There seems to be one big problem with this argument. Unlike in the 30s, trade has not collapsed. Thus, the likelihood of a trade war, and consequent ill effects, are quite a bit higher. The effects on the American consumer of sudden price increases on Chinese imports, or their disappearance altogether due to a collapse in trade, could be quite severe.
Scott Alexander has an interesting post describing Robin Hanson’s controversial views on efficient charitable donation. Put simply, he says that donors could maximise the benefit of their charity by investing during their lifetime and donating the accumulated proceeds in a lump sum at the end of their life — because investment returns outstrip economic growth.
People don’t do this, says Hanson, because it would mean forgoing the immediate sense of satisfaction that is the real motivation for most charitable giving. Ouch. The post has generated lots of comments about the maths (and ethics) of investing for tomorrow rather than donating today, and a good deal of contemplation on the most efficient way to give money.
But the problem as I see it is much more fundamental: is charity, in itself, an efficient way to effect meaningful change?
Many of the problems that charities try to address are symptoms of poverty, rather than causes of it. Malaria is a good example. One of Hong Kong’s swankiest districts used to be a malarial swamp. It wasn’t charity that got rid of the disease; it was economic development — the British colonists cleared the paddy fields and re-directed the waterway to build the now-famous Happy Valley racecourse, inadvertently solving the malaria problem.
(The valley got its name, by the way, as a superstitious protection against the mysterious deaths that occurred there, which turned out to be serendipitous for the property developers who later built on the site. Death Valley might not have taken off in quite the same way.)
Malaria was also widespread in the southern US as recently as the 1940s. It was eradicated as a result of economic development (when the knowhow and resources became available), as it was in Greece and Italy and other parts of southern Europe.
That’s not to say it’s impossible to eradicate malaria from poor countries, at least in theory. After all, we know perfectly well how to do it. But the reality is that controlling malaria depends on effective government action and cross-border cooperation, which is beyond the scope of most private charities — and typically beyond the ability of the poorest countries. Crappy governance is why they’re poor in the first place.
And that’s precisely the point. Africa’s problem is not Aids or dirty water or a lack of schools or hospitals (though it suffers from all of those things). The problem is poor governance, weak institutions and the ravages of war.
Where do I donate to fix that?
Well, I don’t. The reality is that charities actively avoid giving money directly to governments in the poorest countries because their donors are paranoid about corruption (and accountability). They want to see where their money is going, so they know how good to feel about it.
Indeed, in the US they even host conferences on “efficient giving” so people can make absolutely certain that not one penny of their charity is wasted.
But it’s hard to see how any of this bottom-up stuff helps to improve governance, which is the actual source of the problems.
It’s not even clear that people in the rich world really want to solve these problems. China’s growth since 1979 has lifted more people out of poverty than the total combined efforts of all the world’s charities, yet most Americans seem to think that China is “stealing” jobs and should be penalised rather than held aloft as a model for fixing global poverty. (Though they will donate money for China’s pandas, who, unlike China’s humans, are not considered guilty by association.)
It is therefore doubly ironic that Chinese investment in Africa will probably do more to alleviate poverty than the charities have achieved during the past 40 years.
If people were serious about making the world a better place, it would be a much better place already. Let’s face it, charity is all about the donors, not the recipients.
Euromoney is bizarrely adamant that British banks should have as little capital as possible.
“It’s all too easy to be seduced into fear over the capital positions of UK banks,” it rightly says, while clearly resisting the temptation itself. Indeed, Euromoney isn’t worried at all. It seems to think that a vague 7% equity buffer is more than enough capital to protect taxpayers from ever having to foot another bail-out — or perhaps it just doesn’t care.
As long as bank investors earn a return for risking none of their capital and bankers get overpaid on the subsidised spread, all is for the best in the best of all possible worlds. Though it’s unclear what journalists get from the deal. Free banker love?
The situation is much simpler than is often portrayed in the press, as described in a book called The Bankers’ New Clothes by Anat Admati and Martin Hellwig, which does an excellent job of explaining why banks should fund themselves with a lot more equity, just as every other type of company on the planet does.
Admati and Hellwig have done the research (published in previous academic papers), and it shows that the funding mix a business chooses — the ratio of debt and equity — has little to no effect on its operations.
Bankers often make it seem as though equity is somehow set aside for a rainy day and thereby restricts their lending ability, but this is nonsense. Beware bankers whose lips move. The difference between equity and debt is that equity doesn’t have to be repaid. The proceeds from both end up in the same pot.
