China: Putting Bubbles to Good Use

China seems to do everything different from the United States. While the United States dithers and rewards Wall Street for its avarice and arrogance, China is channeling the power of speculative bubbles into a different direction, transforming financial forces into actual energy--that is, sustainable wind energy.

On November 9, China Longyuan Power Group--Asia's largest wind power generator--announced it planned to raise US$1.3bn in a Hong Kong IPO. By the time the book closed to investors on December 2, the IPO was 29 times oversubscribed and China Longyuan was expecting to take $2.3bn.

With world investors--in panic mode and ever-seeking the global recession-diminished opportunities to seek yield--are running in hordes toward such high-profile IPOs. You know, the kind of IPOs where a state-owned power company partners with foreign financiers, oh and the fire hose of Chinese fiscal stimulus is poised to spray substantial funds in the direction of sustainable energy. It's a win-win-win situation (in the words of Michael Scott).

Contrast China's financial approach with the experience of the United States in the past decade. In the early oughts, we got the Enron bubble and the telecoms bubble. Under the US financial structure Enron succeeded in warping both energy markets and real energy production and distribution, and collapsing in a puff of smoke that cost employees and investors billions; meanwhile, the telecom companies built band-width super-highways to nowhere. Later in the decade Wall Street gave us a real estate bubble where the houses were built on sand. Then we were loath to discover that the Wall Street financial houses were also built on sand. Somehow they talked us into helping them dig their houses out of the sand, and when we were done just kick more sand in our collective faces.

China, instead, has found a way to harness the American proclivity for carnal financial plundering for good--to finance construction of a modernizing clean-energy infrastructure to power a modernizing economy.

Perhaps the Chinese are the true financial alchemists: turning our base metal into green.

What passes for 'journalism' in the FT now

Quoting Sarah Palin's Facebook page as an authoritative source on international monetary issues. Oy vey:

Sarah Palin, the former vice-presidential Republican candidate, on Wednesday sought to link the dollar decline to rising US indebtedness and dependence on foreign oil. “We can see the effect of this in the price of gold, which hit a record high today in response to fears about the weakened dollar,” she wrote on her Facebook page.

Oh, is this thing still on?

Some day I may resuscitate this blog, although writing it has long ago passed into the range of diminishing marginal utility.

For now, I am sweating my tuchus off in Manila, Pearl of the Orient. I am summering at the Asian Development Bank in their Office of Regional Economic Integration. I am developing a pilot study to explore updating the bank's early warning system for predicting financial crises to model more directly the endogeneity between financial soundness indicators and the macroeconomic environment (sometimes called macroprudential analysis or surveillance).

Tuesday with Maurie

Long blogging hiatus due to family, teaching, and dissertation obligations...not to mention a general blogging malaise. But when I read this new abstract from international economist extraordinaire Maurice Obstfeld this morning, I just had to pass it along:

Despite an abundance of cross-section, panel, and event studies, there is strikingly little convincing documentation of direct positive impacts of financial opening on the economic welfare levels or growth rates of developing countries. The econometric difficulties are similar to those that bedevil the literature on trade openness and growth, though if anything, they are more severe in the context of finance. There is also little systematic evidence that financial opening raises welfare indirectly by promoting collateral reforms of economic institutions or policies. At the same time, opening the financial account does appear to raise the frequency and severity of economic crises. Nonetheless, developing countries have moved over time in the direction of further financial openness. A plausible explanation is that financial development is a concomitant of economic growth, and a growing financial sector in an economy open to trade cannot long be insulated from cross-border financial flows. This survey discusses the policy framework in which financial globalization is most likely to prove beneficial. The reforms developing countries need to institute to make their economies safe for international asset trade are the same ones they need so as to curtail the power of entrenched economic interests and liberate the economy's productive potential.

The puzzle Prof. Obstfeld presents us is this: if there is "little systematic evidence" international financial opening raises growth and welfare--and instead leads to more frequent and severe financial crises--why have so many countries undergone financial liberalization? Obstfeld responds with what he deems a "plausible" answer: financial development and growth go hand-in-hand.

How plausible is this? Not as plausible as Obstfeld implies, and Prof. Obstfeld should know better. First off, financial liberalization has been driven forward as a political agenda--globally, and in crisis-afflicted countries. Part of the reason the embrace has been so great is that for decades (a) many economists have been telling political leaders and technocrats that this kind of financial liberalization is the key to success, and (b) international financial institutions (public and private) have systematically pressured countries onto this path. Looking at the political economy of this process reveals a more "plausible" explanation of why so many countries have pursued liberalization despite the apparent risks and unapparnt rewards. Second, Obstfeld implies that growth and financial development are structurally related. They are not--and he himself has so observed the dearth of empirical evidence for such claims.

