Is the Obama fiscal stimulus plan (with its enormous deficits) too much or too little? The right direction, a dead end or the road to Hell? These are not new questions … as this music video makes clear. Enjoy!
You would think that soccer has as much to do with socialism as philosophy does in this classic Monty Python sketch. But maybe there is a connection and maybe it helps explain the American exception that I talk about in Chapter 5 of Globaloney 2.0.
The American Exception is that the United States, which supposedly defines contemporary global culture, has proved to be very resistant to soccer (or Association Football to use its proper name), which is arguably the most global and most commercial and most, well, most American game in the world.
How can globalization be Americanization if America is not at the center of the most global sport of all?
My friend Sasha Issenberg (author of The Sushi Economy, one of my favorite globalization books) provides one answer in a recent essay “Hog the Ball, Kid” in the Boston Globe.
Some people, Sasha reports, think that the U.S. has failed to achieve its soccer potential because youth soccer is too “egalitarian.” There is too much emphasis, they say, on participation and team play and not enough focus on winning and individual achievement. How can you expect greatness if everyone plays and sometimes they don’t even keep score!
It is an interesting point of view. It would be ironic if America, the most capitalist of nations, failed at soccer, the most capitalist sport, because we made it too socialist!
I’ll copy the first few paragraphs of the article below. Click here to read the entire piece.
Sasha Issenberg “Hog the Ball, Kid” Boston Globe December 20, 2009
IN THE WINNER-TAKE-ALL arena of American youth sports, soccer has always been the exception. From the earliest ages, children on basketball courts and football fields have been taught ruthless competition, even been rewarded for showboating at others’ expense – nearly the opposite of the values we hope they learn in school.
Soccer, however, has offered a refuge: the kibbutz next to the stadium complex, a team-oriented, egalitarian game friendly to both genders and a range of body types. Since emerging as a favorite suburban sport a few decades ago, soccer has thrived under baby-boomer parents looking to teach selfless fitness to their kids.
Such a philosophy isn’t just wishful thinking on the part of parents; it is explicit in the organizing principles of the US game. The tribune of the recreational soccer establishment, the American Youth Soccer Organization, was established in California in the 1960s, under a philosophy more humanist than competitive: “Everyone plays.”
But over the last decade, American soccer elites have begun to question this entire approach. In the realm of soccer itself, they worry that the youth game’s communitarian culture is to blame for the country’s World Cup failures. And as far as the kids are concerned, they argue that the teamwork-first ethic has become a national weakness: a philosophy that stifles native talents and enthusiasm in America’s most popular youth sport.
Just in time for Christmas … Hanukkah … OK, maybe New Year.
Globaloney 2.0 is now available from all the usual online booksellers and will soon be in select bookstores. So you really have no excuse. Order your copy today!
The Wall Street Journal always publishes a special themed section on Mondays and this week’s edition is particularly relevant to Globaloney readers. It’s titled“Fixing Global Finance” and brings together a variety of experts and policy-makers to discuss four areas of international concern: the TBTF (too big to fail) problem, international financial regulation, financial innovation and “the regulatory frontier,” which involves an attempt to reconsider the fundamentals of financial regulation.
The report makes good reading and the list of 20 action points is a good beginning. Although I don’t agree with all the points made in this discussion I support the idea of a comprehensive approach to the problem of global financial stability. These are complicated problems and I resist simple solutions such as a Tobin tax or increased transparency.
A Tobin tax may be a good idea in the context of other changes and it is hard to argue against transparency, but the notion that you can just tax or shine lights and then financial markets will take care of the rest is naive. And that’s not globaloney.
Who is the most influential economist today … the one whose ideas offer the best guide to the current crisis? If you limit yourself to living economists, then names like Bernanke and Krugman come to mind along with many others, but it is obviously too soon to pick a winner.
If, invoking Keynes, you include dead economists whose ideas live on, then John Maynard Keynes (on the need for monetary stimulus) and maybe Milton Friedman (on the inflation risks of monetary stimulus) need to be on the list.
I was a little surprised, however, to pick up today’s Wall Street Journal and see a full page article on Arthur Cecil Pigou, “An Economist’s Invisible Hand.” Pigou, who taught at Cambridge with Keynes, was one of my favorite economists when I was teaching Public Finance. Pigou (pronounced Pig-ooo) developed elegant theories of the economics of externalities and generations of my students studied Pigouvian taxes — taxes designed to correct problems of external cost using the market system.
