the visible hand

it is the theory which decides what can be observed – einstein

Archive for July, 2008

decoupling or recoupling isn’t the question

Posted by ecoshift on July 31, 2008

While the current recession in the US will clearly hurt Brazilian and Chinese exports, and while recoupling arguments from Calculated Risk and Noriel Roubini carry significant weight I still find myself thinking that the distribution of power on the world stage has shifted. Formerly “Third World” economies seem to have the emerging domestic markets, the growing domestic managerial and manufacturing capacity and the low cost labor necessary not just to survive a global slowdown but to actually gain position and market share at the expense of northern economies in the process. I don’t see emerging economies as decoupled from the US economy, but I do see them as better equipped to cope and compete in an interconnected global supply chain. I believe the US recession will only intensify this process.

President Obama will be facing a different geopolitical reality than the one we have been accustomed to since the end of WWII. The assumption that we are number one due to the innate superiority of US entrepreneurial leadership could cause us to badly misjudge the dependence of emerging economies on US markets and the ability of US manufacturers (those that haven’t already moved to emerging markets) to compete on level global playing field — even with the declining value of the dollar. The message from China and India this week, coupled with the article below about Brazil’s compassionate economic successes, is that we are no longer able to insist on inequitable terms of trade with the “third world”. They want a level playing field and they believe the cost of insisting on equitable terms is less than the cost caving in to US pressure. US hubris could causes us to miss this transition point. They need us less. We need them more. They own our debt, they manufacture our goods, they breathe our pollution and they provide our raw materials. What is it that we provide again? Leadership?

Unless Obama can come to terms with these new geopolitical realities articles like the one below make me think real leadership will be coming from somewhere else.

Brazil Rides Wave of Growth as Larger Economies Struggle – NYTimes.com
By ALEXEI BARRIONUEVO
Published: July 31, 2008

…Brazil, South America’s largest economy, is finally poised to realize its long-anticipated potential as a global player, economists say, as the country rides its biggest economic expansion in three decades.

That growth is being felt in nearly all parts of the economy, creating a new class of super rich even as people like Ms. Sousa lift themselves into an expanding middle class.

It has also given Brazil new swagger, providing it, for instance, with greater leverage to push for a tougher bargain with the United States and Europe in global trade talks. After seven years, those negotiations finally broke down this week over demands by India and China for safeguards for their farmers, a clear sign of the rising clout of these emerging economies.

Despite investor fears about the leftist bent of President Luiz Inácio Lula da Silva when he was elected to lead Brazil in 2002, he has demonstrated a light touch when it comes to economic stewardship, avoiding the populist impulses of leaders in Venezuela and Bolivia.

Instead, he has fueled Brazil’s growth through a deft combination of respect for financial markets and targeted social programs, which are lifting millions out of poverty, said David Fleischer, a political analyst and emeritus professor at the University of Brasília. Ms. Sousa is one such beneficiary.

Long famous for its unequal distribution of wealth, Brazil has shrunk its income gap by six percentage points since 2001, more than any other country in South America this decade, said Francisco Ferreira, a lead economist at the World Bank.

While the top 10 percent of Brazil’s earners saw their cumulative income rise by 7 percent from 2001 to 2006, the bottom 10 percent shot up by 58 percent, according to Marcelo Côrtes Neri, the director of the Center for Social Policies at the Getulio Vargas Foundation in Rio de Janeiro.

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The Terminator terminates state employees

Posted by ecoshift on July 31, 2008

Governor orders layoffs, steep pay cuts for thousands of state workers
Matthew Yi, Chronicle Sacramento Bureau
Thursday, July 31, 2008

(07-31) 12:38 PDT SACRAMENTO — Gov. Arnold Schwarzenegger, one month into a state budget impasse, today ordered the layoffs of thousands of state workers and steep pay cuts for most other state employees in an effort to save cash as California faces a multibillion-dollar budget deficit.

The state has been without a budget since the current fiscal year began July 1, while the governor and the Democrat-controlled Legislature work to come up with a spending plan to fill a $17.2 billion gap that would include $2 billion in reserves.

