openDemocracy

Here's a fascinating chart of spam activity on oD's forums for the past 2 months:

So, has Mollom beaten the site spamsters? It certainly looks as if they eventually learn that their spam messages are getting blocked ... Now we just need Mollom to implement this for Drupal 4.7 so we can apply to the main site and I'll be singing the praises of Mollom to all who care to listen.

openDemocracy

I went to a fascinating lecture by Daniele Archibugi yesterday at Birckbeck who argues that the prospects for global democratic institutions are actually quite good. The essence of democracy, he argued, are non-violence, public control and political equality. The first is about some sphere of social change being outside the realm of might; the third is the principle that those affected by an action should have a say in the action. The second is the one where Daniele mentioned the financial "events" of the past few days---when the G7, IMF and various finance ministers have met, we have known nothing of their actual deliberations. The degree of public accountability is very tenuous. In all three cases, Daniele thinks that the international system shows signs of beign able to grow in the right direction: the strengthening of the ICC; the accountability mechanisms we do see; the growth of the EU as a systematic experiment in "accountabiltiy beyond borders".

I asked Daniele in the question session afterwards whether the hopes might be misplaced that the financial crisis would be the sort of moment to bring about pro-democratic reform at the global institutional level---after all, the muddling along of ad hoc groupings is coping (...so far...); and if they are misplaced, what sort of crisis is that will actually bring about the democratisation that he is talking about?

At first, I did not understand his response. He said: "Did you say "crisis"?" (I nod). "Which crisis? There has been no crisis." Still puzzled, he went on to clarify:  "... This is somewhere Schumpeter was right and Keynes was wrong: capitalism moves in waves of creative destruction, and the moments of destruction are necessary and part of the system. There is no system crisis here."

This is very persuasive. Schumpeterians have been in the ascendant in economics recently, with theories of growth explicitly relying on the idea that the culling of inefficient, non-innovative firms and the liberation of resources for new ones is what sets the scene for economic growth. Creative destruction and its dynamic are asumed by capitalism, and will not be the conditions that rock capitalism. For Schumpeterians, business cycles are like the evolutionary force of selection---who makes it through? Daniele was contrasting Schumpeter to Keynes who "saw nothing good in the business cycle"and hoped his general theory would help to eradicate the cycle. The Schumpeterian view is given full treatment by Edward Chancellor in the FT yesterday, where he rattles off all the recent historical examples of crisis to point to their systemic nature.

But even if Schumpeter is right about the links between creative destruction at the firm and industry levels, the business cycle,  and the "evolutionary strength" of capitalism, there still seems much to explain. Is the psychology of boom and bust created within the system---the overconfidence, the resilience to criticism, the in-group mentality that create exuberance, as much as the fear and self-loathing that perpetuate depression---or are they caused elsewhere? Despite economists' imperial urges to make everything determined within their system, I suspect the "elsewhere" is important.

openDemocracy

My note to Willem Buiter on his praise of the Fortis "nationalisation":

Dear Professor Buiter,
I agree that Fortis shows that the worry - expressed just today by Munchau in the FT - that Eu cannot respond in a crisis is wrong. But the outcome of the capital injection seems favourable compared to what would come out of TARP, no?

51% of old shareholdings preserved --- doesn't this show that a little more transparency to voters in the Benelux might have got them a better deal?

Taxpayers are unwilling risk capitalists here, and that should make our representatives negotiate harder for our upside, not less hard.
Best wishes,
Tony

openDemocracy

Here is the first draft of the bailout bill. Just 20 pages into it, but it looks as if the right terms have been put into it. Breath-holding over. The American system appears to have delivered.

openDemocracy

The de-leveraging crisis--or the sub-prime crisis or the debtonation crisis--came about through the interaction of wicked plutophiles, genuinely useful financial innovations and lax, cowardly and confused regulators. It is important to untangle these in order to destroy what was genuinely bad in our financial arrangements. The spread of cheap computing, the theoretical understanding of how to price flexibility--option pricing--and the globalisation of supply and demand for capital set the stage for the growth of the financial sector from the 1980s for the next 25 years. In a world of benevolent, professional bankers, these changes would have been welcomed. However, the world of finance became the global magnet for hordes of semi-quantitative plutomaniacs against whom the partially sighted, ideology-bound regulators had no chance of success.

Globalisation, financial innovation and computing have brought benefits that now, when blame is spread generously, should be remembered. The heart of every financial transaction is an exchange of financial risks. When you sell a house, you want an amount of cash in exchange with a known, certain value. When a bank offers a mortgage, it swaps a known value for the likelihood of a stream of payments. The seller of the house has become financially more secure; the seller of the mortgage has taken on the corresponding risk. Moving risk around has real social value. A manufacturing company in Senzhen with good commercial contacts to corporate America can borrow to expand; it wants to take on risk. A fifty year-old office worker in California, at the height of her earning powers and saving for retirement, may find that an investment in a Senzhen factory is attractive. Globalisation of capital markets--whatever abuse it also permitted--expanded the opportunities for these sorts of re-allocations of risk. There is real social value in doing this--as long as you do it right.

