiple technology failures have occurred in the equities markets, with a severe impact on the markets' ability to operate. Even though industry groups have met after the market disruptions to discuss responses, there has not been enough progress. Execution venues are decentralized and unable to agree on common rules. While an industry-based solution is preferable, some issues cannot be addressed by market forces alone and require a regulatory response. Innovation is critical to a healthy and competitive market structure, but not at the cost of introducing substantial risk.
Regulators and industry participants, including asset managers, broker-dealers, exchanges and trading firms, have all put forth ideas and reforms. We agree with a number of their concerns and propose the following four principles:
• First, the equity market needs a stronger safety net of controls to reduce the magnitude and frequency of disruptions. A fragmented trading landscape, increasingly sophisticated routing algorithms, constant software updates and an explosion in electronic-order instructions have made markets more susceptible to technology failures and their consequences.
We propose that all exchanges adopt a stringent set of uniform, SEC-mandated execution controls to reduce errors. In addition to limit-up, limit-down rules that prevent trades from occurring outside a specified price band, pre-trade price and volume limits should be implemented to block problematic orders from entering the market. Mechanisms should also be introduced to halt a firm's, market maker's or other entity's trading when an established threshold is breached, thus minimizing the uncontrolled accumulation of trades.
• Second: Create incentives to reduce excessive market instability. The economic model of the exchanges, as shaped by regulation, is oriented around market volume. Volume generates price discovery and liquidity, which are clearly beneficial. But the industry must recognize how certain activities related to volume can place stress on a market infrastructure ill-equipped to deal with it.
Electronic-order instructions connect the objectives of buyers and sellers to actions on exchanges. These transaction messages direct the placement, cancellation and correction of orders, and in recent years they have skyrocketed. In the 2010 "flash crash," a spike in the volume of these messages exacerbated volatility, overwhelming the market's infrastructure.
According to industry analysis, since 2005 the flow of these order instructions sent through U.S. stock exchanges has increased more than 1000%, yet trade volume has increased by only 50%. One consequence of the enormous growth in order-message traffic is that increasingly the quote that an investor sees isn't the price he or she can transact, as orders often get canceled at lightning-quick speeds.
Currently there is no cost to market participants who generate excessive order-message traffic. One idea would be to consider if regulatory fees applied on the basis of extreme message traffic—rather than executions alone—are appropriate and would enhance the underlying strength and resiliency of the system. Regulators in Canada and Australia have adopted this approach.
• Third: Public market data should be disseminated to all market participants simultaneously. Exchanges currently disseminate prices and transaction data to the SEC-sanctioned distributor for all investors, but exchanges may also send this information directly to private subscribers. While the data leave the exchange simultaneously, the public data are delayed because they go through the intermediary's processing infrastructure. The public aggregator should release information to all market participants at the same time.
Removing the possibility of differentiated channels for market data also reduces incentives that favor investment in the speed of one channel over the stability and resiliency of another. Instability creates and compounds market disruptions. Stable and accurate market data is one of the most important elements of market safety; it is the backbone of the market that must weather the most extreme periods.
• Fourth: Give clearing members more tools to limit risk. A central clearing house with strong operational and financial integrity can reduce credit risk, increase liquidity and enhance transparency through enforced margin requirements and verified and recorded trades. But because clearing members extend credit, the associated risks must be recognized. Tools like pre-trade credit checks and being able to monitor positions and credit on an intraday basis are essential. Clearing firms use various tools like margin and capital adequacy to manage their risk, but exchanges should also provide uniform mechanisms for clearers to set credit limits and to revoke a client's ability to trade immediately upon request, when necessary.
U.S. markets today are the deepest, most liquid in the world and serve an indispensable role in allocating capital. That means the companies that have the greatest potential to innovate and grow will get the capital they need to create jobs, build new industries and ensure a vibrant economy. Investors have benefited significantly from technology and innovation, but the speed and complexity at which our markets operate aren't being matched with the operational and control environment to support them.
Mr. Cohn is president and chief operating officer of Goldman Sachs
At Goldman Sachs, we would back these measures to limit the risk and instability that technology gains brought.
WSJ, March 20, 2014 8:05 p.m. ET
http://online.wsj.com/news/articles/SB10001424052702303563304579447692855042948
Equity-market structure in the U.S. has made important advances over the past 20 years, promoting greater transparency and liquidity. Three powerful forces have been at work: technology, regulation and competition. The result has been narrower spreads, faster execution and lower overall explicit costs to trading stocks.
With the overwhelming majority of transactions now done over multiple electronic markets each with its own rule books, the equity-market structure is increasingly fragmented and complex. The risks associated with this fragmentation and complexity are amplified by the dramatic increase in the speed of execution and trading communications.
In the U.S., there are 13 public exchanges and nearly 50 alternative trading systems. Regulation NMS (National Market System), adopted in 2007, requires that market participants route their orders to the exchange that displays the best public price at any given time. This has increased both the number of linkages in the market and the speed at which transactions are done. The Securities and Exchange Commission has correctly called for an "assessment of whether market structure rules have kept pace with, among other things, changes in trading technology and practices."
In the past year alone, multiple technology failures have occurred in the equities markets, with a severe impact on the markets' ability to operate. Even though industry groups have met after the market disruptions to discuss responses, there has not been enough progress. Execution venues are decentralized and unable to agree on common rules. While an industry-based solution is preferable, some issues cannot be addressed by market forces alone and require a regulatory response. Innovation is critical to a healthy and competitive market structure, but not at the cost of introducing substantial risk.
Regulators and industry participants, including asset managers, broker-dealers, exchanges and trading firms, have all put forth ideas and reforms. We agree with a number of their concerns and propose the following four principles:
• First, the equity market needs a stronger safety net of controls to reduce the magnitude and frequency of disruptions. A fragmented trading landscape, increasingly sophisticated routing algorithms, constant software updates and an explosion in electronic-order instructions have made markets more susceptible to technology failures and their consequences.
We propose that all exchanges adopt a stringent set of uniform, SEC-mandated execution controls to reduce errors. In addition to limit-up, limit-down rules that prevent trades from occurring outside a specified price band, pre-trade price and volume limits should be implemented to block problematic orders from entering the market. Mechanisms should also be introduced to halt a firm's, market maker's or other entity's trading when an established threshold is breached, thus minimizing the uncontrolled accumulation of trades.
