I read the news today, oh, boy...

Adiós, clase media, adiós · ELPAÍS.com		Good-bye, middle class, good-bye - ElPais.com (31/05/2009)
Ridiculizada por poetas y libertinos; idolatrada por moralistas; destinataria de los discursos de políticos, papas, popes y cuantos se suben alguna vez a un púlpito en busca de votantes o de adeptos; adulada por anunciantes; recelosa de heterodoxias y huidiza de revoluciones; pilar de familias y comunidades; principal sustento de las Haciendas públicas y garante del Estado de bienestar. La clase media es el verdadero rostro de la sociedad occidental. En un mundo globalizado, en el que hasta en el más mísero país siempre se puede encontrar a alguien con suficientes medios para darse un paseo espacial, sólo la preeminencia de la clase media distingue los Estados llamados desarrollados del resto. Los países dejan de ser pobres no por el puesto que ocupan sus millonarios en el ranking de los más ricos -de ser así, México o la India estarían a la cabeza del mundo dada la fortuna de sus potentados-, sino por la extensión de su clase media.		Ridiculed by poets and libertines; idolised by moralisers; recipient of the speeches of politicians, popes, patriarchs and anyone who steps on a soapbox looking for voters or followers; flattered by advertisers; wary or revolutions; pillar of families and communities; main support of public finances and guarantee of the Welfare State. The middle class is the true face of Western civilisation. In a globalised world, in which one can find someone with enough means to take a spacewalk in any country, only the dominance of the middle class distinguishes the so-called developed states from the rest. Countries don't cease to be poor because of the position of its millionnaires in the ranking of the wealthy - in that case, Mexico or India would be on top of the world given the fortunes of its tycoons - but because of the size of their middle class.

This process is what I have called "the thirdworldisation of the first world". It seems to be well underway.

A funny thing happened on the way to systemic fiscal reform...

Chris Cook posted a diary on how the current financial, monetary and fiscal system is as broken as Humpty Dumpty and, as of right now, upwards of 80% of the comments are in a subthread about developing an online simulation game to teach people political economy (quotations below the fold).

So, as the title of this diary suggests, let's get cracking.

I caught the following when roaming the internet aimlessly the other day...

Javno.hr: Croatia's PM: Bosnian Croats Must Have All Rights (March 31, 2009)

Croatian Prime Minister Ivo Sanader said ahead of his trip to Bosnia's Mostar that he is taking a message there that Croats living in Bosnia-Herzegovina have to be secured complete equality with the other two constitutive peoples, as well as that it is high time for solutions for the country's future to be found.

- This is a turning point and permanent solutions for Bosnia-Herzegovina should be made. One should keep in mind that it is also the homeland of the Croat people and that Croat people must be sovereign, equal and constitutive with the other two peoples in Bosnia-Herzegovina - Bosniaks and Serbs - Sanader told the Bosnian issue of the Vecernji list daily on Tuesday.

He said that Croatia, as a signatory to the Dayton peace treaty, wants Bosnia to remain integral and sustainable and is giving it all the necessary support on its way towards Euro-Atlantic associations.

I find talk of Bosnia Croats' sovereignty by the Prime Minister of Croatia hair-raising, especially in this context...

I guess I'll be a lone voice in the wilderness and defend US Treasury Secretary Geithner and his Financial Stability Plan. It's not all that bad.

First of all, let's look at what Geithner said introducing the plan on February 10th:

I am going to outline the key elements of this program today. But before I do that, I want to explain how we got here. The causes of the crisis are many and complex. They accumulated over time, and will take time to resolve.

Governments and central banks around the world pursued policies that, with the benefit of hindsight, caused a huge global boom in credit, pushing up housing prices and financial markets to levels that defied gravity.    

Investors and banks took risks they did not understand. Individuals, businesses, and governments borrowed beyond their means. The rewards that went to financial executives departed from any realistic appreciation of risk.

Haven't we been heaping praise on bloggers for saying these things for a few years? Shouldn't we be happy to hear it from the mouth of the US Treasury Secretary?

frontpaged by Jerome

Or whizzes through, anyway, on his way to Madrid.

