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Friday, October 26, 2012

Cameron to Van Rompuy: No Negotiation on E.U. Budget

Just days before the House of Commons debated whether Britain should secede from the E.U., Prime Minister David Cameron and his deputy, Nick Clegg, met with Herman Van Rompuy, President (or chair) of the European Council, to discuss Cameron’s threat to veto any proposed seven-year E.U. budget that is higher than the previous budget (allowing for inflation). The European Commission had proposed a 5% increase over the current budget, setting the stage for a clash of the titans across the federal and state levels. The British refusal even to negotiate on the federal budget exposed a major vulnerability in the E.U. itself just as it was being relied on internationally to protect the euro from succumbing to the systemic risk of Greece or Spain defaulting.

The complete essay is at Essays on Two Federal Empires.

Anti-Federalist Britain: South Carolina on Steroids

If Douglas Carswell, a member of the House of Commons, had his way, Britain would secede from the E.U. before Prince Charles could say, “hip hip!” Carswell's Private Member's Bill, submitted for debate in late October 2012, would repeal the European Communities Act (1972), by which Britain became a state in the former European Economic Community in 1973 (after France had vetoed Britain’s first request). Although Private Member’s Bills rarely become law in Britain, merely having a debate on whether to have a referendum on the question of whether the Kingdom should secede from the empire-level union would stir the pot. The Prime Minister, who was on record in support of not pulling out of the union, but for only economic reasons as his state had been benefitting from the large common market. So even if Carswell’s effort is ultimately unsuccessful, even such a revolt by Tory back-benchers could undercut David Cameron’s power in the midst of a languid economy in the state.

The complete essay is at Essays on Two Federal Empires.

                                     PM David Cameron of Britain at the European Council. Is he onboard?     AFP/Getty

Thursday, October 25, 2012

The U.S. Sues Bank of America: A Spanking or Slap-on-the-Wrist?

In late October 2012, federal prosecutors in New York formally accused Bank of America of “carrying out a scheme, started by its Countrywide Financial unit, that defrauded government-backed mortgage agencies by churning out loans at a rapid pace without proper controls. In a civil suit, prosecutors seek to collect at least $1 billion in penalties from the bank as compensation for the behavior that they say forced taxpayers to guarantee billions in bad loans.” The guarantee can be considered a moral hazard, in that Bank of America (or Countrywide) was not the party on the hook. In other words, the mortgage service company had an artificial incentive to produce mortgages riskier than would otherwise be the case because they would be guaranteed by another party (i.e., American taxpayers).

The full essay is at "U.S. Government Sues Bank of America."

Wednesday, October 24, 2012

Political Risk in Systemic Risk: Finnish Pensions Err in Debt Crisis

Finland became a state in the European Union in 1995 and adopted the euro at its birth in 1999. In terms of population, the state is between Wisconsin and Minnesota, both of which are states in the United States. The Finnish culture prizes saving as well as paying-off debt on time. As the Wall Street Journal put it, the Finns are more German in this sense than are the Germans themselves. It is easy to understand, therefore, why the Finns would not have been excited about the write-offs in Greek government in 2012. The Finnish cultural attribute here is an ideological proclivity. Such a value-system so deeply held can even eclipse or interfere with an otherwise unfettered risk-return trade-off presumed to be part of the market mechanism. Just as the risk-return investment-pricing froze rather than adjusted upward with the leap in risk in CDOs and the related insurance swaps that occurred on Wall Street in 2007 and 2008, the decisions of Finnish pension fund officers in the wake of the European debt crisis to pull out of Greek and Spanish bonds rather than simply to demand a higher rate of return, given the higher risk, likely means that the market mechanism itself freezes rather than functions at levels of high risk (or when risk is increasing dramatically). In other words, the theory of the laissez-faire market, which Adam Smith never advocated, has a serious flaw that is reflected in the mechanism in operation when there is a spike in risk. Un prix ne marche pas quand il y a beaucoup du risque. The free market mechanism in the investment market tends to freeze up rather than re-price instruments whose risk is quickly increasing to a significant degree.

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon. 

Tuesday, October 23, 2012

Anticipating the U.S. Presidential Election of 2012

I wonder which has more import: which party gets its base out or which way the independents lean? Realistically, the result in a given state is likely to be a mixture of the two ( e.g., independents may lean toward Romney, overcoming the Obama campaign's excellent ground game). Even though the Electoral College is by state, I suspect that both in regard to the ground games and how the independents go, the trend will be the same from state to state because the campaigns are national and what independents are taking in does not differ from state to state. In other words, we should be able to discern a subtle "will of the People" at the national level in the election results.

My own hunch is that both parties will get their respective bases out. The big unknown to me is how or whether the independents will break one way or the other. I think the independents are the true "jury" on Obama, so I think how they vote as a group is the thing to watch as the returns come in. A leaning one way or the other can be taken as their verdict. I agree with commendators that the election really is a referendum on the incumbant, even though a myriad of reasons go into voters' decisions.