Pigou is relevant today, the WSJ article asserts, because he helps us think about market failures in a systematic way — and markets sure have failed a lot in recent years. A nice point and one that emphasizes, as I try to do in Globaloney 2.0, that today’s economic problems are market failure problems not just macroeconomic problems.
It’s a mistake to reduce Pigou to his tax policies, but let me do just that for a moment because it connects so well to two current policy debates. What should we do about the global environment? It’s an external cost problem, for sure, where private economic decisions generate potentially severe social costs to the world. Cap and trade is controversially at the forefront of public debate, but a Pigouvian tax (a carbon tax) would be simpler and provide a more market driven mechanism. I wonder if the WSJ was thinking carbon tax when they decided to run the big Pigou piece? Seems unlikely, don’t you think.
Financial regulation is also an external cost problem. Financial firms take big risks and lots of other people pay the price when things go bad. New regulations and safeguards are the talk of the town, but a Pigouvian tax on financial transactions (especially perhaps the riskiest ones) would also be a solution. We would call it a Tobin tax today — using taxes to put “sand in the wheels” of global finance. Probably not something that the WSJ editors would want to endorse.
The carbon tax idea is very appealing in theory although I don’t know how it would work in practice because of collective action problems. The Tobin tax, on the other hand, might be possible in practice, but I worry about the theory side. Pigouvian taxes assume that the markets they deal with are fundamentally stable — stable as an apply in a bowl as Pigou’s teacher Alfred Marshall used to say.
But financial markets are different from other markets — they are not inherently stable — that’s one of the points of my book. Taxing financial transactions and letting the market work may not be enough to safeguard stability and control external cost.
Investors hve rushed from private debt to public debt in a flight to safety 
– but is sovereign debt really safer? This is the question that Gillian Tett asked in yesterday’s Financial Times and I agree with her that the answer might be, No!
Private debt has been risky, of course, because private investments were so highly leveraged. A small absolute fall in value had drastic consequences due to the high leverage rates. Public debt was safer because it was more fully backed tax revenue streams. That was true then (in the rearview mirror, as Tett puts it), but it may not be true looking ahead.
The problem is that government policy makers needed to de-leverage the financial sector without causing a collapse of the economy. This was accomplished, especially here in the United States, by leveraging up the public sector to compensate for de-leveraging the private sector.
This has worked pretty well (judging by the recent growth figures) although not as well as you might have hoped (judging by the unemployment data). Still de-leveraging the private sector without the debt-financed public sector expansion would have resulted in much worse macroeconomic results.
But here’s the problem. If we remember the principle that leverage increases risk, then we must acknowledge, as Tett does here, that this means that private sector risk has been shifted to the public sector — and to public sector debt in particular. The current returns on this debt do not seem to take this risk into account. And that’s a problem — possibly a big one — as I explain in the forthcoming Globaloney 2.0
A front page article in today’s Wall Street Journal argues that “Crisis Compels Economists to Reach for New Paradigm.” It features a discussion of Yale economist John Geanakoplos’s “previously obscure” theories that focus on the role of collateral and leverage in financial bubbles and cycles.
Professor Geanakopolis says that he was inspired to examine the role of collateral while re-reading Shakespeare’s Merchant of Venice, where pound-of-flesh collateral plays a such a prominent role. From the article …
The play’s focus is collateral, with the money lender Shylock demanding a particularly onerous form of recompense if his loan wasn’t repaid: a pound of flesh. Mr. Geanakoplos, too, finds danger lurking in the assets that back loans. For him, the risk is that investors who can borrow too freely against those assets drive their prices far too high, setting up a bust that reverberates through the economy.
Collateral is of course the fulcrum on which leverage is based, with borrowed funds being the arm that transmits the force. You would think that financial economists would have taken the leverage effect into account — it certainly plays a big part in my analysis of “financial globaloney” in Globaloney 2.0 — but the WSJ reports that
Mr. Geanakoplos is among a small band of academics offering new thinking about those cycles. A varied group ranging from finance specialists to abstract theorists, they are moving to economic center stage after years on the margins. The goal: Fix the models that encapsulate economists’ understanding of the world and serve as policy-making tools at the world’s biggest central banks. It is a task that could require a thorough overhaul of the way those models work.
“We could be looking at a paradigm shift,” says Frederic Mishkin, a former Federal Reserve governor now at Columbia University.