• Second: Create incentives to reduce excessive market instability. The economic model of the exchanges, as shaped by regulation, is oriented around market volume. Volume generates price discovery and liquidity, which are clearly beneficial. But the industry must recognize how certain activities related to volume can place stress on a market infrastructure ill-equipped to deal with it.
Electronic-order instructions connect the objectives of buyers and sellers to actions on exchanges. These transaction messages direct the placement, cancellation and correction of orders, and in recent years they have skyrocketed. In the 2010 "flash crash," a spike in the volume of these messages exacerbated volatility, overwhelming the market's infrastructure.
According to industry analysis, since 2005 the flow of these order instructions sent through U.S. stock exchanges has increased more than 1000%, yet trade volume has increased by only 50%. One consequence of the enormous growth in order-message traffic is that increasingly the quote that an investor sees isn't the price he or she can transact, as orders often get canceled at lightning-quick speeds.
Currently there is no cost to market participants who generate excessive order-message traffic. One idea would be to consider if regulatory fees applied on the basis of extreme message traffic—rather than executions alone—are appropriate and would enhance the underlying strength and resiliency of the system. Regulators in Canada and Australia have adopted this approach.
• Third: Public market data should be disseminated to all market participants simultaneously. Exchanges currently disseminate prices and transaction data to the SEC-sanctioned distributor for all investors, but exchanges may also send this information directly to private subscribers. While the data leave the exchange simultaneously, the public data are delayed because they go through the intermediary's processing infrastructure. The public aggregator should release information to all market participants at the same time.
Removing the possibility of differentiated channels for market data also reduces incentives that favor investment in the speed of one channel over the stability and resiliency of another. Instability creates and compounds market disruptions. Stable and accurate market data is one of the most important elements of market safety; it is the backbone of the market that must weather the most extreme periods.
• Fourth: Give clearing members more tools to limit risk. A central clearing house with strong operational and financial integrity can reduce credit risk, increase liquidity and enhance transparency through enforced margin requirements and verified and recorded trades. But because clearing members extend credit, the associated risks must be recognized. Tools like pre-trade credit checks and being able to monitor positions and credit on an intraday basis are essential. Clearing firms use various tools like margin and capital adequacy to manage their risk, but exchanges should also provide uniform mechanisms for clearers to set credit limits and to revoke a client's ability to trade immediately upon request, when necessary.
U.S. markets today are the deepest, most liquid in the world and serve an indispensable role in allocating capital. That means the companies that have the greatest potential to innovate and grow will get the capital they need to create jobs, build new industries and ensure a vibrant economy. Investors have benefited significantly from technology and innovation, but the speed and complexity at which our markets operate aren't being matched with the operational and control environment to support them.
Mr. Cohn is president and chief operating officer of Goldman Sachs
Tuesday, March 4, 2014
Shedding Some Light on Shadow Banking - Don't let a vaguely sinister label for this useful financing prompt harmful regulations
Shedding Some Light on Shadow Banking. By Tony James
Don't let a vaguely sinister label for this useful financing prompt harmful regulations.
WSJ, Mar 04, 2014
http://online.wsj.com/news/articles/SB10001424052702304255604579408991330843998
The term "shadow banking" is one of those Orwellian terms that can undermine critical thought. It has a negative, vaguely sinister connotation about a source of financing that is an essential and desirable part of the financial system. As discussion about the regulation of nonbank entities begins in earnest, it's time to clear the air about what these institutions are and how they operate.
Shadow banking—or more accurately, market-based financing—is simply the provision of capital by loans or investments to some companies by other companies that are not banks. Examples include insurance companies, credit investment funds, hedge funds, private-equity funds, and broker dealers. These institutions do not operate in the dark. Market-based finance in the U.S. amounts to trillions of dollars and is significantly larger than the country's entire banking system.
Mark Carney, Governor of the Bank of England, has correctly noted the role of shadow banking in "diversifying the sources of financing of our economies in a sustainable way." For example, traditional bank financing is not always available for many small- and medium-size companies. Market-based financing has fueled the creation of companies (and thousands of jobs) in many industries. It has rescued companies on the edge of bankruptcy and saved the jobs associated with them. And market-based financing has built warehouses, manufacturing plants and hotels, such as the Four Seasons Hotel and Residences in downtown New York City, when traditional banks could not, or would not, provide capital.
Large banks concentrate risk in relatively few hands, which can pose a risk to the economic system. That is not the case for market-based financing. Risks are safely dispersed across many sophisticated investors who can readily absorb any potential losses. Unlike traditional banks, market-based funds do not borrow from the Federal Reserve, nor do they rely on government-guaranteed deposits. Substantially all their capital comes from well-advised institutional investors who know what they are getting into, and understand the associated risks. Bank depositors (and taxpayers) on the other hand, do not typically know what a bank's investments are or how risky they may be.
Typically, market-based funds also lack the elements that are sources of systemic instability, including high leverage and interdependence. Each investment within a fund is independent and not cross-collateralized or supporting a common debt structure. Losses in any one fund are without recourse to any other fund or to the manager of the capital.
In addition, investors in many market-based funds, including credit investment funds, hedge funds and private-equity funds often cannot instantly withdraw their capital, unlike depositors in banks. Large, sudden withdrawals can lead to runs on the bank or force "fire sales" of assets. With stable, in-place capital, these funds can provide a critical source of liquidity to trading markets in times of turmoil.
Of course, some regulation may be appropriate for nonbank entities that present bank-like risks to financial stability or that lend to consumers. But let's not forget that it was the regulated entities that were the source of almost all the systemic risk in the financial crisis.
Regulations are far from a panacea and would need to be carefully constructed to ensure that the enormous economic benefits of market-based financing are not lost through inappropriate and stifling regulatory policies established for large, deposit-taking banks.
While banks in the U.S. are better capitalized and much safer today than before the financial crisis, market-based financing—shadow banking, if you prefer—still brings enormous economic advantages to a wide range of businesses and employees, and fills a real gap in the market.
In Europe, where banks are less well capitalized, the need for market-based financing is even more critical. As the G-20's Financial Stability Board noted in its policy framework last August, market-based financing creates "competition in financial markets that may lead to innovation, efficient credit allocation and cost reduction."
It is critical that any misunderstanding of the shadow banking system does not result in regulations that undermine the many thousands of companies and jobs that need market-based financing to survive and grow.