“Today I am exercising my executive authority to avoid a full-blown crisis and keep our state moving forward,” said the governor, whose move was expected after The Chronicle and other news outlets obtained a copy of the order last week. “This is not an action I take lightly, but we do not have a budget, and as governor, I have a responsibility to make sure our state has enough money to pay its bills.”

Cutting the pay of about 200,000 state workers to the federal minium wage of $6.55 an hour would save California as much as $1.2 billion a month, the governor’s office said. Such workers would get regular pay plus back pay once a new budget is approved.

The layoffs of nearly 22,000 temporary, seasonal and student workers would save the state as much as $28.5 million a month, the governor’s office added. It is not clear whether workers laid off would be rehired when a new budget is enacted.

Slashing state worker pay will likely face a legal challenge from state Controller John Chiang, who has the responsibility to disburse pay checks, saying he will not go along with the governor….

The state’s revenues have plummeted in recent months as a result of declining home sales and prices.

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WTO Doha round collapses: US, India and China refused to compromise

Posted by ecoshift on July 30, 2008

After 7 Years, Talks on Trade Collapse – NYTimes.com
“By STEPHEN CASTLE and MARK LANDLER
Published: July 30, 2008

GENEVA — World trade talks collapsed here on Tuesday after seven years of on-again, off-again negotiations, in the latest sign of India’s and China’s growing might on the world stage and the decreasing ability of the United States to impose its will globally.

Pascal Lamy, director general of the World Trade Organization, could not bridge differences between a group of newly confident developing nations and established Western economic powers. In the end, too few of the real power brokers proved committed enough to make compromises necessary to deliver a deal.

The failure appeared to end, for the near term at least, any hopes of a global deal to further open markets, cut farm subsidies and strengthen the international trading system.

“It is a massive blow to confidence in the global economy,” said Peter Power, spokesman for the European Commission. “The confidence shot in the arm that we needed badly will not now happen.”

After nine consecutive days of high-level talks, discussions reached an impasse when the United States, India and China refused to compromise over measures to protect farmers in developing countries from greater liberalization of trade.

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Housing bill: No upside for taxpayers

Posted by ecoshift on July 30, 2008

I’ve never been under the illusion that our congressional representatives are capable of negotiating with business as advocates for taxpayers. It’s almost as if there’s a perceived conflict of interest if lawmakers negotiate a deal where government profits from it’s support for corporate enterprise. But, it’s really a shame that ordinary taxpayers end up taking on the risk of a bailout rescue that will help keep housing prices high with no potential upside should the bailout rescue be successful… 50 billion here, 50 billion there — pretty soon….

Anyway, here’s the money quote: “The way this is structured it’s only a matter of how much the taxpayers are going to lose.”

Bush Signs Sweeping Housing Bill – NYTimes.com
Published: July 31, 2008 (I know today’s the 30th, but that’s what it says on the NYT website.)


The law authorizes the Federal Housing Administration to insure up to the $300 billion in such loans but the Congressional Budget Office has estimated that only $68 billion of that authority is likely to be used. The original lenders will have to pay upfront fees into an insurance fund, and borrowers will pay continuing insurance premiums of 1.5 percent a year to insulate taxpayers against losses from defaults.

The budget office has estimated that 35 percent of the refinanced loans will end up in trouble again.

The authority for the Treasury Department to help Fannie Mae and Freddie Mac is limited only by the debt ceiling. The budget office has said that a $25 billion expense should appear on the federal budget for the next two fiscal years, representing its best estimate of how much the program will end up costing taxpayers.

But the budget office said there was a better than 50 percent chance that the rescue authority would not be used, and there would be no cost, while there was a 5 percent chance that one or both of the mortgage giants would lose another $100 billion or more, costing taxpayers a vast sum.

Some experts have said that the law was wrong-headed in its effort to retain the hybrid nature of the mortgage finance giants, which are private companies with publicly traded stock, but which have an explicit guarantee of help from the government — an arrangement that critics say privatizes the profits but socializes the risk and any losses.

David M. Walker, the former comptroller general of the United States and head of the Government Accountability Office who is now president of the Peter G. Peterson Foundation, said that Mr. Bush might have been unwise to sign the measure.

“Providing authority to the secretary of the Treasury to extend credit or to buy stock is one that will end up costing the taxpayers tens of billions of dollars,” Mr. Walker said in an interview earlier this week.

