Olivier Blanchard does not pull his punches here. European governments were too slow to realise how serious this crisis is, and they are not doing enough. Thanks to Eurointelligence for the pointer.
Month: March 2009
Calculated Risk links to video of Austan Goolsbee of the White House Council of Economic advisers, discussing how the Geithner plan aligns the incentives of the public and private sector participants. I had dubbed this idea a fib but Goolsbee makes it sound plausible: “if the private guy makes money, the government makes money. If the private guy loses money, the government loses money.” CR links to an example that explains how this plan could still see the private guys make money and the government lose money but it doesn’t explain how the price gets set, which is sort of the crucial issue. So, here’s a simple numerical example that shows how the price gets set. The point is probably pretty obvious, but I found it self-instructive to work through the figures.
Remember last spring? It seems an age ago now. The fear then was of resource scarcity: of rising oil prices, and of rising food prices, as biofuels crowded out food production and population continued to grow. Environmental worries also reflect resource scarcity, albeit of another type. Once this crisis is over, whenever that is, all these concerns will inevitably come back on the agenda, and could easily dominate it for the rest of the century.
In that context, one of the most alarming news stories, to me, of last year, was that involving Korea’s Daewoo Logistics leasing almost half of Madagascar’s arable land on a 99 year basis. Here is a pretty positive account of the deal in Time magazine. Why my alarm? Because the deal reflected the fact that
“[Food-importing countries] have lost trust in trade because of the price crisis this year,” says Joachim von Braun, director of the International Policy Food Research Institute in Washington.
Thus, from a Korean point of view,
“We want to plant corn there to ensure our food security. Food can be a weapon in this world,” said Hong Jong-wan, a manager at Daewoo. “We can either export the harvests to other countries or ship them back to Korea in case of a food crisis.”
The latter quote, taken from this FT piece, should send shivers down the spine of anyone with a sense of history. (The article also makes it clear that the agreement was far less positive for Madagascar than had at first been reported.) Markets are a political institution. The deal they represent is straightforward: if you are willing to pay the going price, then you can buy what you need. When countries start to doubt whether that deal will remain valid going forward, and in consequence act to carve out sources of supply for their own exclusive use, the geopolitical consequences can be catastrophic.
As I contemplated this story, I idly wondered what would happen if, in a decade or two, some African or Latin American country decided that it wanted to renege on such a deal which had been struck by a previous government with, say, China or India. And so it was with considerable interest that I read this from the BBC. I don’t suppose the Koreans will invade Madagascar! But one can predict that this will not be the only occasion on which such a domestic backlash occurs. Why on earth would anyone assume otherwise?
The moral is straightforward. In addition to tackling the underlying problems of resource scarcity, we need to credibly commit to keeping international markets open over the decades to come. And in order to be able to do that, governments need to get the macroeconomics right, now. Otherwise, as the example of the Great Depression shows, this will just be a taste of things to come. And that won’t just be bad news for the economy.
Official details here and here. It’s pretty much as I described yesterday and I’m no more impressed than before. In particular, it hardly takes a corporate finance expert to figure out that “The equity co-investment component of these programs has been designed to well align public and private investor interests in order to maximize the long-run value for U.S. taxpayers” is a bit of a fib. Funnily, toxic (or troubled) assets have now been renamed “legacy assets”! This terminology might be appropriate if we were dealing with newly-cleansed banks with new ownership and management. However, as I’m reminded every time I see this man’s happy smiling face, that just ain’t the case.
In my comments on John McHale’s recent post and also on the radio at the weekend, I suggested that the government should probably stick to the 9.5% target set out in January’s Addendum document. While the document did not contain details about how the government was going to make these adjustments, it was still a clear commitment to stick to a particular path to get back towards a 3% deficit by 2013. If three months later, we were seen to already be well off these targets, the concern would have to be that the international bond market would judge us as being incapable of sticking to a plan.
However, having thought about this a bit, I’d be inclined now to argue that there probably has been so much slippage already this year that sticking to a 9.5% target for the calendar year 2009 may not be a good idea. My impression now is that the implementation gaps in getting the changes in the April 7 budget made effective will mean that we will only see about half of the budgetary improvement that these measures would bring in a full calendar year. So, for instance, suppose that without adjustments the deficit is likely to be 13.5% for 2009. In that case, getting to 9.5% for the year would require 8 full percentage points of full-year-equivalent adjustments.
A better strategy would be to make adjustments that leave the government running an effective deficit in the second half of the year of 9.5%, and so facing into the 2010 budget in exactly the position that they had promised to be in. In the example of a no-adjustments deficit of 13.5%, this would amount to running a deficit for 2009 of 11.5%, which could be interpreted as 13.5% for the first half of the year and 9.5% for the second half.
In a sense, this is a recommendation to government as to how to “spin” an outcome which looks like slippage from the January plan as still being, in a sense, consistent with it. Beyond that, those economic commentators that will want to criticise the government for failing to meet its own plan, if indeed it announces a target higher than 9.5%, should keep in mind that meeting this target would require starting 2010 with a budget deficit well below what was envisaged in that plan.