The situation surrounding International Letters of Credit doesn't seem to be getting any better more than two weeks after I first posted about it on the front page (This is where it gets real on October 13)

In my opinion the solution is going to have to be to create an international trade credit guarantee society. The WTO could organize this. It could be capitalised (maybe to the tune of $1 trillion) with a loan from the World Bank denominated in the IMF's "Special Drawing Rights" currency. Users of the guarantee (either traders or their countries) would pay an insurance fee for the use of the guarantee, which would be used by the guarantee society to pay the loan back. Come to think of it, instead of a loan this could be one of Chris Cook's 'capital rental' arrangements where, as long as the guarantee society uses the money from the WB (or from member states themselves) it pays a fraction of the 'insurance fee' revenues back to the capital contributors.

Below the fold I relate this situation to Chris' earlier writings on 'peer-to-peer finance'.

John Kenneth Galbraith's The New Industrial State (1967-85) is allegedly too much about sociology to be considered proper economics by this year's Swedish Bank Prize winner. In the last 30 years political economy hasn't progressed in the direction that he foresaw in the 1960's, and so probably his book has to be seen more as a description of what things were like in the 1950's and 60's than as a general theory. But still it contains gems like the following extended quotation, which to me goes a long way towards explaining working-class conservatism in the US.

Much may be learned of the character of any society form its social conflicts and passions. When capital was the key to economic success, social conflict was between the rich and the poor. Money made the difference; posession or nonpossession justified contempt for, or resentment of, those oppositely situated. Sociology, economics, political science and fiction celebrated the war between the two sides of the tracks and the relation of the mansion on the hil to the tenements below.

But by the 1960's things had become different...

For some reason I cannot quite put my finger on, I am dissatisfied about the exchange between Jerome and Martin Wolf on Bernanke's savings glut theory.

To paraphrase, Wolf takes a cue form a 2005 speech by Bernanke and blames East Asia's (and especially China's) mercantilist policies for the credit crunch. Jerome replies that wealth capture is not wealth creation. I guess part of my problem is that the two positions are not incompatible, and Jerome 1) doesn't refute that East Asia has been mercantilist; 2) doesn't refute the argument that this is the root cause of the asset bubble now deflating. Even if Wolf were to accept Jerome's contention that the bubble was a Western policy choice, Wolf's argument seems to be that there was no good policy path out of the situation created by China's dollar peg and that deflation and recession were inevitable and Jerome doesn't address that.

So I read Wolf's piece over a couple of times and then had some discussions with Metatone, Drew and Colman and here's the result.

Like many people I have been following what has been called Paulson's Authorisation for the Use of Financial Force. One of the most interesting developments around it has been a counter-proposal by Chris Dodd, Chairman of the US Senate's banking committee.

I have found Paul Krugman's blog very useful and I encourage you to read his analysis. Here I'll just quote his reaction to Paulson't and Dodd's plans.

I hate to say this, but looking at the plan as leaked, I have to say no deal. Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.

...

And there's no quid pro quo here -- nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

I hope I'm wrong about this. But let me say it again: Treasury needs to explain why this is supposed to work -- not try to panic Congress into giving it a blank check. Otherwise, no deal.

I've had more time to read the Dodd proposal -- and it is a big improvement over the Paulson plan. The key feature, I believe, is the equity participation: if Treasury buys assets, it gets warrants that can be converted into equity if the price of the purchased assets falls. This both guarantees against a pure bailout of the financial firms, and opens the door to a real infusion of capital, if that becomes necessary -- and I think it will.

Jerome has written against the Paulson plan today, as have many others which you can see linked in that thread. Here I want to focus on how the Dodd plan plugs the holes in the Paulson plan, how it's supposed to work, and how it might yet fail.

I just read George Soros' latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means. My original interest was in reading about his theory of Reflexivity and his associated model for financial bubbles. Then I thought I would quote what he has to say about Market Fundamentalism and how the current Crisis might spell the end of it. But I think today I'll just quote him on what he calls "the Postmodern Idiom" and how it makes Popper's "Open Society" vulnerable.

