A colossal game of “Chicken”

The clip above shows Franklin D. Roosevelt campaigning for the US presidency in 1933, using eerily familiar rhetoric. The clip opened the second portion of last week’s episode of The Explainer (which you can watch on YouTube), which focused on the Great Depression (in it, I asked my guest to expound on his blog post, Smartly protectionist). The Great Depression has provided a lot of grist for the mill in recent years, for example see A history lesson from the Great Depression – How the World Works – Salon.com

Today, I was going to focus on what’s going on in America but I’m down with the flu so it will have to be for next week.

For the past couple of weeks watching Bloomberg’s been a riveting experience as experts try to grapple with the goings-on in markets in the US and elsewhere. Non-experts, too: Question for a Management Class makes for quite interesting reading.

On the eve of the US House of Representatives voting on the bailout, a group of American economists released an open letter calling on representatives to reject the bailout plan. Columnist Will Hutton in The Guardian pointed out the argument at the heart of the economists’ opposition (and, by all accounts, among US voters who had House Republicans spooked about a popular backlash if they voted for the White House-proposed bailout plan):

And although some conservatives in Britain and America continue to make the ideological case against any government action as a response to the recent turmoil – governments necessarily do everything worse than the market – they have no alternative proposal about how to restore trust once it has gone. Trust is a reciprocal relationship, dependent upon a desire to be considered decent and honourable. Even in the dog-eat-dog financial markets, trust and integrity are matters of self-interest. However amoral you may be, it is in your interest to care about your reputation, because if you behave badly you will not do business with me – or others – on favourable terms again.

But the scale of the personal rewards now available in London and Wall Street – £15m-£20m at the top is the norm – along with the greed-is-good doctrine associated with extreme laissez-faire economics, has trashed the need for individuals to worry about integrity. They don’t need to be concerned about their reputations; they just need one deal or one year at the top and they need never work again. The incentive structure has so departed from one of the principal norms of fairness – proportionality between value added and reward – that it has eviscerated trust relationships and integrity.

Everybody tries to ‘game’ the system on their route to vast personal fortunes – whether short-selling, packaging up dud mortgages as prime mortgages or telling lies about their financial viability – and the result is that the system is getting wise. The best course today in any financial transaction is to presume zero integrity. Credit is drying up and with it the very lifeblood of the economy.

Worse, now that the system is in trouble, financiers are turning to taxpayers in the US and Britain for help without understanding the other key principal of fairness – that we will consider helping those who for no fault of their own get into trouble, but not those who freely created their own bad circumstances.

Hank Paulson certainly acted decisively in launching his plan, but the former Goldman Sachs CEO, who negotiated a special exemption from tax when he took the job, like his former Wall Street colleagues is not well endowed with the fairness gene. It polluted the very design of the scheme.

He knows that unless the US government does something comprehensive, the entire financial system is at stake, but his original plan was designed to bail out the system intact. It made no demands that any financial executives sacrifice pay or bonuses despite having driven their firms and wider economy to the point of bankruptcy. He does not want the government to provide new bank capital to help recapitalise a bust banking system. Instead, he wants the government to buy their toxic debt and so leave the banks unreformed. On top he wanted complete discretion to act as he chose without any oversight.

American economists of every persuasion signed a joint letter complaining not at the aim of the bail out, which is plainly vital, but for its lack of fairness. Conservative papers and politicians echoed the complaint. Suddenly, Wall Street is coming back to earth. The transactions from which it skims such riches are built on the savings of ordinary Americans to whom it has obligations, as it has to other Wall Street firms. What we know now about the yet to be agreed compromise is that Paulson has accepted Congressional oversight, will offer direct help to distressed US homeowners as well as banks, and will accept some constraints on the worst excesses of executive pay.

But the core proposal remains. The government will buy toxic debt rather than inject government funds into the banks’ capital base, in other words, reject even partially nationalising the entire US banking system as the Swedes had to in 1992. I don’t know – nobody does – whether the Paulson plan would be sufficient or whether ultimately the Americans will have to go for nationalisation. What I do know is that unless there is a radical and government-led change in ownership, structure, regulation and incentives so that the principles of fairness are put at the heart of the Anglo American financial system – proportionality of reward and fair distribution of risk – there is no chance of the return of trust and integrity upon which long-term recovery depends.

In the end the House of Representatives rejected the White House plan. FT.com / In depth – House rejects US bail-out bill, stitched the news together with failures and rescues in the UK, Benelux and Germany; and in House to Wall Street: Drop dead – MarketWatch  says the Republicans were the ones who blinked:

Republicans voted against the bill by a two-to-one ratio, and in the process rejected their own leadership, who had worked for nearly a week to craft a bill that could gain a majority. Nearly 100 Democrats also voted against the bill, spurning their leadership.