Paradigm shift? About time.
One of the arguments that I make in Globaloney 2.0 is that the risks of international finance were systematically ignored or “misunerestimated” as a former President might have said. I call the false belief that international finance is fundamentally safe and sound “Financial Globaloney.”
When you take even relatively safe domestic investment patterns and add to them the instabilities and uncertainties of international currency markets, I argue, the risks rise exponentially. When those investment are highly leveraged, as they usually are, the risk profile explodes.
The good folks at the Financial Times have produced an excellent brief presentation that explains the “carry trade” (which my students will recognize as an example of “naked interest arbitrage”), showing both why this investment pattern would seem “safe as houses” and why it can go so badly wrong.
Click here to go to the FT carry trade site. (Note: you will need to register — it’s free — to view the article.)
The bad news is that the carry trade, which unwound during the bust, is leveraging up, with the U.S. as the low-interest source of funds. That’s why the dollar keeps falling — investors borrow dollars and sell them to get currencies that earn higher interest. That’s why it has been so difficult to talk the dollar back up — you’d need to raise U.S. interest rates or bring down foreign rates to lessen carry trade flows.
The carry trade collapses during a crisis. Everyone rushes to cash out and bring their money home. That’s why a surge in the dollar would be bad news for the global economy — it would probably be associated with another seismic financial shock.
Gillian Tett of the Financial Times has been one of my favorite sources for commentary and analysis during the financial crisis. Perhaps one reason she is capable of providing fresh insights is that her background is not one you would expect for a financial journalist. No MBA. No journalism degree. Not the usual career path at all.
Nope — she earned a Ph.D. in social anthropology before joining the FT staff. Her fieldwork was in a mountain village in Tajikistan “where I analyzed how marriage rituatals were used to preserve religious and ethnic identity in the Soviet System,” she reports in a fascinating essay titled “Icebergs and Ideologies: How Information Flows Fuelled the Financial Crisis” in the October 2009 issue of Anthropology News.
It was, she writes, perfect training to understand global finance. “That is partly because,” she say, “bankers (like Tajik villagers) operate as a tightly defined group, with specific cultural patterns and a quasi language (or jargon) of their own. Also like Tajik villagers, bankers are generally trained to think in rigid “silos” and, as a result, find it hard to see how their overall system operates, or to see the contradictions in their own rhetoric and internal organizations.”
Tett’s brief article is a must-read if you want to understand the human dynamics of the financial crisis — and why so many well-informed people didn’t see it coming. Click here to download the article.
Harold James, The Creation and Destruction of Value: The Globalization Cycle. Harvard University Press, 2009.
Princeton Professor Harold James is the author of one of my favorite globalization books, The End of Globalization: Lessons from the Great Depression (2001), so I was excited to learn about his new book on the economic crisis. James is unique in his deep understanding of how financial crisis pushed globalization over the edge in the 1930s and how the current crisis compares with that devastating experience.
I know of only one person who might be James’s equal in this regard: his name is Ben and he works for the Federal Reserve. Since Bernanke isn’t free to write books about the crisis just yet, James is my go-to-guy for deep insights.
And I am not disappointed. Each chapter provides key ideas and raises questions that will draw me back to re-read this book. James’s comparison between the Crash of 2008 and the crises of 1929 and 1931, for example, helped me understand both the recent past and the Great Depression much more clearly. His chapter on the chronology of the crisis is well crafted and broadly useful. I guess I am especially drawn to the last two chapters, however, which look at power and values.
Major financial crises really shake things up. In the penultimate chapter James considers how power will shift in the international system. Will the US retain its strong position or will China or the EU rise to fill the void. James’s wise analysis reminds me of Paul Kennedy’s writings of 20 years ago — informed and useful, raising many questions.
The final chapter on values is very thought-provoking. The collapse of values leaves people confused about whom and what to trust. This is true about market values, which is what the chapters mainly discusses, but also about values more generally, which is how James concludes the book.
Regaining trust is a long and arduous process. That is why when globalization is broken, it is not easy to put it back together again. We will look for communities of virtue, but inevitably we will not find them at once. And the globalization cycle will resume, but not immediately (page 277).
James is right about this, as I argue in Globaloney 2.0. Globalization will come back, but not in the same form. Market values will come back first (see the stock market’s recent surge) but faith in broader values will not be so easily restored.