Because debt has to be paid back, businesses that are too dependent on it can quickly become swamped if the value of their assets depreciates. And this is as true for Citi as it is for Apple (which has almost zero debt).
To put that in terms that all homeowners will understand: the financial crisis caused the banks to fall into negative equity because they were mortgaged to the hilt. And the response to the crisis has only made things worse — they continue to be heavily mortgaged because their borrowing costs are so cheap due to an implied taxpayer guarantee through too-big-to-fail.
The only beneficiaries of this are the bankers and the investors. It makes no positive difference to bank customers or to the financial system. In effect, taxpayers are the equity.
Needless to say, this is not an efficient way to run the financial system. The discipline imposed by funding with equity is almost completely removed, yet the safety cushion is still in place thanks to the captive equity unwittingly provided by taxpayers.
This blatant moral hazard is cause for celebration over at Euromoney: “Importantly, there is no trigger for any fresh equity issuance, with a new recommended end-2013 capital target of ‘7% of RWAs’.”
Hurrah! That’s a 93% mortgage on the entire banking system — assuming that the banks don’t cheat, which they obviously do.
Does anyone outside The City think that’s a prudent margin of safety for the most important sector of our economy? Seven percent. Would people be surprised to find out that their home enjoys more secure funding than the bank that’s providing it? I think so.
When it comes to the national economy, politicians love to draw comparisons with small businesses and households and common-sense notions of thrift. But what happens to those sentiments when it comes to discussing the banks? The plain wisdom of the greengrocer is quickly forgotten and, instead, we’re treated to mind-boggling banker gibberish that is ultimately a lesson in the benefits of maximum leverage.
Given the level of deliberate obfuscation, it’s perhaps not surprising that some people misinterpret what’s really being said. “Equity is expensive,” they wail, as if bank investors are somehow a different breed of animal to the people buying Apple stock. They are not, of course.
Bank equity is only expensive when compared to taxpayer-subsidised bank debt, but the cost of that subsidy is very real. Bankers can safely ignore those costs because they’re not on the banks’ balance sheets, but from a national perspective it doesn’t make any sense to say that bank equity is expensive — because the nation does bear the cost of guaranteeing the debt.
So, the question is really about choosing a capital structure that maximises the safety and the utility of the banking system, rather than the current arrangement that simply maximises compensation for the bankers themselves.
I don’t understand the drone debate. Even the Huffington Post is asking why more Democrats weren’t on hand to support Rand Paul’s tedious and pointless stunt.
What am I missing about these drones? They’re basically remote-control aeroplanes, so I find it quite baffling why everyone seems to think the president needs to explicitly state that they can’t be used on American soil. What the feck?!
To be clear, the missiles that can be fired from a drone can also be (and much more commonly are) fired from other weapons systems. And it doesn’t mater what type of platform fires it, you won’t see it coming. So what’s the significance of the drones?
Dozens of countries have these things and I’m not aware of a similar issue in any of them. I’m also not aware of any other weapon system that has caused politicians to demand an express promise that they won’t be used domestically — including nerve agents.
Indeed, America has in fact used nukes domestically (for testing). Has there been pressure not to use tanks or B2 bombers at home?
The stupidest thing about it all is that the controversial aspect of drones is — almost exclusively — related to their use against people in Pakistan and other countries that America is not at war with. It has nothing to do with the president wanting to use them against Americans.
If Barack Obama wanted to drop a Hellfire missile on your ass, he wouldn’t have to use a drone. He could use any type of plane he fancied. Or any Navy vessel. Or he could just set up a tripod on the White House lawn. What difference a drone makes is completely beyond me.
And why supporters of Obama go along with it is just bizarre. Isn’t the whole thing just another shameless Republican excuse for holding up the normal functioning of government…?
Hong Kong prison homes spur virus risk decade after Sars, according to Bloomberg, though I’m not sure the article makes its point.
Andrew Lilico is a true believer in the logic of austerity and took to the Conservative Home blog recently to argue for bigger, faster cuts.
He was kind enough to respond to my comment and I’ve posted the exchange below.
oblivia: No, no, no. And no.
Lilico reckons Britain could face the same fate as Ireland and Spain. “It is not a “’purely theoretical’ concern,” he assures us.