Mr. James is president and chief operating officer of Blackstone, a global investment and advisory firm.
Don't let a vaguely sinister label for this useful financing prompt harmful regulations.
WSJ, Mar 04, 2014
http://online.wsj.com/news/articles/SB10001424052702304255604579408991330843998
The term "shadow banking" is one of those Orwellian terms that can undermine critical thought. It has a negative, vaguely sinister connotation about a source of financing that is an essential and desirable part of the financial system. As discussion about the regulation of nonbank entities begins in earnest, it's time to clear the air about what these institutions are and how they operate.
Shadow banking—or more accurately, market-based financing—is simply the provision of capital by loans or investments to some companies by other companies that are not banks. Examples include insurance companies, credit investment funds, hedge funds, private-equity funds, and broker dealers. These institutions do not operate in the dark. Market-based finance in the U.S. amounts to trillions of dollars and is significantly larger than the country's entire banking system.
Mark Carney, Governor of the Bank of England, has correctly noted the role of shadow banking in "diversifying the sources of financing of our economies in a sustainable way." For example, traditional bank financing is not always available for many small- and medium-size companies. Market-based financing has fueled the creation of companies (and thousands of jobs) in many industries. It has rescued companies on the edge of bankruptcy and saved the jobs associated with them. And market-based financing has built warehouses, manufacturing plants and hotels, such as the Four Seasons Hotel and Residences in downtown New York City, when traditional banks could not, or would not, provide capital.
Large banks concentrate risk in relatively few hands, which can pose a risk to the economic system. That is not the case for market-based financing. Risks are safely dispersed across many sophisticated investors who can readily absorb any potential losses. Unlike traditional banks, market-based funds do not borrow from the Federal Reserve, nor do they rely on government-guaranteed deposits. Substantially all their capital comes from well-advised institutional investors who know what they are getting into, and understand the associated risks. Bank depositors (and taxpayers) on the other hand, do not typically know what a bank's investments are or how risky they may be.
Typically, market-based funds also lack the elements that are sources of systemic instability, including high leverage and interdependence. Each investment within a fund is independent and not cross-collateralized or supporting a common debt structure. Losses in any one fund are without recourse to any other fund or to the manager of the capital.
In addition, investors in many market-based funds, including credit investment funds, hedge funds and private-equity funds often cannot instantly withdraw their capital, unlike depositors in banks. Large, sudden withdrawals can lead to runs on the bank or force "fire sales" of assets. With stable, in-place capital, these funds can provide a critical source of liquidity to trading markets in times of turmoil.
Of course, some regulation may be appropriate for nonbank entities that present bank-like risks to financial stability or that lend to consumers. But let's not forget that it was the regulated entities that were the source of almost all the systemic risk in the financial crisis.
Regulations are far from a panacea and would need to be carefully constructed to ensure that the enormous economic benefits of market-based financing are not lost through inappropriate and stifling regulatory policies established for large, deposit-taking banks.
While banks in the U.S. are better capitalized and much safer today than before the financial crisis, market-based financing—shadow banking, if you prefer—still brings enormous economic advantages to a wide range of businesses and employees, and fills a real gap in the market.
In Europe, where banks are less well capitalized, the need for market-based financing is even more critical. As the G-20's Financial Stability Board noted in its policy framework last August, market-based financing creates "competition in financial markets that may lead to innovation, efficient credit allocation and cost reduction."
It is critical that any misunderstanding of the shadow banking system does not result in regulations that undermine the many thousands of companies and jobs that need market-based financing to survive and grow.
Mr. James is president and chief operating officer of Blackstone, a global investment and advisory firm.
Saturday, February 22, 2014
Diversify Europe's Financial Grid. By Alberto Gallo
Diversify Europe's Financial Grid. By Alberto Gallo
Euro-zone lenders hold assets worth more than €30 trillion, three times the output of the euro area.
http://online.wsj.com/news/articles/SB10001424052702304914204579394612843250876
WSJ, Feb 20, 2014
European banks remain vulnerable to another financial crisis. Capital buffers are too small, creditor bail-ins too low and emergency resolution mechanisms still inadequate to insulate governments from losses that could arise from a system-wide failure. In short, we need a new formula for financial stability.
A banking crisis today would still cost European sovereigns between 2% and 10% of GDP. The final bill would depend on many factors, the size of the initial loss being only one. Others include how much is mitigated by the banks' own capital reserves, by pre-existing government backstops and by any money that can be recouped by bailing-in bondholders.
The size of a country's banking system is also critical. By that measure, Europe's banks remain too big to fail.
Euro-zone lenders have shrunk their balance sheets by a total of €4.4 trillion since the second quarter of 2012, but still hold assets worth more than €30 trillion, according to the European Central Bank. That's three times the output of the euro area and far outstrips the U.S., where bank assets are less than GDP.
And if European banks are too big, they're also still undercapitalized. Capital is adequate relative to risk-weighted assets, against which "capital ratios" are measured, but falls short as a proportion of the banks' total asset base and of potential losses.
To make their capital ratios look better, many banks have reduced their risk-weighted assets over the past few years, often by "optimizing" their internal risk models. More than one-third of European banks now have less than 30% risk-weighted assets over total (RWA), some as low as 20%. This means a bank's "10% capital ratio" is effectively equal to €2 of capital for every €100 of assets (20% RWA times 10% equals €2). That's too low, especially for systemic banks whose balance sheets are as large as a country's GDP.
Regulators recognize the issue and are trying to introduce an absolute floor on capital: the Basel committee's 3% leverage ratio prescribes a minimum €3 of capital over assets. But even this would not have helped troubled banks such as Dexia or Anglo Irish, which lost the equivalent of 4% and 20% of their assets during the 2008-09 crisis, respectively.
We estimate that to stand on their own feet, banks need a leverage ratio of about 5.8% of capital over assets. This is consistent with the approach of Swiss and U.S. regulators, who recommend a 6% leverage ratio. It means euro-zone banks would need to raise an additional €492 billion of capital—more than six times the €80 billion that the European Banking Authority says they raised in 2013.
Another solution would be to increase bail-in requirements or state backstops. German Finance Minister Wolfgang Schäuble recently proposed speeding up the formation of Europe's Single Resolution Fund, a bank-financed pool of money planned to help wrap up or restructure failing banks. But the proposed €55 billion that would be available in the fund pales in comparison to the potential losses generated by bank failures, even if a bail-in were to be implemented first. We estimate the fund could help one large or two mid-sized institutions withstand failure, at best.
