Monday, November 10, 2008

Roundup: November 10


China has announced a "massive infrastructure spending program" to total CNY4tr ($586bn) over two years -- perhaps as much as 14% of GDP. Brad Setser asks whether the spending is all really new -- or whether it just represents acceleration of already planned spending -- and says it is directionally right, as China must now quickly reorient its economy domestically. Any delay could cause serious dislocations. It's unclear whether the spending will all come from the central government or whether regional governments will be involved -- Chinese local governments still cannot legally issue their own bonds, though this has been floated as a possible way to manage the spending. In the last analysis, the money will come from China's foreign reserves -- which means several hundred billion dollars less of US government bond buying. But Treasuries were paradoxically up today, though orthodox theory would predict them down and indicate the stimulus could weigh heavily on a US recovery. The TARP is a larger absolute dollar figure, but the Chinese stimulus plan is much more to the point -- instead of paying bonuses to the unproductive and holding unperforming assets, the Chinese scheme would prime the demand side of the economy (relying on consumer spending, rather than the dubious prospect of banks deciding to renew the fever pace of pre-2007 lending) and leave the country holding real assets: new housing for the poor, rural water and power projects, a new railroad system. (And, en route, much needed tax reform.) But then they don't have room to make mistakes -- the US doesn't face civil unrest if real GDP growth drops below 6%.

The AIG bailout has been expanded; the US government will buy an additional $40bn of 10% perpetual preferred shares from AIG, will reduce the interest it charges on its loan facility to Libor + 3% from Libor + 8.5%, and will contribute $52.5bn to buy MBS and CDOs on which AIG has written CDS. Buiter says it's time to "pull the plug": either nationalize the entity completely or put it into receivership; and says it's inexplicable that a year and a half into the crisis the US has yet to roll out a special form of receivership for highly connected financial firms. Information Processing points out that the incentives for AIG's trading partners to cooperate aren't obvious.
"The looting continues," says Yves Smith, whose retrospective of the "Mussolini-style corporatism" is invaluable. The perspicuous Steven Davidoff calls shenanigans on Treasury's odd dance around the word "equity" and its nominal 79.9% stake in AIG.

Bloomberg News is sueing the Federal Reserve under the Freedom of Information Act to force it to disclose details of the assets it is accepting as collateral for lending. Concern about moral hazard, transfers of funds to banks, and transparency has evaporated now that our representatives are no longer grandstanding on CNBC: Barney Frank has spoken to Tim Geithner and assures us we have nothing to worry about. Meanwhile, EconomPic carries a picture that speaks a thousand words as to the bailout so far. And naive confidence in our financial overlords should hardly be stoked by the revelation that the Fed has been in talks with AIG since the original deal in September -- what is there to assure the markets that the handouts are now at an end?

Krugman says FDR's economic policies were too cautious; the short-run failure of some New Deal policies and their long-run success has a lot to do with FDR not having pursued fiscal stimulus aggressively enough (not to mention the hangover of Hoover's tax increases). Debate over the Depression is picking up between big-ticket economists. Robert Reich says we face a "Mini Depression" in which industry bailouts won't help reverse job losses and government must step in as the "spender of last resort." Mankiw is posting a lot of irrelevant charts.

The Washington Post reviews reactions to Treasury's surreptitious tax law interpretation changes, which likely made the Sovereign Bancorp and National City deals possible.

Nancy Pelosi and Harry Reid have written a mendacious and short-sighted letter to Hank Paulson urging him to consider using the TARP to bailout automakers. Obama's chief of staff Rahm Emanuel has come out in favor of an auto industry bailout.

Barry Eichengreen and Richard Baldwin introduce and edit a new book published in advance of the G20 meeting with short essays from 17 leading economists on the policies the G20 should pursue.

Fitch has downgraded Bulgaria, Hungary, Kazakhstan, and Romania, and revised down the foreign currency ratings of South Korea, Mexico, Russia, South Africa, Chile, and Malaysia. Latvia nationalized its second-largest bank at the weekend.


The NYT reports that the US military has carried out a dozen secret attacks in Syria, Pakistan, and elsewhere under an order issued by Rumsfeld and Bush that streamlined approval for military action outside of official war zones.

The SADC summit this meeting issued a doubly nonconclusive statement, on Zimbabwe and on the DRC. Morgan Tsvangirai has responded to the SADC's risible suggestion that sharing the Ministry of Home Affairs will resolve the situation in Zimbabwe with a firm statement -- that leaves the future of the power-sharing agreement and the country in limbo. Human Rights Watch issued a report today saying Zanu-PF continues to use the police and justice system as a weapon against its opponents. Zanu-PF is claiming the MDC has established military bases in Botswana, a claim Tsvangirai's party denies. The ZWD is trading at rates around ZWD200tr = 1 USD as the economy begins "to openly dollarise," with remittances now constituting up to 50% of Zimbabwe's forex earnings.

The AP reports that the president-elect's advisors are working on a proposal to ship the Guantanamo prisoners back to the US for trials in criminal courts and close our nation's shame.

The Washington Post reports on a list of "about 200" Bush Administration executive actions set to be swiftly reversed by Obama once in office, including actions on abortion counseling, stem cell research, and emissions. Meanwhile, the Bush Administration is busily passing end-of-term regulations to obstruct environmental protection.

60 Iranian economists have signed a letter criticizing Ahmadinejad's foreign policy for discouraging trade and investment.

China is toeing a hard line in talks with envoys of the Dalai Lama, leading to speculation the Dalai will undertake a more drastic step, such as calling for the election of his replacement.

Obama and Medvedev spoke on Saturday.


The Maldives is setting up a sovereign wealth fund to buy land elsewhere to guard against the likelihood that global warming will destroy the country and render its 300k residents climate migrants.

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