Err, did I miss the UK joining the euro? If not, then Lilico is talking nonsense. It’s a “purely theoretical” concern that Britain will be forced by the Germans to take the same medicine as Ireland and Spain.
As long as we have our own currency, it’s impossible that we could run out of money and have to go begging to Europe for a bailout. Doesn’t Lilico know this? Is he deliberately cultivating groundless fears or just being ignorant?
It’s bizarre that people who railed against giving up the pound now behave as though we joined the euro anyway. What’s the point of currency sovereignty if you don’t take advantage of the huge power it gives us? We could have spent the past couple of years sprinting past the rest of Europe, but instead we’ve just joined them.
Hard to think of anything stupider.
Lilico: Yeah, yeah, cos countries that print their own currencies *never* have sovereign debt crises, do they? How could anyone have thought that the UK in 1976 had a gilts crisis, or that Angola is anything other than AAA today. And *obviously* the Irish recession and bank failures came *after* the ECB intervened, not before – how could I have been so silly as to think things had occurred in the opposite order.
I am no longer able to be polite about this utterly ridiculous meme that has spread that countries that print their own currencies can never have sovereign bond problems. It’s garbage.
oblivia: There are indeed parallels between Britain in 1976 and the PIIGS in 2009 — they were beholden to others. Britain was dependent on funding from the IMF, while Ireland and Spain had devolved monetary policy under the euro.
News flash: We are no longer indebted to the IMF and we didn’t join the euro. These aren’t accidents. They were the product of deliberate Conservative efforts to protect our independence.
Now you argue that this independence is an illusion. Forget all the arguments of the past, you say, we are in just as much peril today as we were in 1976. Be afraid.
I say this is nonsense.
ps Andrew Lilico is a director and principal at Europe Economics, a consultancy specialising in economic regulation, competition policy and the application of economics to public and business policy issues. You can find him on Twitter as @AndrewLilico, though you do so entirely at your own risk.
pps Martin Wolf also has a good piece in today’s FT that slays a few austerity dragons and makes the point that the problems in the PIIGS were caused by the ECB’s ill-advised austerity (which was forced on them after they gave up their independence to join the euro): “Eurozone countries’ debt crises resulted from European Central Bank policy failures. Because of its refusal to act as lender of last resort to governments, they suffered liquidity risk – borrowing costs rose because buyers of bonds lacked confidence they would be able to resell easily at all times. That, not insolvency, was the immediate peril.”
I commented on Gavyn Davies’ much-discussed article: Helicopters can be dangerous.
This line in particular struck me as odd: “The increase in the monetary base is temporary in the case of QE, and permanent in the case of OMF.”
OMF is overt monetary finance, which is apparently a “less inflammatory” term for helicopter money. I’m not exactly sure why Davies thinks helicopter money would be dropped permanently, or why he thinks anyone is arguing that this would be a good idea.
But what I find particularly obnoxious is how the City is now back to calling for common sense and fiscal restraint. Ha!
Remember, it was bankers who demanded the initial increase in the monetary base (through bailouts) as a way of preserving their bonuses, and it was bankers that drove monetary expansion in the years before the financial crisis as they earned fat margins from cavalier lending, but when someone suggests a monetary expansion that might actually benefit ordinary people… heaven forbid!
Of course, neither MMT nor modern monetarism are concerned with a permanent expansion of the monetary base anyway. The point is to take control of the money supply away from the banking cartel and using a rule-based system instead. Outside of the banking industry, this is not a remotely controversial idea.
The only restriction on what a sovereign nation can or cannot do is determined by the available resources, rather than some made-up limit on the amount of money (which can be created at will).
I responded to a comment underneath this article: Currency Wars, What Are They Good For? Absolutely Ending Depressions – Matthew O’Brien – The Atlantic.
This comment (and article) would have been timely in about December 2008, when there were some legitimate reasons to fear a trade war (however irrational it might have been). Today, we already know the answer. It didn’t happen.
Instead, China printed massive amounts in 2009, as did most other large economies. And, after considerable strengthening of the yen, Japan is now benefiting from unorthodox monetary policy through Abenomics, and even India seems to be joining the party. But none of these countries are doing it to beggar their neighbours, which is the key point to understand. They are addressing problems in their domestic economies, which happens to have an effect on exchange rates (or not, in a world where everyone is doing the same thing).
Talk of “currency wars” is just marketing for a book of the same name. And best ignored.