These backstops are also very difficult to put into action—the decision to restructure or resolve a bank has to pass through national committees, the European Commission, the Single-Resolution Mechanism (whose fine-print is still being drafted), and various other boards. Not a weekend job.
Regulators need a more comprehensive approach to making banks safe. It must encompass the total size of capital reserves, the size and structure of banking systems, and rules that can efficiently bail-in bondholders. Regulators are moving in the right direction, but they have not gone far enough.
Ultimately, I believe that Europe will be free from the threat of failing banks only once it has a smaller banking system and a more diversified supply of credit.
Think of credit like an energy grid: In Europe, 80% to 90% of the energy comes from banks—the coal or nuclear plants of the system. If something goes wrong with them, the costs will be high, the collateral effects toxic, and the damage could take years to clean up.
We need more "renewable energy" in the form of non-bank sources of credit. That means bonds, securitizations, and lending from insurance companies and asset managers. Only then will Europe be free from its banks.
Mr. Gallo is the head of macro-credit research at the Royal Bank of Scotland. The views expressed are his own.
Euro-zone lenders hold assets worth more than €30 trillion, three times the output of the euro area.
http://online.wsj.com/news/articles/SB10001424052702304914204579394612843250876
WSJ, Feb 20, 2014
European banks remain vulnerable to another financial crisis. Capital buffers are too small, creditor bail-ins too low and emergency resolution mechanisms still inadequate to insulate governments from losses that could arise from a system-wide failure. In short, we need a new formula for financial stability.
A banking crisis today would still cost European sovereigns between 2% and 10% of GDP. The final bill would depend on many factors, the size of the initial loss being only one. Others include how much is mitigated by the banks' own capital reserves, by pre-existing government backstops and by any money that can be recouped by bailing-in bondholders.
The size of a country's banking system is also critical. By that measure, Europe's banks remain too big to fail.
Euro-zone lenders have shrunk their balance sheets by a total of €4.4 trillion since the second quarter of 2012, but still hold assets worth more than €30 trillion, according to the European Central Bank. That's three times the output of the euro area and far outstrips the U.S., where bank assets are less than GDP.
And if European banks are too big, they're also still undercapitalized. Capital is adequate relative to risk-weighted assets, against which "capital ratios" are measured, but falls short as a proportion of the banks' total asset base and of potential losses.
To make their capital ratios look better, many banks have reduced their risk-weighted assets over the past few years, often by "optimizing" their internal risk models. More than one-third of European banks now have less than 30% risk-weighted assets over total (RWA), some as low as 20%. This means a bank's "10% capital ratio" is effectively equal to €2 of capital for every €100 of assets (20% RWA times 10% equals €2). That's too low, especially for systemic banks whose balance sheets are as large as a country's GDP.
Regulators recognize the issue and are trying to introduce an absolute floor on capital: the Basel committee's 3% leverage ratio prescribes a minimum €3 of capital over assets. But even this would not have helped troubled banks such as Dexia or Anglo Irish, which lost the equivalent of 4% and 20% of their assets during the 2008-09 crisis, respectively.
We estimate that to stand on their own feet, banks need a leverage ratio of about 5.8% of capital over assets. This is consistent with the approach of Swiss and U.S. regulators, who recommend a 6% leverage ratio. It means euro-zone banks would need to raise an additional €492 billion of capital—more than six times the €80 billion that the European Banking Authority says they raised in 2013.
Another solution would be to increase bail-in requirements or state backstops. German Finance Minister Wolfgang Schäuble recently proposed speeding up the formation of Europe's Single Resolution Fund, a bank-financed pool of money planned to help wrap up or restructure failing banks. But the proposed €55 billion that would be available in the fund pales in comparison to the potential losses generated by bank failures, even if a bail-in were to be implemented first. We estimate the fund could help one large or two mid-sized institutions withstand failure, at best.
These backstops are also very difficult to put into action—the decision to restructure or resolve a bank has to pass through national committees, the European Commission, the Single-Resolution Mechanism (whose fine-print is still being drafted), and various other boards. Not a weekend job.
Regulators need a more comprehensive approach to making banks safe. It must encompass the total size of capital reserves, the size and structure of banking systems, and rules that can efficiently bail-in bondholders. Regulators are moving in the right direction, but they have not gone far enough.
Ultimately, I believe that Europe will be free from the threat of failing banks only once it has a smaller banking system and a more diversified supply of credit.
Think of credit like an energy grid: In Europe, 80% to 90% of the energy comes from banks—the coal or nuclear plants of the system. If something goes wrong with them, the costs will be high, the collateral effects toxic, and the damage could take years to clean up.
We need more "renewable energy" in the form of non-bank sources of credit. That means bonds, securitizations, and lending from insurance companies and asset managers. Only then will Europe be free from its banks.
Mr. Gallo is the head of macro-credit research at the Royal Bank of Scotland. The views expressed are his own.
Thursday, February 13, 2014
How Dodd-Frank Doubles Down on 'Too Big to Fail'
How Dodd-Frank Doubles Down on 'Too Big to Fail'
Two major flaws mean that the act doesn't address problems that led to the financial crisis of 2008.
http://online.wsj.com/news/articles/SB10001424052702304691904579345123301232800
By Charles W. Calomiris And Allan H. Meltzer WSJ, Feb. 12, 2014 6:44 p.m. ET
The Dodd-Frank Act, passed in 2010, mandated hundreds of major regulations to control bank risk-taking, with the aim of preventing a repeat of the taxpayer bailouts of "too big to fail" financial institutions. These regulations are on top of many rules adopted after the 2008 financial crisis to make banks more secure. Yet at a Senate hearing in January, Elizabeth Warren asked a bipartisan panel of four economists (including Allan Meltzer ) whether the Dodd-Frank Act would end the problem of too-big-to-fail banks. Every one answered no.
Dodd-Frank's approach to regulating bank risk has two major flaws. First, its standards and rules require regulatory enforcement instead of giving bankers strong incentives to maintain safety and soundness of their own institutions. Second, the regulatory framework attempts to prevent any individual bank from failing, instead of preventing the collapse of the payments and credit systems.
