Monthly Archives: February 2009

Strange maps


If you want to get further depressed about the state of the world economy, click over to the map prepared by NRC Handelsblad, the leading business newspaper in The Netherlands. Tons of information, intelligently presented.

I found the map through the increasingly indispensible Fistful of Euros, my go-to site for European economic commentary, closely followed by Eurointelligence.

(By the way, there’s nothing strange about the maps. But I couldn’t resist an homage to the wonderful Strange Maps.)

Geoff Mulgan's seven lessons for the president

Geoff Mulgan is one of the brightest, most interesting people I know. Through the Oxford University Press blog, he offers seven lessons to ensure president Obama is a strategic success:

  1. Focus – do a few things really well. Most leaders dissipate their energies. I argue that it’s best to prioritise fields where you have both power and knowledge. Many leaders try to act where they have neither – eg strategies for the middle east where the US lacked power over the key levers, or attempting to reinforce family values where governments lacked either the knowledge or the power to achieve very much. By contrast we know quite a lot about how to run a successful health system and the federal government has the power to get it right.
  2. Build in a focus on the long-term, to counter the huge power of tactics and spin in modern governments. That requires senior people spending most of their time thinking 2, 5 or 10 years into the future. Kevin Rudd’s Australia 2020 exercise and his new strategy unit is a good example, as is Sarkozy’s current work on France 2025. Many recent US presidents’ teams show exactly what you shouldn’t do, ie putting tacticians like Karl Rove in charge of policy. This also needs to inform how recovery plans are shaped – the more they can simultaneously address the immediate problems of recession and longer-term challenges, like climate change and ageing, the better.
  3. Ensure resilience – and build up your government’s capacity to cope with shocks, whether further sharp downturns in the economy or catastrophes like Hurricane Katrina (since a near certainty is that natural disasters will continue increasing in regularity in the years ahead).
  4. Work hard to avoid the common optical illusions of government. They usually risk believing their own rhetoric, continuing with projects just because they’ve had a lot of investment, and failing to empathise, whether with their own citizens or other countries. Robert MacNamara suggested in his film ‘The Fog of War’ that this last failing was the most common, and damaging, one for governments.
  5. In difficult times speed up innovation. Roosevelt is a good example who was willing to ‘try anything’ in response to unemployment. For the same reason it’s important to learn fast. Any new leader is bound to make mistakes but it’s best to make them quickly and early – and learn globally. Most of the things the US needs to do are being done somewhere already. China now automatically scans the world for best practice. The US needs to learn similar habits.
  6. Don’t be captured by the mainstream. Innovation and adaptability also requires that a President draws on ideas from beyond the mainstream. Roosevelt’s genius was in part to draw on advisers who were not part of the Wall Street/Washington consensus. They helped him shape a radically different response to the Depression. Obama’s big risk at the moment is that his key staff are too much insiders, too embedded in the system that now looks broken.
  7. Above all sustain hope and optimism even through difficult times, since hope is a vital energy that makes everything else easier. Just as optimism correlates with individual’s ability to recover from heart attacks, so does it influence societies ability to recover from downturns and crises.

A book for our times


It’s one of the biggest clichés for the literary minded: I’m finally going to read War and Peace. Ever since I read an ecstatic review of Richard Pevear and Larissa Volokhonsky’s translation of Tolstoy’s famous doorstop, I’ve been eyeing copies at my local bookstore. In January, I made the leap, slightly to my wife’s scorn, and embarked on the journey.

Dear reader, if you haven’t read War and Peace, rush to your nearest bookstore and get the Pevear/Volokhonsky translation immediately. It’s a wonderful, gripping read (excepting part two of the epilogue). The characters will stay with you forever, the love stories are as good as any, the court and political intrigues provide a glimpse into a vanished society and the battle scenes have never been bettered. It has tremendous resonance for our (and I expect any) time.

Read the scenes at the battle of Borodino or Schöngrabern, for example. Tolstoy portrays vividly how strategies and plans in the mess and confusion of battle count for very little. Events take their own course, and commanders have decidedly little effect on the outcome. In the contest between Napoleon and Kutuzov, Kutuzov ultimately triumphs precisely because he recognizes the limits of his power and influence. He is a man largely without illusion.