Mr. Walker noted that other government interventions in the private market, including a rescue of the Chrysler automobile company had provided an opportunity for taxpayers to profit. But when it comes to the mortgage giants, he said, there is no upside.

“The way this is structured,” he said. “It’s only a matter of how much the taxpayers are going to lose.”

read more

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Chad Hanson: Blowing Smoke

Posted by ecoshift on July 25, 2008

Chad Hanson: Blowing Smoke
Logging Industry Lies on Forest Fires and Climate Change
By CHAD HANSON

Recent editorials by timber industry spokespersons are a wildly misleading attempt to promote increased logging of western U.S. forests under the guise of reducing wildland fires and mitigating climate change. The timber industry fails to mention, however, that logging is one of the major contributors to greenhouse gas emissions (Schlesinger, “Biogeochemistry: an analysis of global change”, Academic Press, 1997). A recent scientific study found that completely protecting our national forests from all commercial logging would significantly increase carbon sequestration and reduce greenhouse gases (forests “breath in” CO2 and incorporate the carbon into new growth), while increasing logging on our public lands would have the opposite effect (Depro et al. 2008, Forest Ecology and Management, Vol. 255).

The logging industry also makes numerous scientifically-inaccurate assumptions about fire. For example, the industry would have us believe that little or no natural growth of forest will occur after wildland fire. In fact, some of the most vigorous and productive forest growth occurs after burns, including in high severity fire areas in which most or all of the trees were killed (Shatford and others 2007, Journal of Forestry, May 2007)….

Read more…

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Recession-Plagued Nation Demands New Bubble

Posted by ecoshift on July 18, 2008

Recession-Plagued Nation Demands New Bubble To Invest In | The Onion – America’s Finest News Source

WASHINGTON—A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.

“What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future,” said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm….

According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent.

“Perhaps the new bubble could have something to do with watching movies on cell phones,” said investment banker Greg Carlisle of the New York firm Carlisle, Shaloe & Graves. “Or, say, medicine, or shipping. Or clouds….

“The U.S. economy cannot survive on sound investments alone,” Carlisle added.”

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Cap & Trade is a tax on carbon emissions

Posted by ecoshift on July 17, 2008

FT.com | Willem Buiter’s Maverecon | Cap & Trade is a tax on carbon emissions – fortunately!

On June 11, I went to a presentation at the London headquarters of BP of the BP Statistical Review of World Energy, June 2008, by Tony Hayward, Group Chief Executive of BP and Christof Rühl, the Chief Economist. Nice presentations, good documents, until the Chief Executive extolled the unique virtues of Cap & Trade and the Chief Economist jumped in by asserting that Cap & Trade was, unlike the taxation of carbon emissions, an efficient way to deal with the environmental externalities of greenhouse gas emissions. This assertion deserves a one-word label: baloney.

Cap & Trade is an efficient way to deal with the environmental externalities of greenhouse gas emissions because it is equivalent to a tax on greenhouse gas emissions.

Let me state this slightly more precisely…

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T. Boone Pickens’ plan “to escape the grip of foreign oil”

Posted by ecoshift on July 10, 2008

My Plan to Escape the Grip of Foreign Oil – WSJ.com
By T. BOONE PICKENS
July 9, 2008; Page A15

One of the benefits of being around a long time is that you get to know a lot about certain things. I’m 80 years old and I’ve been an oilman for almost 60 years. I’ve drilled more dry holes and also found more oil than just about anyone in the industry. With all my experience, I’ve never been as worried about our energy security as I am now. Like many of us, I ignored what was happening. Now our country faces what I believe is the most serious situation since World War II.

The problem, of course, is our growing dependence on foreign oil – it’s extreme, it’s dangerous, and it threatens the future of our nation.

Let me share a few facts: Each year we import more and more oil. In 1973, the year of the infamous oil embargo, the United States imported about 24% of our oil. In 1990, at the start of the first Gulf War, this had climbed to 42%. Today, we import almost 70% of our oil.