The principal danger to the banking system arises when fear and uncertainty about the value of bank assets induces the widespread refusal by banks to accept each other's short-term debts. Such refusals can lead to a collapse of the interbank payments system, a dramatic contraction of bank credit, and a general loss in confidence by consumers and businesses—all of which can have dire economic consequences. The proper goal is thus to make the banking system sufficiently resilient so that no single failure can result in a general collapse.
Part of the current confusion over regulatory means and ends reflects a mistaken understanding of the Lehman Brothers bankruptcy. The collapse of interbank credit in September 2008 was not the automatic consequence of Lehman's failure.
Rather, it resulted from a widespread market perception that many large banks were at significant risk of failing. This perception didn't develop overnight. It had evolved steadily and visibly over more than two years, while regulators and politicians did nothing.
Citibank's equity-to-assets ratio, measured in market value—the best single comprehensive measure of a bank's financial strength—fell steadily from about 13% in April 2006 to about 3% by September 2008. And that low value reflected an even lower perception of fundamental asset worth, because the 3% market value included the value of an expected bailout. Lehman's collapse was simply the match in the tinder box. If other banks had been sufficiently safe and sound at the time of Lehman's demise, then the financial system would not have been brought to its knees by a single failure.
To ensure systemwide resiliency, most of Dodd-Frank's regulations should be replaced by measures requiring large, systemically important banks to increase their capacity to deal with losses. The first step would be to substantially raise the minimum ratio of the book value of their equity relative to the book value of their assets.
The Brown-Vitter bill now before Congress (the Terminating Bailouts for Taxpayer Fairness Act) would raise that minimum ratio to 15%, roughly a threefold increase from current levels. Although reasonable people can disagree about the optimal minimum ratio—one could argue that a 10% ratio would be adequate in the presence of additional safeguards—15% is not an arbitrary number.
At the onset of the Great Depression, large New York City banks all maintained more than 15% of their assets in equity, and none of them succumbed to the worst banking system shocks in U.S. history from 1929 to 1932. The losses suffered by major banks in the recent crisis would not have wiped out their equity if it had been equal to 15% of their assets.
Bankers and their supervisors often find it mutually convenient to understate expected loan losses and thereby overstate equity values. The problem is magnified when equity requirements are expressed relative to "risk-weighted assets," allowing regulators to permit banks' models to underestimate their risks.
This is not a hypothetical issue. In December 2008, when Citi was effectively insolvent, and the market's valuation of its equity correctly reflected that fact, the bank's accounts showed a risk-based capital ratio of 11.8% and a risk-based Tier 1 capital ratio (meant to include only high-quality, equity-like capital) of about 7%. Moreover, factors such as a drop in bank fee income can affect the actual value of a bank's equity, regardless of the riskiness of its loans.
For these reasons, large banks' book equity requirements need to be buttressed by other measures. One is a minimum requirement that banks maintain cash reserves (New York City banks during the Depression maintained cash reserves in excess of 25%). Cash held at the central bank provides protection against default risk similar to equity capital, but it has the advantage of being observable and incapable of being fudged by esoteric risk-modeling.
Several researchers have suggested a variety of ways to supplement simple equity and cash requirements with creative contractual devices that would give bankers strong incentives to make sure that they maintain adequate capital. In the Journal of Applied Corporate Finance (2013), Charles Calomiris and Richard Herring propose debt that converts to equity whenever the market value ratio of a bank's equity is below 9% for more than 90 days. Since the conversion would significantly dilute the value of the stock held by pre-existing shareholders, a bank CEO will have a big incentive to avoid it.
There is plenty of room to debate the details, but the essential reform is to place responsibility for absorbing a bank's losses on banks and their owners. Dodd-Frank institutionalizes too-big-to-fail protection by explicitly permitting bailouts via a "resolution authority" provision at the discretion of government authorities, financed by taxes on surviving banks—and by taxpayers should these bank taxes be insufficient. That provision should be repealed and replaced by clear rules that can't be gamed by bank managers.
Mr. Calomiris is the co-author (with Stephen Haber ) of "Fragile By Design: The Political Origins of Banking Crises and Scarce Credit" (Princeton, 2014). Mr. Meltzer is the author of "Why Capitalism?" (Oxford, 2012). They co-direct (with Kenneth Scott ) the new program on Regulation and the Rule of Law at the Hoover Institution.
Two major flaws mean that the act doesn't address problems that led to the financial crisis of 2008.
http://online.wsj.com/news/articles/SB10001424052702304691904579345123301232800
By Charles W. Calomiris And Allan H. Meltzer WSJ, Feb. 12, 2014 6:44 p.m. ET
The Dodd-Frank Act, passed in 2010, mandated hundreds of major regulations to control bank risk-taking, with the aim of preventing a repeat of the taxpayer bailouts of "too big to fail" financial institutions. These regulations are on top of many rules adopted after the 2008 financial crisis to make banks more secure. Yet at a Senate hearing in January, Elizabeth Warren asked a bipartisan panel of four economists (including Allan Meltzer ) whether the Dodd-Frank Act would end the problem of too-big-to-fail banks. Every one answered no.
Dodd-Frank's approach to regulating bank risk has two major flaws. First, its standards and rules require regulatory enforcement instead of giving bankers strong incentives to maintain safety and soundness of their own institutions. Second, the regulatory framework attempts to prevent any individual bank from failing, instead of preventing the collapse of the payments and credit systems.
The principal danger to the banking system arises when fear and uncertainty about the value of bank assets induces the widespread refusal by banks to accept each other's short-term debts. Such refusals can lead to a collapse of the interbank payments system, a dramatic contraction of bank credit, and a general loss in confidence by consumers and businesses—all of which can have dire economic consequences. The proper goal is thus to make the banking system sufficiently resilient so that no single failure can result in a general collapse.
Part of the current confusion over regulatory means and ends reflects a mistaken understanding of the Lehman Brothers bankruptcy. The collapse of interbank credit in September 2008 was not the automatic consequence of Lehman's failure.
Rather, it resulted from a widespread market perception that many large banks were at significant risk of failing. This perception didn't develop overnight. It had evolved steadily and visibly over more than two years, while regulators and politicians did nothing.