Many Republicans in the House were never persuaded that the credit crunch in the financial system is an impending disaster deserving of taxpayer aid. Politicians who had cut their teeth on free-market principles couldn’t accept the idea that the federal government should back up the banks who had foolishly bet everything on the housing bubble.

Or they didn’t want to face the voters in six weeks and explain why a Republican would vote for the biggest government bailout ever.

In his blog, Howard Lindzom put it bluntly:

The market has been demanding a large scope bailout plan for weeks. The market has been chewing through financials one by one until it gets what it wants.

Let’s not kid ourselves, the markets are rigged. The bailout is a wimpy ass way to deal with the problem for sure, but a $1.2 trillion loss in market cap was just TODAY’s tradeoff. The market wants some extra rigging short-term and a meltdown is/was the trade-off.

The people in Washington know very little about a lot of things. That is their specialty, their claime to fame. They know shit ass less than nothing about the stock market and the MOOD of America that matters (money). Today, you saw what a bad mood can bring from traders. Tomorrow and for the next week you will see what panic brings as the selling accelerates.

This crisis though is not about the stock market, it is about THE CREDIT MARKETS. There is NO access to capital. We are shut down for business. Way worse than after 9/11 when the markets were closed. At least than, we were out shopping at the request of our President. Now we are just deer in the headlights at the whim of the House of Reps and Congress and Senate who just seem out to punish the rich. Bullshit politics. Everybody has a chance to be famous. They are really punishing everybody else.

The FED is out of bullets and we have absolutely zero leadership or hopes of any leadership soon.

On that sobering note, as the New York exchange plunged (777 points), and then Asia, too (biggest drop since 1987),  An analyst on Bloomberg dryly said, “Cash seems to be the safest place to put your money now.” Commodity prices had their biggest drop in 52 years (since the index began). The Australian Prime Minister issued a statement appealing to the US Congress to pass the emergency measure, a sentiment echoed by the Japanese Finance Minister. George W. Bush will address his countrymen shortly before the markets open on Tuesday. 

This seems a colossal game of “chicken,” with political leaders answerable to voters pitted on a collision course with financiers normally dismissive of nations, sovereignty, etc., demanding a bailout from the political leaders, otherwise everything comes crashing down. It’s interesting that as today wore on, the analysist began to speak rather confidently of the bailout being passed by the end of the week. 

The Republican nightmare is obviously straight out of the Hollywood version of populist Huey Long’s barely fictionalized movie biopic, All the King’s Men:

 

Here at home, people have been nervous ever since insurance giant AIG ended up being taken over by the US government to prevent its collapse. See Business – Are my Philam investments safe? in INQUIRER.net

There are also concerns, now, over the possibility of bank runs and to head off potential panic, the Central Bank has tried to make soothing noises. See Business – How safe is my money in the bank? also in INQUIRER.net

Salve Duplito, who authored the two articles above, then goes on to point out that instead of hand-wringing, some sober planning is in order for ordinary people: Money Smarts » How are you dealing with the crisis?

As for the economists, Nouriel Roubini takes a kind of grim satisfaction in not turning out to be a Cassandra (see The Worst Financial Crisis Since the Great Depression and the subsequent The Shadow Banking System is Unravelling:Such demise confirmed by Morgan and Goldman now being converted into banks) while Roubini then looks at the proposed 700 billion dollar bailout plan and compares it to other bailouts in the past: Is Purchasing $700 billion of Toxic Assets the Best Way to Recapitalize the Financial System? No! It is Rather a Disgrace and Rip-Off Benefitting only the Shareholders and Unsecured Creditors of Banks

Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system. Such recapitalization – via the use of public resources – can occur in a number of alternative ways: purchase of bad assets/loans; government injection of preferred shares; government injection of common shares; government purchase of subordinated debt; government issuance of government bonds to be placed on the banks’ balance sheet; government injection of cash; government credit lines extended to the banks; government assumption of government liabilities.

A recent IMF study of 42 systemic banking crises across the world provides evidence on how different crises were resolved. First of all only in 32 of the 42 cases there was government financial intervention of any sort; in 10 cases systemic banking crises were resolved without any government financial intervention. Of the 32 cases where the government recapitalized the banking system only seven included a program of purchase of bad assets/loans (like the one proposed by the US Treasury). In 25 other cases there was no government purchase of such toxic assets. In 6 cases the government purchased preferred shares; in 4 cases the government purchased common shares; in 11 cases the government purchased subordinated debt; in 12 cases the government injected cash in the banks; in 2 cases credit was extended to the banks; and in 3 cases the government assumed bank liabilities. Even in cases where bad assets were purchased – as in Chile – dividends were suspended and all profits and recoveries had to be used to repurchase the bad assets. Of course in most cases multiple forms of government recapitalization of banks were used.

