Reserve Currency

The Economist has an article that makes sense discussing the role of the dollar as a world currency. The basic point is that there is no good alternative right now. A very nice discussion of this issue also appeared in the Economic Report of the President, which had this graph:



This appendix made the important point that although the Euro zone is large, there is no unified European debt, only the debt of individual countries. This makes it harder to hold reserves in euros than in dollars. Depth of our capital markets is what makes the dollar a reserve currency.

Strong Dollar

Once again a US Treasury Secretary has affirmed support for the strong dollar.

U.S. Treasury Secretary Timothy Geithner said a strong dollar is in the nation’s interest and the government recognizes the importance it plays in the global financial system.

“I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar,” Geithner told reporters in Tokyo today.

This despite the fact that the dollar fell to a 15-month low against major counterparts (click here for a picture of the DXY index) and will continue to slide as the US adjustment to our large current account deficits continues. This ignores any slide due to fears of inflation from large budget deficits. As the economy recovers imports will rise and thus we will need more dollar depreciation for the current account to adjust. If those who fear that deficits will lead to future inflation are correct then the dollar's slide will be even larger.

But at least we love that strong dollar!

The NYTimes reports about Oleg Deripaska suing Vedomosti over disclosure of financial information. The key points:

Rusal, the world’s largest aluminum company, is closely held by wealthy Russian businessmen, including Oleg Deripaska, once Russia’s richest man. As a private company, few details of its business are public.

The company hopes to raise $2.5 billion in an initial public offering in Hong Kong that will be an important test of international investor interest in Russian equities.

A series of articles in the business newspaper Vedomosti at the end of October detailed Rusal’s dismal financial results for 2008 and included other facts about the company. The articles cited documents given to bankers at a conference closed to the public.

That scoop is evolving into a legal test for business publications in Russia, a country where the political press is already kept on a tight rein.

Something appears to be missing in this story. Why is Deripaska doing this? Clearly, this lawsuit threat can have nothing to do with RUSAL’s impending IPO. The information that Vedomosti published is already published! A lawsuit, even if successful, is not going to put that genie back in the bottle. Moreover, Deripaska’s hypersensitivity about this can only serve to heighten suspicions that RUSAL really does have something to hide. In short, threatening a lawsuit is not in Deripaska’s immediate interest at all. So why is he making the threat?


The answer is that Deripaska is acting here not primarily on his own behalf but on behalf of all the members of the small club of oligarchs in Russia who – like Deripaska - participate in Vladimir Putin’s “protection racket.” Clifford Gaddy and I are writing in detail about this scheme in our new book, Russia’s Addiction. Beginning in the year 2000, when he entered office as Russia’s president, Putin has had a deal with the most powerful business owners. In that deal, the oligarchs agreed to abide by a few clear rules about their behavior inside and outside Russia; in return, Putin guaranteed them not only protection against expropriation by the state but also, and even more important, protection against each other. To be able to deliver on that latter guarantee, Putin has since 1999 at the latest preserved a monopoly on damaging financial information about the oligarch-controlled companies. That is, he and only he (along with one or two key associates) possesses the information, and he protects it from any leaks. Financial information is the nuclear weapons of Russia’s thoroughly opaque corporate elite. When Putin took over, the oligarchs were on the verge of all-out and all-destructive war against one another using such information. He ended the era of proliferation and brinksmanship and enforced a peace that has lasted to this day.


But if Putin’s power over the oligarchs rests on a monopoly of financial information, what could be more threatening to him and his system than independent collection – and release – of financial information? If independent media seek out the goods on the oligarchs, Putin's authority is dissipated. Ending internecine warfare among the oligarchs was the key event in the formation of the protection racket. The main terrain on which that war had been fought was ... the "independent media." Independent in quotes because, of course, the oligarchs owned the media and used it as weapons against each other. That is how kompromat was disseminated prior to Putin's accession. Putin took the media over to insure the oligarchs against each other. Deripaska’s threat against Vedomosti is intended to send the message to the press today not to upset the system Putin established a decade ago.

Craziest Quote of the Day

This would count for the year and probably the decade too. It is from Dick Armey, former House Majority Leader from Texas, and former Department Chair at North Texas State University:

“I don’t consider Larry Summers a serious economist,” Armey said. “You can get a Ph.D. from Harvard without ever having seriously considered the subject.”

I wonder if you can get the John Bates Clark Medal without seriously considering the subject? Here is the article it came from.

Summers list of publications is at least 10 pages long (his cv is here).

Links for today

Ned Phelps has an interesting article in the FT that criticizes both Keynesians and neoclassicals. He blames speculation for the housing crisis, not incentives.

The WSJ has an article (subscription required) on John Geanokopolos's work on leverage. I think that theorists will be interested to learn that they were on the margins:

Mr. Geanakoplos is among a small band of academics offering new thinking about those cycles. A varied group ranging from finance specialists to abstract theorists, they are moving to economic center stage after years on the margins.

Hard to see what margins they were on, but then we also learn that traditional macroeconomics had been relegated to second class status:

Traditional macroeconomics, such as practiced by John Maynard Keynes and Milton Friedman, was relegated to second-class status.

So I guess any comment about economics is possible in the WSJ. But despite these complaints, the article is interesting.

Everyone wants to make their work seem more revolutionary than it was, and reporters need it to be so, else why report it.

Mortgage Finance

This article by John Krainer of the San Francisco Fed has lots of information about the evolution of mortgage finance. This is important for thinking about the financial crisis of course. This is especially relevant for thinking about the relative importance of Government Sponsored Enterprises (GSE's) like Fannie Mae and Freddie Mac versus the non-agency securitizers. We can see, for example, that as the housing bubble proceeded the share of mortgages supplied by the GSE's declined:


We can also see that the non-agency lenders were more highly represented in the more risky types of mortgages at the height of the boom. For 2006 we have this picture:


Thus:

Compared with mortgages purchased by the GSEs, non-agency securitizations were much more likely to involve adjustable-rate mortgages, including option ARMs, to be rated as subprime, and to have less-than-full documentation of borrower income and assets. The median FICO credit score for the non-agency securitizations was about 30 points lower than for the mortgages held or guaranteed by Fannie Mae or Freddie Mac and much closer to the credit scores typically associated with loans guaranteed by Ginnie Mae.

These pictures are not consistent with the view that the housing bubble was the fault of the GSE's alone. Deteriorating standards seemed to accelerate as the GSE share fell.

Real Costs

The Brazilian Real has been appreciating significantly since last March. This rally has pushed the price of Big Mac up dramatically, according to this story in Bloomberg:

Buying McDonald’s Corp.’s flagship hamburger costs 8 reais in Sao Paulo, or $4.62, compared with $3.99 in New York and 2.29 pounds in the U.K. capital, or $3.74.

This is the counterpart to the dollar's weakening of course. But Brazil's President has not taken this lying down. As the Economist reports:

Brazil has gone for the direct approach. Foreign capital has flooded in, attracted by the healthy prospects for economic growth and high short-term interest rates. That has pushed up local stock prices, as well as the real, Brazil’s currency. To stem the tide, the government this week reintroduced a tax on foreign purchases of equities and bonds. Though many doubt the long-term efficacy of such measures, it had an immediate effect. The real, which had risen by more than one-third since March, fell by 2% (before regaining some ground). Brazil’s main stockmarket dropped by almost 3%.

This seems like quite a costly way to prevent currency appreciation -- cause your own stock market to fall. Perhaps a useful move to prick a bubble, but Brazil's appreciation versus the dollar does not seem to be driven by much other than fundamentals.