Citibank's equity-to-assets ratio, measured in market value—the best single comprehensive measure of a bank's financial strength—fell steadily from about 13% in April 2006 to about 3% by September 2008. And that low value reflected an even lower perception of fundamental asset worth, because the 3% market value included the value of an expected bailout. Lehman's collapse was simply the match in the tinder box. If other banks had been sufficiently safe and sound at the time of Lehman's demise, then the financial system would not have been brought to its knees by a single failure.
To ensure systemwide resiliency, most of Dodd-Frank's regulations should be replaced by measures requiring large, systemically important banks to increase their capacity to deal with losses. The first step would be to substantially raise the minimum ratio of the book value of their equity relative to the book value of their assets.
The Brown-Vitter bill now before Congress (the Terminating Bailouts for Taxpayer Fairness Act) would raise that minimum ratio to 15%, roughly a threefold increase from current levels. Although reasonable people can disagree about the optimal minimum ratio—one could argue that a 10% ratio would be adequate in the presence of additional safeguards—15% is not an arbitrary number.
At the onset of the Great Depression, large New York City banks all maintained more than 15% of their assets in equity, and none of them succumbed to the worst banking system shocks in U.S. history from 1929 to 1932. The losses suffered by major banks in the recent crisis would not have wiped out their equity if it had been equal to 15% of their assets.
Bankers and their supervisors often find it mutually convenient to understate expected loan losses and thereby overstate equity values. The problem is magnified when equity requirements are expressed relative to "risk-weighted assets," allowing regulators to permit banks' models to underestimate their risks.
This is not a hypothetical issue. In December 2008, when Citi was effectively insolvent, and the market's valuation of its equity correctly reflected that fact, the bank's accounts showed a risk-based capital ratio of 11.8% and a risk-based Tier 1 capital ratio (meant to include only high-quality, equity-like capital) of about 7%. Moreover, factors such as a drop in bank fee income can affect the actual value of a bank's equity, regardless of the riskiness of its loans.
For these reasons, large banks' book equity requirements need to be buttressed by other measures. One is a minimum requirement that banks maintain cash reserves (New York City banks during the Depression maintained cash reserves in excess of 25%). Cash held at the central bank provides protection against default risk similar to equity capital, but it has the advantage of being observable and incapable of being fudged by esoteric risk-modeling.
Several researchers have suggested a variety of ways to supplement simple equity and cash requirements with creative contractual devices that would give bankers strong incentives to make sure that they maintain adequate capital. In the Journal of Applied Corporate Finance (2013), Charles Calomiris and Richard Herring propose debt that converts to equity whenever the market value ratio of a bank's equity is below 9% for more than 90 days. Since the conversion would significantly dilute the value of the stock held by pre-existing shareholders, a bank CEO will have a big incentive to avoid it.
There is plenty of room to debate the details, but the essential reform is to place responsibility for absorbing a bank's losses on banks and their owners. Dodd-Frank institutionalizes too-big-to-fail protection by explicitly permitting bailouts via a "resolution authority" provision at the discretion of government authorities, financed by taxes on surviving banks—and by taxpayers should these bank taxes be insufficient. That provision should be repealed and replaced by clear rules that can't be gamed by bank managers.
Mr. Calomiris is the co-author (with Stephen Haber ) of "Fragile By Design: The Political Origins of Banking Crises and Scarce Credit" (Princeton, 2014). Mr. Meltzer is the author of "Why Capitalism?" (Oxford, 2012). They co-direct (with Kenneth Scott ) the new program on Regulation and the Rule of Law at the Hoover Institution.
Saturday, January 25, 2014
Number of new antibacterial-drug approvals in the US
Source: Drug Makers Tiptoe Back Into Antibiotic R&D. By Hester Plumridge
As Superbugs Spread, Regulators Begin to Remove Roadblocks for New Treatments
WSJ, Jan 23, 2014
http://online.wsj.com/news/articles/SB10001424052702303465004579322601579895822
Saturday, December 28, 2013
MRSA Infections, swine effluent lagoons, and farm consolidations
Answering to some comments in a book review, 'In Meat We Trust,' by Maureen Ogle (http://online.wsj.com/news/articles/SB10001424052702303482504579177742158078278), WSJ, Dec. 17, 2013 6:36 p.m. ET:
A recent paper* in a FAO publication summarizes advances in hog manure management. Obviously, the cases mentioned are small in comparison with the great consolidated farms, but even so, there are multiple ways to manage better the effluents and some useful ways to profit from the lagoons/catchments are shown here.
@Mr Evangelista: I got access to the paper** you mentioned. If interested you may ask for it. I'd like, though, to calm down things. As it says other paper*** published at the same time, which it is likely it is the one Mr Blumenthal mentioned:
"In 2011,we estimated the overall number of invasive MRSA infections was 80 461; 31% lower than when estimates were first available in 2005"
The reasons are not well understood (several explanations are offered), but that is not relevant now. The important idea is that despite increasing consolidation of farm operations and an increasing population (from approx 295 million in 2005 to approx 311 million in 2011), there are 31% less MRSA infections.
References
* Intensive and Integrated Farm Systems using Fermentation of Swine Effluent in Brazil. By I. Bergier, E. Soriano, G. Wiedman and A. Kososki. In Biotechnologies at Work for Smallholders: Case Studies from Developing Countries in Crops, Livestock and Fish. Edited by J. Ruane, J.D. Dargie, C. Mba, P. Boettcher, H.P.S. Makkar, D.M. Bartley and A. Sonnino. Food and Agriculture Organization of the United Nations, 2013. http://www.fao.org/docrep/018/i3403e/i3403e00.htm
** High-Density Livestock Operations, Crop Field Application of Manure, and Risk of Community-Associated Methicillin-Resistant Staphylococcus aureus Infection in Pennsylvania. By Joan A. Casey, MA; Frank C. Curriero, PhD, MA; Sara E. Cosgrove,MD, MS; Keeve E. Nachman, PhD, MHS; Brian S. Schwartz, MD,MS. JAMA Intern Med. Vol 173, No. 21, doi:10.1001/jamainternmed.2013.10408
*** National Burden of InvasiveMethicillin-Resistant Staphylococcus aureus Infections, United States, 2011. By Raymund Dantes, MD, MPH; Yi Mu, PhD; Ruth Belflower, RN, MPH; Deborah Aragon, MSPH; Ghinwa Dumyati, MD; Lee H. Harrison, MD; Fernanda C. Lessa, MD; Ruth Lynfield, MD; Joelle Nadle, MPH; Susan Petit, MPH; Susan M. Ray, MD; William Schaffner, MD; John Townes, MD; Scott Fridkin, MD; for the Emerging Infections Program–Active Bacterial Core Surveillance MRSA Surveillance Investigators. JAMA Intern Med. Vol 173, No. 21, doi:10.1001/jamainternmed.2013.10423
Thursday, December 26, 2013
Views from Japan: Abe Visit to Yasukuni Shrine
Views from Japan: Abe Visit to Yasukuni Shrine
1 Abe Visit to Controversial Japanese Shrine Draws Rare U.S. Criticism. By George Nishiyama
Visit to Yasukuni Raises Concern Premier Shifting Focus From Economy to Nationalistic Goals
Wall Street Journal, Dec. 26, 2013 3:04 p.m. ET
http://online.wsj.com/news/articles/SB10001424052702304483804579281103015121712
[...]