Yet, in spite of my preoccupation with the concept of reflexivity, I failed to recognize a flaw in Popper's concept of open society: that political discourse is not necessarily directed at the pursuit of truth. I believe Popper and I made these mistakes because of our preoccupation with the pursuit of truth. Fortunately, these errors are not fatal because the case for critical thinking remains unimpaired and the mistakes can be corrected: we can recognize a difference between the natural and social sciences, and we can introduce the pursuit of truth as a requirement for an open society.

I'm reading JK Galbraith's The New Industrial State, whose 3rd Chapter ends on the following note:

The modern large Western corporation and the modern apparatus of socialist planning are variant accommodations to the same need. It is open to every free-born man to dislike this accommodation. But he must direct his attack to the cause. He must not ask that jet aircraft, nuclear power plants or even the modern automobile in its modern volume be produced by firms that are subject to unfixed prices and unmanaged demand. He must ask, as just noted, that they not be produced.

While I finish the book and digest it and other recent readings such as Veblen's The Theory of Business Enterprise, I thought I would throw the quotation out there and ask for your reaction/interpretation of it. I see a large number of handles to go into favourite themes of ET.

Brought across by afew

I don't know why the World Oil Congress is being held in Madrid but, given that it is, the Spanish press has access to the participants. Here's an interview published by El Pais today, in which the Secretary General of OPEC blames everyone except themselves: speculators, US foreign policy, US environmental policy, the subprime crisis, you name it... But he also claims that this is not a supply-and-demand problem as there is no unsatisfied demand.

"Muchos se están haciendo ricos con el mito de que falta petróleo" · ELPAÍS.com		"Many are getting rich with the myth that there is an oil shortage" - ElPais.com
ENTREVISTA: La nueva crisis energética		INTERVIEW: The new energy crisis
ALEJANDRO BOLAÑOS - Madrid - 02/07/2008		By ALEJANDRO BOLAÑOS - Madrid - 02/07/2008
El Congreso Mundial del Petróleo que se celebra esta semana en Madrid se ha convertido en un zoco en el que todos tratan de vender la misma mercancía averiada: que la culpa de la brutal subida del precio del oro negro es de otro. Abdalla Salem El-Badri, secretario general de la Organización de Países Exportadores del Petróleo (OPEP), rebate a los que, como algunos Gobiernos occidentales y varias multinacionales, culpan a la falta de producción. Para El-Badri, libio de 68 años, el precio coge impulso en el exceso de especulación financiera.		The World Oil Congress held this week in madrid has become a souq in which everyone tries to sell the same broken merchandise: that the brutal rise in the price of black gold is someone else's fault. Abdallah Salem Al-Badri, secretary general of OPEC, refutes those who, like some Western governments, blame lack of production. For Al-Badri, a 68-year-old Libyan, the price is propelled by financial speculation.

Monetarists are at it again...

[Murdoch Alert] Mervyn King moves to calm fears of imminent rate rises

Mr King re-iterated that the Bank still expects inflation to rise to more than 4 per cent before the end of the year and highlighted that controlling inflation was the Bank's only concern.

"I am confident that we will bring inflation back to the target, but I cannot tell you what level of interest rates we will need to set to achieve that, " he said.

Economists say that while there is widely expected to be an increase in interest rates, it is not expected as soon as next month.

(my emphasis)

That's paragraph 9 of the Times' story (which includes a video of King speaking to the Commons), which chooses to obfuscate by headlining the reassurances that no, interest rates will not rise next month while deep in the article we learn that King is getting ready to pull a Volcker.

It seems that European (Union) involvement in sorting out Bush's Iraqi misadventure has become a hot topic again:

• An opportunity for Europe to remove the U.S. from Iraq by Magnifico on June 7th, 2008
  
• On Iraq, it's Time to Call Europe by Joerg in Berlin on June 5th, 2008
  

Jörg's diary especially got me thinking about what could be expected of European Union involvement in Iraq, and what a European strategy should be. My tentative answer is based on two principles: human rights and riding the wave.

I recently got an e-mail inviting me to sign a petition to defend public health care in the Madrid Autonomous Community. I'm translating here the overview section of the website with a minimum of commentary as I don't know much about the specifics and I haven't lived in Madrid for 8 years.