I had the sense in the second presidential debate that Obama looked smug, even arrogant, as if he were running the debate in virtue of his office. His tone directed at the moderated seemed to say, "Ok Candy, you may proceed with that." Perhaps the two labels are unfair, though people who have had contact with the president in person tend to provide similar feedback. I suspect the average Joe (not necessarily "the plumber") voter is turned off by conceit. Watching the debate, I had a subtle sense that whispered in my ears, "American viewers might be reacting negatively to his personality, as if saying to themselves, 'now we see how he really is . . . hmmm.'" There is the brand and the man. In other words, apart from the speeches and the orchastrated ads, Barak Obame might not be someone we would necessarily want to get to know, after all. I wonder if this recognition or awareness was occurring for the American people only then, during the debates, as we observed Obama interact with a rival in real time. "So this is how he plays with others . . . hmmm."

In divining what prompts the electorate's leaning one way or the other in a given election, we would be wise not to leave out "comfort level" with seeing and hearing the candidate at issue. Mentality or attitude is relevant because we know that whoever is elected president will be a regular fixture in our lives, albeit vicariously through electronic means. I am not referring only to whether we like the guy; the matter extends to our comfort with his attitude. This is a very subtle thing. Personality and attitude can thus be understood to play a role, albeit a subtle one, in how a candidate for president is "evaluated." An election is not simply about policy, which is a reason why the latter should be included on a ballot separately. 

Of course, Obama's attitude was not the only one on display during the debate. I have in mind Romney's duplicity, even lying, in his claim, "I care about all Americans" during the debate after he had said in private that it would not be his job to worry about 47 percent of us if elected no doubt turned many people off (at least those of us who follow politics). As he looked straight into the camera and made his statement as though sincere, I wondered whether the highest politicians have such an astonishing ability to act. That is to say, the true gift of a politician could be the ability to come off as incredibly sincere when he or she is simply acting the part. "Wow he's good" was what came to my mind. Of course, the excellence of a skill is of little value if the skill itself is a vice. Perhaps what we are left with is a fleeting glimpse of how little we know about either candidate, and yet we presume we know so much about both. "Obama cares" and "Romney is compassionate" may turn out to be marketing-driven rather than real, yet we cannot be wrong about what we believe to be the case, right?

To give another example, we watched Andy Taylor, the nice sheriff in Mayberry; from this experience of the man we felt a loss when Andy Griffith died in the summer of 2012 even though the man was reportedly not "good with people." That is to say, the man behind the sheriff was not as kind, yet we mourned as if we had lost the sheriff. For some reason, the human mind is susceptable to acting. Where most of an electorate do not get to meet the candidates in person, as in the case of the election for an empire-scale office such as the U.S. Presidency, the susceptability is particularly strong because the contact comes only through television and perhaps a mass rally.

I suspect that many independents (and perhaps even Republicans and Democrats) were left after the debates with the sense of why we as a people could not have done better in coming up with two nominees (and why not more than two?). This suspicion was confirmed for me when I learned after the third debate that the candidates presumed to discuss domestic policy even though the debate was to be on FOREIGN policy. Such a lapse can itself be a red flag respecting boundary issues or problems with "keeping within the lines" (i.e., as in coloring books).

Moreover, the sheer length of the primary "season" (year) and the general election campaign suggest that something rather basic in the American electoral system is off-balance, both relative to presidential campaigns in U.S. history and simply in terms of efficacy. Stretching something out for months does not necessarily mean better quality as a result. In fact, tangents can fill voids as the media seeks to keep up their viewers' attention when it naturally goes to something else. So I suspect that a lot of us will feel a sense of relief on "the day after" simply because the damn thing is done.

Sadly, we will then likely have gridlock to look forward to, regardless of which party has the White House, because of the expansive use of the filibuster in the U.S. Senate and the fact that one party is not likely to control both chambers of Congress and the Presidency. In terms of policy, the presidential election matters to be sure (and even more in terms of judicial appointments), but not nearly as much as we suppose. It is not as though whoever occupies the White House can simply snap his fingers and one of his campaign promises is enacted into law. I think we, the American People, need a strong dose of reality when it comes to buying into all the hype surrounding the alleged importance of the campaign and what a president can do. In other words, we need to tone it down a bit and come down to earth. Maybe then we can address the matter of the sheer length of the campaign "season" and how we can come to know the candidates behind the actor-personas and one-liners.


Monday, October 22, 2012

Predicting Future Events in Political Risk Analysis: On the European Debt Crisis

Political risk assessment is a nasty business in that the future has a stubborn habit of not wanting to be too predictable. Even though tomorrow displays a remarkable tendency to be similar to the world of today—the status quo enjoying the right of default—forecasting future events is notoriously difficult. To use statistics to nail down probabilities may actually involve considerable luck. Not even the stature of the person making the predictions may be decisive, after all. I have in mind the predictions of Alexei Kudrin, the former Russian finance minister, on the European debt crisis and the euro.

The full essay is in Essays on the E.U. Political Economy, available  in print and as an ebook at Amazon.