Mr. Abe visited Tokyo's Yasukuni Shrine on Thursday, triggering strong criticism from Beijing and Seoul, but also a rare disapproval by Washington, which has pushed the Asian neighbors to mend ties that are strained by territorial disputes and differences over wartime history.
Many Asian nations that suffered from Japan's wartime actions view Yasukuni as a symbol of Tokyo's past militarism because it honors not just Japan's war dead but also some convicted World War II war criminals, including Hideki Tojo, who was prime minister for most of the war.
"The United States is disappointed that Japan's leadership has taken an action that will exacerbate tensions with Japan's neighbors," said the U.S. Embassy in Tokyo on its website, in an unusual direct criticism of Japan's leader by its main ally.
Mr. Abe has repeatedly said he regretted not visiting the shrine during his first tenure as prime minister from 2006 to 2007 and said his critics misunderstood his intentions. "I offered my respects to those who lost their precious lives for our country, and prayed that their souls may rest in peace," he told reporters after the visit. "I have no intention at all of hurting the feelings of the Chinese or the South Korean people."
Although a well-known conservative who has stated that changing the pacifist constitution drafted by the occupying U.S. forces was his "life's work," Mr. Abe had adopted an economy-first policy after taking office in December 2012, putting his nationalist agenda on the back burner.
His so-called Abenomics policy featuring government spending and monetary stimulus has spurred consumption, resulting in the Japanese economy recording the strongest expansion among industrialized nations in the first half of this year, although the country's growth rate slowed in the third quarter.
The improved economy has helped make Mr. Abe one of the most popular Japanese leaders in recent years, with his support ratings hovering around 60% for most of the past year.
All of that has come as a relief to Washington, which faces a rising military power in China and is wary of the regional tensions developing into physical confrontations. The U.S. has also tired of a revolving door of short-lived Japanese prime ministers.
During an October visit to Tokyo, U.S. Secretary of State John Kerry and Defense Secretary Chuck Hagel paid respects at the Chidorigafuchi National Cemetery, a tomb for Japan's unknown war dead, in a move widely seen as a message to Mr. Abe that there are alternatives to Yasukuni.
While Mr. Abe had refrained from going to Yasukuni until Thursday, on the anniversary of his taking office, some of his cabinet ministers had visited, each time inviting protests from China and South Korea. Mr. Abe's visit, the first by a prime minister in seven years, drew angry responses from the neighbors.
China's foreign minister summoned Japan's ambassador to protest and criticized Thursday's visit as the latest attempt by Mr. Abe to gloss over Japan's militaristic past. "Under these conditions, not only does the Japanese leader not show restraint, but instead makes things worse by manufacturing another incident over history," spokesman Qin Gang said in a statement. "Japan must bear all the consequences arising from this."
Seoul also decried the move. "Our government cannot but deplore and express anger about Japanese Prime Minister Shinzo Abe's visit to the Yasukuni Shrine despite concerns from neighboring countries and the international community," said Yoo Jin-Ryong, a South Korean spokesman.
Analysts in the region agreed the move would further deteriorate relations. The development is severe, said Wang Shaopu, director of Japan Institution at Shanghai Jiao Tong University. "It will worsen China-Japan's already bad-enough relations."
Others said Mr. Abe had gone ahead with the visit because he felt he had nothing to lose given that ties were already frayed. While he has visited all of the Association of Southeast Asian Nations, he has yet to visit China or South Korea nor has he held formal bilateral meetings with their leaders.
"Mr. Abe probably thought that a visit to Yasukuni at this point wouldn't have too much of an impact on prospects of future summits with Beijing and Seoul considering how chances already seemed slim," said Masafumi Kaneko, a senior research fellow at the Center for International and Strategic Studies at PHP Institute.
Mr. Abe's aides said what they cared about most was the U.S. reaction. "The biggest, or should I say, the only concern is what the U.S. would say," said a senior government official who was aware of the prime minister's plans in advance. He expressed confidence that the ties between the allies wouldn't be affected, noting that President Barack Obama was relying on the prime minister to help seal a deal over a trans-Pacific free-trade forum and to move forward plans to relocate U.S. troops in the region.
The government official said Mr. Abe intended to stick to making economic recovery the top priority, stressing how investors would start to see deregulatory measures—the last of the three pillars of his economic policy—in action in the new year. "We intend to keep the ball rolling for Abenomics," the official said.
But Mr. Abe may have miscalculated the U.S. response, analysts said. "The U.S. reaction was unexpected. Mr. Abe is moving to bolster the Japan-U.S. alliance, and the focus is whether they can move beyond just a military alliance, and share values," said Koji Murata, a political-science professor and the president of Doshisha University. "The U.S. may be frustrated at Mr. Abe, who is obsessed with history issues."
Diplomatic feuds have shown they can affect business interests in the region. After the previous Japanese government nationalized disputed islands in the East China Sea in September 2012, Chinese consumers boycotted Japanese products, dealing a serious blow to Japanese firms, including car makers.
But the Tokyo stock market took Mr. Abe's visit to the shrine in stride on Thursday, finishing higher. Investors said other factors, including a weaker yen, were more important than diplomatic issues.
[...]
—Alexander Martin, Kosaku Narioka and James T. Areddy contributed to this article.
2 A Japanese citizen weighs in:
1 Abe Visit to Controversial Japanese Shrine Draws Rare U.S. Criticism. By George Nishiyama
Visit to Yasukuni Raises Concern Premier Shifting Focus From Economy to Nationalistic Goals
Wall Street Journal, Dec. 26, 2013 3:04 p.m. ET
http://online.wsj.com/news/articles/SB10001424052702304483804579281103015121712
[...]