But government purchase of bad assets was the exception rather than the rule. It was used only in Mexico, Japan, Bolivia, Czech Republic, Jamaica, Malaysia, and Paraguay. Even in six of these seven cases where the recapitalization of banks occurred via the government purchase of bad assets such recapitalization was a combination of purchase of bad assets together with other forms of recapitalization (such as government purchase of preferred shares or subordinated debt).

In the Scandinavian banking crises (Sweden, Norway, Finland) that are a model of how a banking crisis should be resolved there was not government purchase of bad assets; most of the recapitalization occurred through various injections of public capital in the banking system. Purchase of toxic assets instead – in most cases in which it was used – made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico).

Thus the claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification. This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at a huge expense for the US taxpayer – the common and preferred shareholders and even unsecured creditors of the banks. Even the late addition of some warrants that the government will get in exchange of this massive injection of public money is only a cosmetic fig leaf of dubious value as the form and size of such warrants is totally vague and fuzzy.

Others have tried to translate the amount in human terms:CJR: What Can You Buy For $700 Billion?

It would reimburse banks, home owners, and local governments for nearly 9 million foreclosures - It could prevent over 200 million foreclosures - It could buy 8.6 billion monthly Metrocards - The government could rebuild Katrina-ravished New Orleans and Gulf Coast … three and a half times - Roughly 538 Yankee Stadiums could be built - 5.4 million students could be sent to a public university - It equals nearly 520 times the amount of Amtrak’s current operating budget - It is $14 billion more than the U.S. spent during the Vietnam War

Another economist, Carsten Hermann Pillath, offers up an approach based on evolutionary economics and cultural science, bringing up game theory and the prisoners’ dilemma (see The financial crisis: a humble evolutionary economist’s perspective).

Over at Left Flank, you can find links to scientists weighing in with their efforts to relate the financial news with Chaos Theory! See Black Swans and Charlatans.

Jeff Jarvis, in Stewardship v. ownership of our news, money, and society  took a cue from the unfolding crisis and criticizes mainstream media and it’s efforts to control how their content is processed, used, and redistributed on the World Wide Web. 

The political fallout, if any, is something else, altogether. I’ve been silent for some weeks because I’ve been trying to get beyond simply reacting to the news, and instead, trying to make sense of where we are and where we ought to go; I’ll attempt to start piecing my thoughts together when I’ve recovered from the flu.

What the??

On a purchase of books costing ₤216.50 and shipped by the bookseller to Manila, the Post Office, upon receipt, then issued the following:

Tentative Assesment Sheet

Customs Duty 49.01 Tariff Heading

$396.95 x 46.66 Exchange Rate

Php 18,522 Dutiable Value in peso x 5% Rate of Duty

Php 926 Total Customs Duty

Value Added Tax

Php 18,522 Dutiable Value in peso

Php 926 Customs Duty

Php 250 Customs Documentary Stamp

Php 250 Import Processing Fee

Php 15 BIR Documentary Stamp

___________________________

Php 19,963 Total Taxable Cost x 12% EVAT Rate

___________________________

Php 2,400 Total Payable VAT

XXXXXXXXXXXXXXXXXXXXXXX

SUMMARY

Customs Duty: Php 926

VAT: Php 2,400

IPF: Php 250

Customs Stamp: Php 250

BIR Stamp: Php 15

__________________________

TOTAL Php 3,841.00

Now I have no problem with paying appropriate taxes but are these the proper taxes, in the right amounts? Books are non-VATable items, I thought (see The Unlawyer and despite House proposals to impose VAt on books; and even this). So what gives? This has long been a sore point among purchasers of books and no one seems to be able to give a definitive answer!

__________________________
Update 9/30/08

The relevant legislation appears to be as follows:

1. Republic Act 9337, amending Section 109 of the National Internal Revenue Code, the importation of books and any newspapers, magazines or journals are exempt from value-added tax. To wit:

“Section 109. Exempt Transactions. – Subject to the provisions of subsection (2) hereof, the following transactions shall be exempt from value-added tax:
xxx
(R) Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements;”

2. Tariff and Customs Code of the Philippines, Section 105:

“Section 105. Conditionally Free Importations. –
xxx
s. Philosophical, historical, economic, scientific, technical and vocational books specially imported for the bona fide use and by the order of any society or institution, incorporated or established solely for the philosophical, educational, scientific, charitable and literary purposes, or for the encouragement of the fine arts, or for the bona fide use of and by the order of any institution of learning in the Philippines: Provided that the provisions of this subsection shall apply to books not exceeding two (2) copies of any one work when imported by any individual for his own use, and not for barter, sale or hire.;”

3. Republic Act No. 8047, otherwise known as the Book Publishing Industry Development Act:

“Section 12. Incentives for Book Development. –
xxx
In the case of tax and duty-free importation of books or raw materials to be used in book publishing, the Board and its duly authorized representatives shall strictly monitor the quality and volume of imported books and materials as well as their distribution and the utilization of the said imported materials.