In the swirling, confusing turmoil of our time, we’d do well to take Tolstoy’s counsel. Strategies and carefully laid plans are all well and good, but events are likely to render them irrelevant. We need our Kutuzovs rather than our Napoleons.

One caution: it truly is annoying reading a 1,300-page book in bed. I regularly wished for a way to cut my volume up into its separate books.

The problem of economic virtue

Consider a country that is the world’s number one exporter. There’s no housing bubble, because most people rent their homes. Investment and savings rates are high. It should be comparatively insulated from the global economic crisis, surely?

No. Germany did everything “right” by the standards of prudence and good economic management. Even in the knowledgeable circles I run around in, most people are astounded that Germany is the world’s top exporter — not China, not the US. But in a world with hardly any demand, that’s a problem. Not enough people want Germany’s exports anymore. And since its economy is constructed on manufacturing rather than services — at least compared to most other advanced economies — Germany is actually suffering more than imprudent peers.

Thomas Fricke, chief economist of Financial Times Deutschland, makes the problem clear:

On an annualised basis, German GDP contracted by almost 9%. In the US, the estimated decline during Q4 was 4%, similarly in Spain and France. Even the Brits got away with a projected decline of 6% annualised.

Unsurprisingly, doom and gloom is widespread. Corporate confidence in Germany, measured by the Ifo Index, has fallen to its lowest point since 1990, when the country was burdened by the cost of reunification.

In most of the US coverage of the crisis, I think the global effects are being neglected. I tried to conjure up a silver lining yesterday, but the global depth of the problem makes it hard to see any kind of brightening. Fed chairman Ben Bernanke noted today that the global nature of the “slowdown” is one of the significant downside risks for any recovery in sight. His careful testimony underplays just how bad things are.

Transfer of wealth

There’s doom and gloom everywhere you turn. The S&P is plumbing lows not seen for ages. Housing markets continue to crater. Everywhere you look economic growth, industrial production, export volumes are falling off cliffs. Is there anything to feel good about?

I think there’s one aspect to the current economic and financial crisis that has had too little attention (Dean Baker is a notable exception). The value of the houses and 401-Ks of my generation may be plummeting, but that’s creating the opportunity for a younger generation to purchase assets that were both out of reach and clearly overpriced. That’s not a call on my part for the employed young to rush out and buy houses and stocks — the worst may well be still to come. But it’s when some stability returns to markets, people who were previously priced out of whole swathes of expensive places like the Bay Area will be able to buy. It’s also healthy that more people may view the benefits of home ownership versus renting with some skepticism. It’s not for everyone.

Rather than the many cries for action to boost the housing market, we should be glad that asset bubbles are deflated. It’s a transfer of wealth to younger generations, even if that’s painful for my generation. Let’s hope that when economic growth emerges from our current travails, it has firm foundations and isn’t based merely on an unsustainable bubble.

Do you believe in algebra?

Among the many great tributes and comments on Darwin’s 200th birthday, I particularly liked Alex Palazzo’s suggestion on The Daily Transcript:

Stop asking people if they “believe in evolution”. Every time I hear some dumb ass politician or right wing theological nut say “I don’t believe in evolution”, it makes me cringe. Evolution is not some magical mystical process that you take on faith. Do you ever hear the question “do you believe in algebra?” Instead pose the question “do you understand how evolution works?”

The anger of Martin Wolf

I’ve been reading the Financial Times for nearly 25 years. No English-language newspaper does a better job of covering the stories that matter globally. It’s always been intelligent and reasoned, often taking positions that casual observers might find odd for the “world business newspaper”. For example, it endorses Labour and Democrat politicians more, to my memory, than Conservative and Republican.