Mr. Abe visited Tokyo's Yasukuni Shrine on Thursday, triggering strong criticism from Beijing and Seoul, but also a rare disapproval by Washington, which has pushed the Asian neighbors to mend ties that are strained by territorial disputes and differences over wartime history.
Many Asian nations that suffered from Japan's wartime actions view Yasukuni as a symbol of Tokyo's past militarism because it honors not just Japan's war dead but also some convicted World War II war criminals, including Hideki Tojo, who was prime minister for most of the war.
"The United States is disappointed that Japan's leadership has taken an action that will exacerbate tensions with Japan's neighbors," said the U.S. Embassy in Tokyo on its website, in an unusual direct criticism of Japan's leader by its main ally.
Mr. Abe has repeatedly said he regretted not visiting the shrine during his first tenure as prime minister from 2006 to 2007 and said his critics misunderstood his intentions. "I offered my respects to those who lost their precious lives for our country, and prayed that their souls may rest in peace," he told reporters after the visit. "I have no intention at all of hurting the feelings of the Chinese or the South Korean people."
Although a well-known conservative who has stated that changing the pacifist constitution drafted by the occupying U.S. forces was his "life's work," Mr. Abe had adopted an economy-first policy after taking office in December 2012, putting his nationalist agenda on the back burner.
His so-called Abenomics policy featuring government spending and monetary stimulus has spurred consumption, resulting in the Japanese economy recording the strongest expansion among industrialized nations in the first half of this year, although the country's growth rate slowed in the third quarter.
The improved economy has helped make Mr. Abe one of the most popular Japanese leaders in recent years, with his support ratings hovering around 60% for most of the past year.
All of that has come as a relief to Washington, which faces a rising military power in China and is wary of the regional tensions developing into physical confrontations. The U.S. has also tired of a revolving door of short-lived Japanese prime ministers.
During an October visit to Tokyo, U.S. Secretary of State John Kerry and Defense Secretary Chuck Hagel paid respects at the Chidorigafuchi National Cemetery, a tomb for Japan's unknown war dead, in a move widely seen as a message to Mr. Abe that there are alternatives to Yasukuni.
While Mr. Abe had refrained from going to Yasukuni until Thursday, on the anniversary of his taking office, some of his cabinet ministers had visited, each time inviting protests from China and South Korea. Mr. Abe's visit, the first by a prime minister in seven years, drew angry responses from the neighbors.
China's foreign minister summoned Japan's ambassador to protest and criticized Thursday's visit as the latest attempt by Mr. Abe to gloss over Japan's militaristic past. "Under these conditions, not only does the Japanese leader not show restraint, but instead makes things worse by manufacturing another incident over history," spokesman Qin Gang said in a statement. "Japan must bear all the consequences arising from this."
Seoul also decried the move. "Our government cannot but deplore and express anger about Japanese Prime Minister Shinzo Abe's visit to the Yasukuni Shrine despite concerns from neighboring countries and the international community," said Yoo Jin-Ryong, a South Korean spokesman.
Analysts in the region agreed the move would further deteriorate relations. The development is severe, said Wang Shaopu, director of Japan Institution at Shanghai Jiao Tong University. "It will worsen China-Japan's already bad-enough relations."
Others said Mr. Abe had gone ahead with the visit because he felt he had nothing to lose given that ties were already frayed. While he has visited all of the Association of Southeast Asian Nations, he has yet to visit China or South Korea nor has he held formal bilateral meetings with their leaders.
"Mr. Abe probably thought that a visit to Yasukuni at this point wouldn't have too much of an impact on prospects of future summits with Beijing and Seoul considering how chances already seemed slim," said Masafumi Kaneko, a senior research fellow at the Center for International and Strategic Studies at PHP Institute.
Mr. Abe's aides said what they cared about most was the U.S. reaction. "The biggest, or should I say, the only concern is what the U.S. would say," said a senior government official who was aware of the prime minister's plans in advance. He expressed confidence that the ties between the allies wouldn't be affected, noting that President Barack Obama was relying on the prime minister to help seal a deal over a trans-Pacific free-trade forum and to move forward plans to relocate U.S. troops in the region.
The government official said Mr. Abe intended to stick to making economic recovery the top priority, stressing how investors would start to see deregulatory measures—the last of the three pillars of his economic policy—in action in the new year. "We intend to keep the ball rolling for Abenomics," the official said.
But Mr. Abe may have miscalculated the U.S. response, analysts said. "The U.S. reaction was unexpected. Mr. Abe is moving to bolster the Japan-U.S. alliance, and the focus is whether they can move beyond just a military alliance, and share values," said Koji Murata, a political-science professor and the president of Doshisha University. "The U.S. may be frustrated at Mr. Abe, who is obsessed with history issues."
Diplomatic feuds have shown they can affect business interests in the region. After the previous Japanese government nationalized disputed islands in the East China Sea in September 2012, Chinese consumers boycotted Japanese products, dealing a serious blow to Japanese firms, including car makers.
But the Tokyo stock market took Mr. Abe's visit to the shrine in stride on Thursday, finishing higher. Investors said other factors, including a weaker yen, were more important than diplomatic issues.
[...]
—Alexander Martin, Kosaku Narioka and James T. Areddy contributed to this article.
2 A Japanese citizen weighs in:
hello,
this is a pretty simple issue... it's a thing about "mind" or "philosophy" for Japanese and "political" for China or Korea. it'd not been a problem until middle of 80s indeed. they are just always looking for something to claim or criticize Japan to let us compromise us one-sidedly. they are just trying to do this in the name of human-right. Japan has to be 100% evil, and they have to be 100% victims forever. so they will never forgive us no matter how we apologized.
if PM Abe didn't do it, they would find something another.it's not known very much in other countries, but Japan's already apologized many times, paid much and supported in many ways even the countries didn't let their citizens know about that.
major Japanese started to think it looks waste of time and effort to make a good relationship with them any longer.more than 70% of Japanese agree with PM Abe's Yasukuni visit this time in a survey of a TV channel (this is so-called "liberal" channel). we all know he just wants to thank people who worked and died for this country, and wishes peace.
personally, i go to the shrine when i'm in Tokyo (my grand father died in WW2).have a good new year!
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