This is a staggering number, particularly for a country that consumes oil the way we do. The U.S. uses nearly a quarter of the world’s oil, with just 4% of the population and 3% of the world’s reserves. This year, we will spend almost $700 billion on imported oil, which is more than four times the annual cost of our current war in Iraq.

In fact, if we don’t do anything about this problem, over the next 10 years we will spend around $10 trillion importing foreign oil. That is $10 trillion leaving the U.S. and going to foreign nations, making it what I certainly believe will be the single largest transfer of wealth in human history.

Why do I believe that our dependence on foreign oil is such a danger to our country? Put simply, our economic engine is now 70% dependent on the energy resources of other countries, their good judgment, and most importantly, their good will toward us. Foreign oil is at the intersection of America’s three most important issues: the economy, the environment and our national security. We need an energy plan that maps out how we’re going to work our way out of this mess. I think I have such a plan.

Read on…

[My Plan to Escape the Grip of Foreign Oil]

(Graphic credit: Martin Kozlowski)

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Fannie and Freddie Stocks Plummet

Posted by ecoshift on July 10, 2008

Fannie and Freddie Stocks Plummet – NYTimes.com
July 10, 2008
By REUTERS

NEW YORK (Reuters) – A firestorm of anxiety over the ability of U.S. mortgage giants Fannie Mae and Freddie Mac to get the capital they need to survive sent their debt and stocks plummeting on Thursday.

Stoking concerns, former St. Louis Federal Reserve President William Poole said the two major U.S. mortgage finance companies were “insolvent” and may need a U.S. government bailout, according to Bloomberg News.

The outlook was so dire that Bush administration officials were meeting with regulators to discuss contingency plans should they be unable to raise funds and support the worst housing market since the Great Depression, according to a report in the Wall Street Journal.

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Stiglitz: A global lesson in market failure

Posted by ecoshift on July 9, 2008

globeandmail.com: A global lesson in market failure

A global lesson in market failure
JOSEPH STIGLITZ
From Tuesday’s Globe and Mail
July 7, 2008 at 6:44 PM EDT

The world has not been kind to neo-liberalism, that grab bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently and serve the public interest well. It was this market fundamentalism that underlay Thatcherism, Reaganomics and the so-called “Washington Consensus” in favour of privatization, liberalization and independent central banks focusing single-mindedly on inflation.

For a quarter-century, there has been a contest among developing countries, and the losers are clear: Countries that pursued neo-liberal policies not only lost the growth sweepstakes; when they did grow, the benefits accrued disproportionately to those at the top.

Although neo-liberals do not want to admit it, their ideology also failed another test. No one can claim that financial markets did a stellar job in allocating resources in the late 1990s, with 97 per cent of investments in fibre optics taking years to see any light. But at least that mistake had an unintended benefit: As costs of communication were driven down, India and China became more integrated into the global economy.

But it is hard to see such benefits to the massive misallocation of resources to housing in the United States. The newly constructed homes built for families that could not afford them get trashed and gutted as millions of families are forced out of their homes. In some communities, government has finally stepped in – to remove the remains. In others, the blight spreads. So even those who have been model citizens, borrowing prudently and maintaining their homes, now find that markets have driven down the value of their homes beyond their worst nightmares.

To be sure, there were some short-term benefits from the excess investment in real estate: Some Americans (perhaps only for a few months) enjoyed the pleasures of home ownership and living in a bigger home than they otherwise would have. But at what a cost to themselves and the world economy! Millions will lose their life savings as they lose their homes. And the housing foreclosures have precipitated a global slowdown. There is an increasing consensus on the prognosis: This downturn will be prolonged and widespread.

Nor did markets prepare us well for soaring oil and food prices. Neither sector is an example of free-market economics, but that is partly the point: Free-market rhetoric has been used selectively – embraced when it serves special interests; discarded when it does not…

Simply put, in a world of plenty, millions in the developing world still cannot afford minimum nutritional requirements. In many countries, increases in food and energy prices will have a particularly devastating effect on the poor, because they constitute a larger share of their expenditures.

The anger around the world is palpable….

Neo-liberal market fundamentalism was always a political doctrine serving certain interests. It was never supported by economic theory. Nor, it should now be clear, is it supported by historical experience. Learning this lesson may be the silver lining in the cloud now hanging over the global economy.

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