Friday, November 27, 2009

Tobin Taxes

Paul Krugman argues for extending Tobin taxes not just to currency transactions but also to repo transactions as well:

As Gary Gorton and Andrew Metrick of Yale have shown, by 2007 the United States banking system had become crucially dependent on “repo” transactions, in which financial institutions sell assets to investors while promising to buy them back after a short period — often a single day. Losses in subprime and other assets triggered a banking crisis because they undermined this system — there was a “run on repo.”

And a financial transactions tax, by discouraging reliance on ultra-short-run financing, would have made such a run much less likely. So contrary to what the skeptics say, such a tax would have helped prevent the current crisis — and could help us avoid a future replay.

Would a Tobin tax solve all our problems? Of course not. But it could be part of the process of shrinking our bloated financial sector. On this, as on other issues, the Obama administration needs to free its mind from Wall Street’s thrall.

Tyler Cowan argues against Krugman and makes several good points, most notably, that capital requirements are more effective than a Tobin tax to deal with excessive risk taking.

It seems to me that one big problem with a Tobin tax is that it is a tax on arbitrage transactions, and in particular, on short selling. It seems to me that asset bubbles are caused by the difficulties of arbitrage and short selling. If we had more of it then skepticism about bubbles could be priced and this would be valuable. Taxing financial transactions raises the cost of an already costly activity. So the unintended consequence could be severe.

Ethanol Woes

The NYTimes reports about the projected excess of ethanol mandated by Congress. Two years ago Congress mandated more use of ethanol for obvious political reasons:
To please the farm lobby and to help wean the nation off oil, Congress mandated that refiners blend a rising volume of ethanol and other biofuels into gasoline. They are supposed to use at least 15 billion gallons of biofuels by 2012, up from less than seven billion gallons in 2007.
But the recession and reductions in fuel consumption make these targets hard to fulfill:
At the maximum allowable blend, in which gasoline at the pump contains 10 percent ethanol, updated projections suggest that the country is unlikely to be able to use all the ethanol that Congress has ordered up. So something has to give.

When Congress wrote the rules, in 2007, gasoline consumption had been growing for years, and it looked as if the nation would be able to use considerably more ethanol in the future. Gasoline consumption hit a peak of 3.4 billion barrels that year.

But gasoline demand fell in 2008, after soaring gas prices early in the year were followed by the economic crisis. Consumption was slightly less than 3.3 billion barrels last year, and it could end 2009 at about the same level.

Congress could lower the targets but this would anger farmers. It could raise the amount of ethanol blended in gasoline, but this would ruin catalytic converters.

Perhaps the best solution would be for Congress to just buy the excess ethanol and store it. Cars would be saved and the subsidies would be maintained. But this would make transparent the fact that ethanol is a political subsidy to farmers, not a beneficial program to deal with global warming or energy needs. And making this transparent would make the subsidy program less sustainable over time. So this is unlikely. So more of our cars are likely to be rendered clunkers, but the cash will only be for the farmers this time.

Makes you kind of wonder what Congressional created health care will be like.

Wednesday, November 11, 2009

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!

Tuesday, November 10, 2009

Protection Rackets

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.

Monday, November 9, 2009

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).

Tuesday, November 3, 2009

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.