Financial intermediaries can often provide more attractive risk re-allocations than would be possible with direct contracting between lenders and borrowers because they can enjoy the statistical effects of pooling risks. This is the basis of insurance: because things tend not to all go wrong at the same time--because ``sod's law'' is not a law--two mortgages are less risky than one mortgage. Information technology expanded the scope for the discovery of offsetting risk of this sort, and so found ways to ``cancel-out'' uncertainty. There is real social value in doing this, as long as you really do it. Only inveterate gamblers prefer material uncertainty to stability, and they can always be served at the casino. The more material uncertainty can be destroyed through social aggregation of risk, the easier we ought to be able to sleep at night ...as long as we are really doing this. Computers trawling great databases of prices could identify opportunities for cancelling risk on an unprecedented scale.

The development of portfolio theory and option pricing theory by financial economists has opened the way for a greatly increased scope for pooling risks. Even once you have identified uncertainty that can be ``cancelled out'', you need to turn that aggregate into a product that those affected by the uncertainty can buy; and as long as you can assess the price of risk, these become products that those with a collective appetite for risk can supply. So, a retiree might want to swap her accumulated pension fund in exchange for a promise to have her medical care covered, her subsistence needs covered, and a small amount left over for her children. Financial theory now allows such products to be priced and supplied.

In the midst of all this potential to do good came the plutomaniacs and bad regulators. The three forces of good change in finance of the last 25 years--increased opportunities to trade, increased data-processing and increased understanding--could all in themselves justify some degree of increase in the level of leverage. For every pound, euro or dollar of certain value that a financial firm could count on, it could now transform those into more uncertain pounds, euros or dollars of value than in the past. The banking multiplier could increase. Its increase from a traditional value of about 6 to the current value of about 25 is the story of ``debtonation'' that Ann Pettifor has told so well. Even if the forces of good change could justify--an extreme suggestion--a doubling of the rate of leverage, the five-fold increase we have lived through in 20 years can only be explained by the monumental failure to properly guide an invisible hand made weak by the mendacity of many in the financial industries.

As globalisation allowed banks to run rings around national regulators, the Bank for International Settlements transformed itself in the 1980s into a world-wide regulator. All banking institutions need to show consolidated accounts and prove that taking all their operations together, they have sufficient capital to cover ordinary and even extraordinary risks. Banks are required to limit their lending to 8 times their capital, where the value of the capital base is cleverly adjusted for its riskiness. In a world of benevolent bankers, all of them following the rules, these constraints should have worked. The banking money multiplier would have stayed at 8X, a number apparently entirely justified by the good forces for change in finance.

But we know the reality ...Banking ``innovation'' became more concerned with hiding the lending that banks were extending in order to continue to lend a long way beyond the 8 times capital limit. The ``special investment vehicles'' like Granite--the Jersey-based company that Northern Rock set up--existed only to be the repositories of lending that would not be counted against capital by the Bank for International Settlements regulation. Bankers, bonuses based on the volumes of the transactions they performed, had found a way around the spirit of regulation to unconstrained personal gain. Asset price bubbles followed, as the money created by banks chased limited investments. Emerging markets, technology stocks, housing, stock markets, gold, commodities, contemporary art ...anything in vaguely fixed supply--or at least supply slightly more fixed than the unconstrained creation of money by the financial sector--rose in price to absorb the money being created in the cracks of international regulation by the plutomaniacs. We can tell that the crisis still has a way to run from the stellar results of Hirst's last auction.

The crisis we are now going through comes from the fact that the money-creation went into a largely virtual economy. This was not about factories in Senzhen or retirement packages ...most of the growth in money was going to casino chips on which rich-world middle classes became hooked; their appreciating housing assets gave them a sense of righteous enrichment, a reward for who knows what hidden moral virtue they could conjure. The retrenchment today will require de-leveraging from today's absurd 25X to a normal 8X. Two thirds of the debt in the system needs to be eased out.

The dilemma now is this: how do we de-leverage in such a way that the virtual economy is hit, not the real? and how do we protect the real forces for good while cutting off the most destructive tendencies of the plutomaniacs? Regulatory pragmatism is aimed at the first problem now. AIG is too close--or thought to be too close--to the real economy to be allowed to default, while Lehman is sufficiently virtual to need to go. HBOS has strong links to reality--its mortgage business in the UK is tightly related to household savings, and so to the UK economy as a whole--to get nod-through approval to join the stronger balance sheet of Lloyds-TSB. As banker to the real economy and bankrupter of the virtual economy, this regulatory pragmatism is the right approach to the immediate mess.