Coordinadora Anti-privatización de la Sanidad Pública de Madrid		Coordinator against the privatization of Madrid's public health service
Desde hace años, la política sanitaria de la Comunidad de Madrid ha estado dirigida a provocar un deterioro continuado del sistema público con el fin de poder justificar, posteriormente, su privatización ante los contribuyentes. Así, en lugar de aumentar el presupuesto sanitario en función de las necesidades y el aumento de la población, se vienen asignando incrementos a todas luces insuficientes, que sitúan a la Comunidad de Madrid en los últimos lugares del Estado en cuanto a gasto por habitante.A la par, se han aumentado de forma continuada las derivaciones a la sanidad privada de todos aquellos servicios que se consideran económicamente rentables, lo que ha permitido la aparición de un sector privado listo para parasitar al sector público.		For years, the health policy of the Madrid [Autonomous] Community has been directed to provoking a continued decay of the public system with the goal of being eventually able to justify its privatization to the taxpayers. Thus, instead of increasing the health budget according to the needs and the population increase, clearly insufficient increases have been assigned, placing the Madrid Community among the last in Spain according to per-capita expenditure. In parallel, there has been a continuing increase of the outsourcing to private health care of all services considered economically profitable, which has fostered the appearance of a private sector ready to become a parasite to the public sector.
Este déficit de financiación, junto con el incremento poblacional y la congelación real de plantillas, ha generado un deterioro asistencial que cualquier ciudadano puede observar y sufrir en los hospitales y centros sanitarios de nuestra Comunidad.		This financing deficit, along with the population increase and the real freezing of staff numbers, has deteriorated the quality of the health care that any citizen can observe and endure in the hospitals and health centres of our Community.

In the comments to my latest diary Where will Peak Oil hurt the most? I took a beating for using Foreign Exchange Reserves as a measure of the ability of a country to purchase oil in the open market in the event of a global oil crunch, thus cushioning the blow from such a shock. I was conceptualizing reserves as a stock that could be spent when apparently it's a side-effect of monetary policy and exchange-rate movements. What this illustrates is my tenuous grasp of international trade, the balance of payments, and the system of national accounts.

In yesterday's open thread, Francois in Paris wrote

Developing countries have historically a much larger demand elasticity than developed countries and likely still have [but] don't see it as a superior "virtue" that "poor, frugal countries" would hold against "rich, wasteful countries". It doesn't mean that poor countries are more adaptable to high oil prices, quite the contrary.

It means that they are far more dependent on oil, oil purchases representing a much larger share of their GDP, and that, as a consequence, prices have a much larger effect on their activity, a rise creating a much larger demand destruction aka recession. They don't have a output "surplus" they can reallocate to oil purchases that would allow them to weather a price increase for a long time while they switch to other sources by infrastructure changes as developed countries can do.

If oil prices stay high, we must expect a very, very deep recession in the bottom half of the world economic ladder. We'll hurt too but it'll be nothing compared to them.

This is related to a discussion I was having with kcurie the other day off-site, in which I was wondering about where the immediate impact of Peak Oil would be strongest. My impression was that the countries now undergoing a strong bout of oil-fuelled industrialization should be the ones most vulnerable to an oil shock, because of the disproportionate fraction of GDP taken up by oil imports. This would include most countries in South-East Asia. I noted the fact that recently Indonesia announced its intention to quit OPEC as it is becoming a net oil importer. On the other hand, China is known to be swimming in currency reserves, and so could buy oil in the international markets if necessary (which would drive prices up for everyone, including them, but at least initially they could buy their way out of a pinch).

But this is the kind of question that cannot be answered from first principles and where received ideas about various countries' economic structure can be dangerously misleading, especially as they get out of date and out of line with the evolving reality. So, I got ahold of the IEA's 2007 key statistics [PDF] (2005 data), imported the summary table at the end of the document into R, and made supplemented them with Wikipedia's data on world currency reserves (2007-8 data from the IMF). The result is in three charts, below the fold, with some unexpected conclusions.