This time is no different

Carmen Reihhart and Ken Rogoff explain why we are likely to face a wave of fiscal crises in the wake of the banking crises. This stems from the research in their magisterial book. Their point is simple, but important:

In previous cycles, international banking crises have often led to a wave of sovereign defaults a few years later. The dynamic is hardly surprising, since public debt soars after a financial crisis, rising by an average of over 80 per cent within three years. Public debt burdens soar owing to bail-outs, fiscal stimulus and the collapse in tax revenues. Not every banking crisis ends in default, but whenever there is a huge international wave of crises as we have just seen, some governments choose this route.

What will complicate the response is not only the short-term political focus on employment, but also the fact that many emerging economies (which are not in such bad shape) still rely on the US as a market for goods. It is still not clear how the world will re-balance to smaller US external deficits.

While our institutions our better now -- better Central Banks and the IMF -- it is still not clear if governments will respond to this challenge. But beware Reinhart and Rogoff's warning:

Markets are already adjusting to the financial regulation that must follow in the wake of unprecedented taxpayer largesse. Soon they will also wake up to the fiscal tsunami that is following. Governments who have convinced themselves that they have done things so much better than their predecessors had better wake up first. This time is not different.

Geithner and his critics

Treasury Secretary Tim Geithner faced his critics in Congress yesterday and they were angry. There was bipartisan agreement in attacking the AIG bailout. It is a complicated issue, of course. But given the quality of these critics I cannot help feeling support for Geithner. Where was Congress then? Have they agreed on a mechanism to shut down large financial institutions? Do they remember how close we were to meltdown last year?

Elitists and Populists

I admit it. I really liked David Brooks' column today. His fundamental point is that elitists and populists really reflect the same type of thinkings:

These two attitudes — populism and elitism — seem different, but they’re really mirror images of one another. They both assume a country fundamentally divided. They both describe politics as a class struggle between the enlightened and the corrupt, the pure and the betrayers.

These attitudes appeal to people because they simplify, kind of like conspiracy theories. Life is more complex. But complexity is not viable political platform. Better to attack the villains.

Brooks description of the competing fantasies is very good:

Ever since I started covering politics, the Democratic ruling class has been driven by one fantasy: that voters will get so furious at people with M.B.A.’s that they will hand power to people with Ph.D.’s. The Republican ruling class has been driven by the fantasy that voters will get so furious at people with Ph.D.’s that they will hand power to people with M.B.A.’s. Members of the ruling class love populism because they think it will help their section of the elite gain power.

This is close to an old theory of mine about the attraction of Marxism. I have always thought that adherents view themselves as planners in the socialist commonwealth. No member of the socialist vanguard envisions herself as a worker realizes her self worth through labor in a workers's state. The theory appeals to elite requirements, because what else would intellectuals do in a workers' paradise where there is no need to criticize society? Must have to run society.

This is a good idea

Douglas Diamond and Anil Kayshap have a good idea relating to the proposed tax on Wall Street.

Obama and Golf

Michele Cottle criticizes the President for playing golf, and Paul Kruman approves. This is one of the stupidest articles one can read. For example,

As a senator, John F. Kennedy scored political points on Eisenhower by mocking Ike’s golf obsession--while taking pains to keep his own golfing gifts under wraps. (As Van Natta recounts, JFK forbade the media from photographing him at play.) Bushes 41 and 43 were both slammed for golfing during wartime. It has been posited that W. quit the game in part because of the stinging coverage of comments he made on the golf course in August 2002, following a suicide bombing in Israel. “There are a few killers who want to stop the peace process that we have started, and we must not let them,” Bush told the assembled journalists. “I call upon all nations to do everything they can to stop these terrorist killers. Thank you. Now watch this drive.” The tone-deaf clip eventually made its way into Michael Moore’s Fahrenheit 9/11. It was not one of golf’s finer moments.

So JFK hypocritically criticized Ike for playing golf even though he was a golfer (don't even get me started on JFK sending Pierre Salinger to buy all the Cuban Cigars he could find before announcing his boycott of Cuban imports). And George W. Bush made stupid comments on a golf course. Obama should thus quit golf because he can be falsely accused by some hypocrite? Or because a stupid President made stupid comments on a golf course?

This is what happens to liberals when they consider golf. Their minds go numb. Then there must be the ritual comment that golf is a white elitist pastime. This can only be said by a non-golfer. I played today at Wilson Golf Course in LA. The course is a United Nations meeting. I doubt there is a place in America -- except on other public golf courses -- where you get Blacks, Whites, Jews, Hispanics, and Korean Americans interacting in such a friendly, equal, manner. Obama's natural constituency plays golf at public courses all over America.

Derman on Regulators

Emmanuel Derman dreams about the TSA and the FED trading places.

If a bank failed at 9 a.m. one morning and shut its doors, the TSA would announce that all banks henceforth begin their business day at 10 a.m.

And, if a terrorist managed to get on board a plane between Stockholm and Washington, the Fed would increase the number of flights between the cities.

That does sum it up pretty well.

Hamilton Channels Shiller

Jim Hamilton channels some Bob Shiller to explain why stocks have performed so poorly for the last decade. Worth reading.