Books, magazines, periodicals, newspapers, including book publishing and printing, as well as its distribution and circulation, shall be exempt from the coverage of the expanded value added tax law.”

The opinion of the BIR is that that the importation of books for personal use is exempt from value added tax as well as from the payment of import duties. The Post Office was informed accordingly and you may want to inform the Post Office of these provisions if you face a similar problem. A small handling fee, is, however, legitimate on the part of the Post Office.

My choice

And who knows, if you read and respond to this before midnight, tonight, Philippine time, it could be yours, too.

My choice for Bloggers’ Choice Award in the Philippine Blog Awards, is the collective known as Filipino Voices.

The variety of voices, the breadth (and depth) of the commentary on the site, and the collective representing the most successful and enduring effort to bring the voices of ordinary citizens to the fore, deserves admiration -and recognition by their peers in the blogosphere.

Crisis Management, Immigration, and Devolution

It’s an interesting time to be in the UK, where the Mother of All Parliaments, the House of Commons, has been roiled by infighting and discouraging economic news.

The Chancellor of the Exchequer ignited a firestorm of protest last week: see Chancellor Alistair Darling warns slump could be the worst for 60 years, precipitating a slump in the Pound Sterling and a furious debate over whether he acted irresponsibly or not. In many ways the entire thing -including debating whether government ministers ought to be blunt or Pollyanna-like in their official statements, the reliability or unreliability of official statistics, the question of whether the chief executive should take the fall to prevent the decimation of the party- sounds eerily familiar and because of that, oddly comforting.

The Brits are working through issues not very different from our own and it seems to be there isn’t all that much of a difference between the way British and Filipino politicians are trying to do damage control: orare  ignoring public opinion altogether while politicizing previously relatively partisan-free civil service institutions.  

The Times in a recent editorial (which came at the heels of the paper’s report that a sacking was in the offing), The twilight of Sir Ian Blair, looked at the controversial head of Scotland Yard and took him to task in all-too-familiar (for Filipinos) terms:

His responses are by now well practised. He believes that near-constant pressure to quit is an occupational hazard to be shrugged off if not actually ignored. And he believes mutinous disloyalty from senior colleagues is an inevitable result of radical reforms of which he is fiercely proud.

The trouble for Sir Ian is that his reforms have not made him indispensable. Nor can he be sanguine any longer about the calls for him to go. His support from the Association of Chief Police Officers and the Home Office has crumbled: his contract will not be renewed in 2010. This makes him a lame duck not only in the view of his many critics, but in fact. If his record were spectacular, this newspaper would back his bid to stay in office until the 2012 Olympics and beyond. Unfortunately, it is not.

 What sets the British media apart from our own is the deeper sense of memory, whether institutional, national, and personal, that the media, the politicians, and commentators have. For example, Libby Purves in Why did Alistair Darling choose 1948? points out a fascinating detail, concerning 1948 as a watershed year for Britain despite postwar austerity:

The disreputable anomaly of plural voting was abolished – previously university graduates could vote in two places, and business owners had an extra vote at their place of work. 

The odd thing of course being that there are frustrated middle and upper class Filipinos who continue to think plural voting might be a good thing.

The business and finance media, too, write clearly and informatively, something hardly ever seen at home. The Business Editor of The Times pens an analysis: This slowdown has a long way to go yet – so just look forward to the sales. And there are short, but richly informative reports that contextualize the economic news. An article, Is the party over for pubs?, points out British pubs are closing at the rate of four per day and also ties in the various economic trends (crashing property prices, increasing food and labor costs, etc.) into the uncertain future of a British institution.

In Britain 2028: we need ten new cities, please, Camilla Cavendish looks at the immigration policies of the UK, something that ought to be of interest to Filipinos living and working here.

Just today, Gordon Brown to increase Holyrood’s tax powers focuses on the great Labour project of restoring the Scottish Parliament and increasing its powers over taxation and budgeting: again, this ia a debate erupting in Britain which should be interesting to proponents of Federalism.

Update: Only Blair could save Labour now provides an insight into how more “mature” democracies factor surveys into the political situation, and how past and present leaders can add and detract from their party’s future prospects.

A great pleasure is reading the obituaries published in the British papers. See K.K. Birla: industrial tycoon and philanthropist.

 

On the Economy

On YouTube – Broadcast Yourself. you can view my recent Explainer show where former NEDA Chief Cielo Habito presented his views on the economy and prospects for the remainder of the year.

You can also view the following, below: first, the presentation he used on my show; the more comprehensive presentation on which it was based, which he presented at the Philippine Daily Inquirer. And after that, his presentation last year, and also, one by DLSU economist Dr. Michael Alba, from three years ago.