But what of the longer term problem of good regulation? Can we have our good financial cake without it being forced down our throats like geese prepared for their liver? A solution to a problem usually comes from choosing the right constraints: what is fixed? what can be assumed to be in our choice? It is important to assume that the plutomaniacs will always be with us: financial regulation must assume that the great magnet of money will always disproportionately attract the iron-like sharks. What was true of politics when David Hume recommended that we design constitutions on the assumption that every man be a knave should now, in a world where the market has become mightier than the sword, be applied to financial regulation. 75 years after Hume's advice, Benjamin Constant, in his essay on the Freedom of the Moderns as Compared to that of the Ancients, reminded us that we ought to continue, all of us, to stay involved in politics in order to prevent the return of tyranny:

we should [...never...] surrender our right to share in political power too easily. The holders of authority are only too anxious to encourage us to do so. They are so ready to spare us all sort of troubles, except those of obeying and paying!

Today, this advice holds for control over finance. This is where the holders of authority lie in wait for us. Politics today needs to be in the shareholder assembly, as activist investors, as savers and borrowers. We must take control of regulation from the demoralised public servant and help ourselves. Where is your pension invested? Who manages the money? How culpable am I for the use that my savings have been put to? In our pre-occupation for the freedom of the moderns, for our cherished ability to get along with our private concerns, we have left a gaping opportunity for plutomania to operate and create havoc. Regulation is too important to be left to the conflicted civill servants.

We need all to become our own regular regulators.

openDemocracy

openDemocracy/Russia was created last year. Two new articles on Abkazia demonstrate why it is a brilliant initiative.
The idea was that English readers around the world should be able to learn at first hand the vitality and intelligence of Russia’s free voices and that Russians should be able to participate directly in the growing (we hope) democratic discussion that is global in its interests and concerns.
Alas, it has taken the crisis in the Caucasus to confirm how much this initiative is needed. openDemocracy has always resisted the clichés of received ideas and the imposition of worn out worldviews while seeing itself as a platform where minority voices and opinions (even if they too have their clichés and evasions) can be well published and debated when the current is against them.
oD’s exceptional coverage of the Caucasus predates the present interest and will continue after it. Others have drawn attention to the analysis and the seeking for human based conceptual frameworks in new essays by Ivan Krastev and Mary Kaldor, I’m just going to draw your attention to Zygmunt Dzieciolowski's encounter with Sergei Bagapsh the President of Abkhazia and then an article by Inal Khashig,
editor of the Abkhaz newspaper Chegemskaya Pravda, who states that the West's endorsement of Georgia's claims has merely ensured that Abkhazian independence is a fact.
Zygmunt writes in the tradition of his late Polish compatriot the celebrated Ryszard Kapuscinski. It’s a journalism of the main facts and the telling details, threaded with an awareness of history and place so that the reporting is rooted in time without being fatalistic or sensational. He brings to life the “soft voice” of President Bagapash, his willingness to delay catching his flight to Moscow to talk with co-editor of openDemocracy Russia, his wariness of and desire for independence from the Russia that has just saved his statelet but was only recently also imposing sanctions on it.
One detail I didn’t know that comes across strongly in both Zygmunt’s report and Kashig’s insistent article. The West’s participated in preventing medicines including antibiotics from being imported by Abkhazia after it broke away from Georgia in the early 1990s. This abuse of humanitarian principles turned everyone who remained into a potential martyr. When Russia let in antibiotics it made a moral gain (whatever the cynical calculations behind it) that western media coverage seems completely oblivious of. This is the kind of significant detail that openDemocracy Russia brings to our understanding of the Caucuses.

openDemocracy

First, the increasingly abstracted stock-flow models from Paul Krugman and Mark Thoma.

Second, a suggested account of the recent oil price rise (from the oildrum):

openDemocracy

A good summary of the positions by Mark Thoma (a bit of theory)

Arnold Kling is not sure where to place his bets, but has a good counterfactual question to Krugman: does he believe oil prices were at the right fundamental level last year when they were at $60/bll. And if not, why weren't stocks disappearing then?

 Read the rest of this post...

openDemocracy

Mark Thoma has a good summary of yesterday's econ-blogosphere debate on the speculation question.

 He ends up on the question of what single cause can account for the run-up in both agricultural products and oil prices.

I am not sure he should be such an ardent Occamist here - compare these 2 graphs, of oil and wheat prices this year, and ask what sort of common explanation you might want:

 Read the rest of this post...

openDemocracy

The economics blogosphere is abuzz ... is the oil price being driven up by market fundamentals or by some sort of manipulative activity?

Paul Krugman has a short theoretical piece here challenging the speculator-spotters to come up with a story that fits the facts.

 Read the rest of this post...

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Fundamentalism and oil markets

Heiligendamm can be a success, if Merkel ignores Bush

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By Gerd Leipold, Greenpeace International Executive Director

National and international pressure ahead of the G8 summit, to maintain a hard line on the science of global warming, and what is needed to stop it, has forced the Bush Administration to blink. Their hasty announcement of “new climate initiative” days before the G8 shows that for the first time Bush has realized there is nowhere to hide on this issue anymore. The announcement is an attempt to create the impression of action and has been forced on them after it became public that they had voiced their “fundamental opposition” to a G8 text calling for global emissions to be halved by 2050 (compared to 1990 levels). The US administration called this the “German proposal”. But there is nothing German about those figures; it is simply the universal physics of the problem.  

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06 - 06 - 07

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