One of the great strengths of the FT over the last decade and more has been the economic commentary of Martin Wolf. I’ve quoted him often on Davos Newbies, which might seem a bit of a copout for a blogger. But until the financial and economic turmoil of the last year or so, Wolf was just about the only mainstream writer consistently probing issues on the global economy. I know Wolf a little bit, and I remember discussing this strange state with him when I still lived in London. He thought Paul Krugman could obviously intrude on his patch, but in those days Krugman was (to my mind correctly) obsessed with exposing the bankruptcy of the Bush administration. There was no one else, until the rise of what Felix Salmon calls the econoblogosphere.

One of Wolf’s traits has always been, to my mind, impressive reasoning, bolstered by wonderful command of pertinent statistics. He’s often impassioned, but until recently I would never have termed him angry. It’s a worrying sign of the desperate straits of the global economy that Wolf is screaming from the rooftop afforded him by the FT.

Many people have quoted his column yesterday (the first line forces you to read on, certainly):

Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.

What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.

But if you want to see how the usually unflappable Wolf is boiling, I can highly recommend the boxing match between him and various writers for the FT’s Lex column. Wolf is arguing for government-imposed controls on bonuses at banks that take government aid. A number of Lex writers foolishly rush into battle against Wolf, only to slink from the field of battle. Here’s a taste of Wolf’s argument:

I think that, once we get away from the red herrings, there are just three real issues at stake here.

The first is whether it is desperately important to pay bankers more than any other workers in a society (these are not entrepreneurs, after all), because their talents are so rare and so socially valuable. The answer to this is: you must be joking.

The second is whether governments have a legitimate interest as risk-bearers of last resort in the incentives provided by the structure of remuneration at least, if not its level. The answer to this is: of course they have – and how!

The third question is whether it makes sense to separate out a regulated utility banking industry from free-wheeling capital market-oriented institutions. On this last point, I have an open mind, though I am inclined to believe the answer is: yes. The fact that US legislators reached this conclusion in the 1930s seems to me quite important. But if that is not the answer, then we must accept tighter regulation of the financial system.

For connoisseurs of intra-newspaper tiffs, a small but delicious moment came in an exchange between Wolf and Lex’s Jo Johnson.

Wolf: As Talleyrand said of the Bourbons, “They have learned nothing and forgotten nothing.” That seems to be Jo’s position. It is not mine. I am with Keynes who said, “When the facts change I change my mind – what do you do sir?”

Johnson: And what did people call Talleyrand? “A shit in silk stockings”, I believe, or “de la merde dans un bas de soie” in the original.

A Swedish view on the Swedish bank solution

Even the president has been talking about the Swedish solution to the banking crisis, so it’s valuable to read a Swedish insider’s view. Leif Pagrotsky, who held a variety of ministerial posts through the ’90s and early ’00s, writes on Eurointelligence that Sweden may not be a model. I think the headline slightly overstates the case he makes, which is really concerned with some of the different aspects of Sweden to today’s situation. He writes:

Often the Swedish experience of bad banks in the early 1990’s is used as an example of how great this idea is. Some times the lessons derived from our experience are based on misunderstandings of what we actually did, and how our system worked.

Pagrotsky offers five points:

1. A bad bank can a be an effective instrument in the recovery of losses and of the business of banks.

2. Our experience has nothing to do with bonds or similar financial instruments, only with shares in companies used as collateral for credit. But I expect this situation to arise in many countries today as the crisis continues. As the crisis continues more companies will go bankrupt and banks will recall their collateral and take possession of shares in indebted companies. This can take the form of both bad companies as well as healthy companies that have been used as collateral for credits to their owners or for investments in other parts of the group.

3. Government subsidies for private bad banks, or public bad banks to support private banks with toxic assets is a bad way for taxpayers to tranfer money to troubled banks compared to normal capital injections. All subsidies should be transparent, and public/private bad banks are not.

4. Its key to staff bad banks with professional and experienced management  who are untainted by prevoius scandals. Our experience is encouraging, it was easier to recruit good people tha we expected, good people wanted to work for this pioneering state-owned bad bank. it was perceived to be a unique challenge to participate in this endeavour in the public interest.

5. Taxpayers economic interest must be the guiding principle, not ideology or political considerations. The public should be in no doubt about this, and their trust is necessary.