I think Prof. Obstfeld must know better than this. So why does he continue to frame the topic in this way? The free market pathology strikes again.

Even gloomier

Dean "Sunshine-and-Lollipops" Baker reminds us that we should be even more pesimistic about Friday's jobs report with its estimated 533k lost jobs (and downward revisions of September and October figures, bringing total job losses to -1.9 million since the beginning of the recession).

The reason, the numbers don't impute:

the Bureau of Labor Statistics (BLS) imputes jobs into its survey for new firms that could not included in its sample. This imputation is based on its "birth/death" model which is inevitably backward looking. As a result, it misses turning points, underestimating job growth when the economy speeds up and overestimating job growth (or underestimating job loss) when the economy slows.

The BLS imputed 143,000 jobs into the establishment data over the last three months based on its birth/death model. In the three months from September to November of last year BLS imputed just 117,000 jobs into the establishment data.

In short, the BLS attempts to adjust for unsurveyed new firms by estimating the jobs they create. But most certainly, new firm births are off the historical mark, so BLS is statistically counting jobs that aren't really there.

Hooray!

Congratulations Jared!

The Biden team shapes up:

Given the critical nature of the economic challenges facing America, Vice President-elect Joe Biden announced today the creation of a new position in the Office of the Vice President: Chief Economist and Economic Policy Advisor to the Vice President. The Vice President-elect has selected nationally-prominent economist Jared Bernstein for the post.

"Jared Bernstein is an acclaimed economist, and a proven, passionate advocate for raising the incomes of middle class families. His expertise and background in a wide range of domestic and international economic policies will be an invaluable asset to the Obama-Biden Administration," said Vice President-elect Joe Biden. "It's an honor to have him on my team and I look forward to his advice and counsel."

Who wants to be a trillionaire?

Lots of different economists, apparently.

Greg Mankiw spins a nice yarn:

Not all economists think fiscal stimulus is the answer to the economy’s ills. “There are other choices,” said Greg Mankiw, a Harvard professor who served as President George W. Bush’s chief economic adviser. Foremost among the alternatives is monetary policy, said Mankiw. The Fed can act to bring down long- term interest rates as well as short-term ones, he said.

Umm, Greg, short-term rates are already almost at zero--nowhere else to push. And last time I checked, the market determines long-term rates, and for a long time no one but sovereigns have wanted in the market for US long-term debt. Historically, long-term rates are still pretty low, and they are so at the benevolence of sovereign investors.

So how might the Fed act to bring down long-term rates, in Mankiw's view? Mankiw's interjection is a subtle way of staking out an anti-stimulus position in the recession policy discourse. My inkling is that, in so saying, Mankiw has the following in mind. In 1992, Fed Chairman Alan Greenspan (along with Rubin and a cast of other characters) snookered the incoming Clinton Administration into putting balanced budgets before ambitious democratic social policy goals. A balanced budget, it was argued, would reduce long-term interest rates and thereby speed growth such that those policies could be "afforded" some time later down the line (you know, if this budget-growth scenario played out). And as we know, our dreams of national health care were abandoned at the altar.

Any economist worth his or her salt knows, though rarely will admit publicly, that "balanced budgets" is a more useful political than economic concept. Mankiw knows this, too, and has not been much of a budget-balancer in his research, or as head of Bush's Council of Economic Advisers. However, he finds the argument useful to employ against the tax policies and social programs he ideologically opposes. And he is subtly urging Ben Bernanke to pick and use a similar bludgeon against the incoming Obama Administration to tamper its ambitions for "change." Hmmm, that sounds sorta familiar. Of course, its quite glaringly hypocritical. Bernanke has been burning through cash faster than a coked-up Paris Hilton on a Las Vegas weekend bender. But the Democrats are the ones who should show restraint.

It's hard to believe this guy has the best selling economics text books. Remember, he told us that McDonald's fry chefs should be classified as manufacturing jobs.

Environmental Kuznet's Curve

Should be kicking-in in China any day now...

Deep Thought

I want a new puppy, too.

Deep thought

John McCain, loser, is still more than twice as popular as George Bush at present.

He's really going to leave

Well, now what?

Last night was fun, but now the real, hard fights begin.

But it would be good to keep pushing now and rout the right-wing while they are on the retreat.

Deep thought

Alaska re-elected two convicted felons.

US Senate

Well, the Dems didn't get 60, but at least not getting 60 means they can safely kick out that douche bag Lieberman.

Voter Suppression or Incompetence?

On the phone with the Denver County (CO) Election Office for the fifth time in two weeks to find out why they keep lying about mailing me my absentee ballot.

Unlike the tens of thousands of voters illegally purged from the rolls by Republican Secretary of State Mike Coffman, I am actually still on the voter roll.