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791. Stress-Testing the Regulators: Market Risks and the EU Economy

Author:
Max Watson
Publication Date:
04-2008
Content Type:
Policy Brief
Institution:
Chatham House
Abstract:
Today's market turbulence and global imbalances prompt the question whether economic and regulatory policies are poorly designed or just badly implemented. The question is urgent for Europe, which has its own asset booms and imbalances to worry about as well as the backwash of US problems. The imbalances in Europe's economies in large part reflect favourable shocks, such as falling interest rates and growing financial integration. But the 'growth crisis' in Portugal underscores the fact that there can be hard landings, even without a financial crisis, if fiscal policy is unwise and if productivity fails to take off. The current global imbalances and turbulence also have a common backdrop in the long period of unusually easy liquidity and low risk premia during which today's problems built up. This suggests that central banks should be prepared more often to 'lean against the wind' in times of asset price exuberance, and that politicians should not cut taxes or boost spending permanently on the back of revenue gains that result from transient financial booms. Banks and supervisors have many lessons to draw. Some involve going 'back to basics' on issues such as liquidity, off-balance-sheet operations, and the ability to close and reopen banks. Others require a careful look at incentives – in executive pay, rating agency roles and loan production systems. Supervisors also need to take better account of boom-bust cycles when they assess risks, and address cross-border issues in EU banking. Moral hazard has been partly addressed by pain inflicted on bank managements and shareholders. But at the macro level it may be building up as policy-makers act to limit losses in a setting where they cannot trace the ultimate fallout from risks. In future, their discretionary interventions need to be truly exceptional and much more symmetrical, or the money supply and the public debt will ratchet up amid serious resource misallocation.
Topic:
Economics, Government, and Financial Crisis
Political Geography:
United States and Europe

792. Friedman and Russia

Author:
Andrei Illarionov
Publication Date:
01-2008
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
One day I asked Milton Friedman a question. That question was in my mind every time we met: “Could he have achieved the same status he did in America if he had lived in Russia—not only in terms of his research, but in shaping his outlook on life and in his under-standing of freedom?” Having kept silent for a moment, he answered: “no.”
Topic:
Economics
Political Geography:
Russia, United States, America, Europe, and Asia

793. The Decline of the White Working Class and the Rise of a Mass Upper Middle Class

Author:
Alan Abramowitz and Ruy Teixeira
Publication Date:
04-2008
Content Type:
Working Paper
Institution:
The Brookings Institution
Abstract:
Dramatic shifts have taken place in the American class structure since the World War II era. Consider education levels. Incredible as it may seem today, in 1940 three-quarters of adults 25 and over were high school dropout s (or never made it as far as high school), and just 5 percent had a four-year college degree or higher. But educational credentials exploded in the postwar period. By 1960, the proportion of adults lacking a high school diploma was down to 59 percent; by 1980, it was less than a third, and by 2007, it was down to only 14 percent. Concomitantly, the proportion with a BA or higher rose steadily and reached 29 percent in 2007. Moreover, those with some college (but not a four-year degree) constituted another 25 percent of the population, making a total of 54 percent who had at least some college education 1 . Quite a change: moving from a country where the typical adult was a high school dropout (more accurately, never even reached high school) to a country where the typical adult not only has a high school diploma, but some college as well.
Topic:
Civil Society, Demographics, and Economics
Political Geography:
United States

794. Estimating Consistent Fundamental Equilibrium Exchange Rates

Author:
William R. Cline
Publication Date:
07-2008
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
This paper sets forth a new methodology for obtaining a consistent set of exchange rate realignments needed to accomplish international adjustment in current account imbalances to reach fundamental equilibrium exchange rates (FEERs). The approach is named the symmetric matrix inversion method (SMIM). It is symmetric in that ir treats all countries considered equally rather than seeking exact adjustment for the United States and obtaining other adjustments residually. Country-specific impact parameters based on assumed trade elasticities are applied to a target set of changes in current accounts as percentages of GDP to obtain a corresponding set of target changes in real effective (trade-weighted) exchange rates. A matrix inversion technique is then applied to identify the corresponding set of changes in bilateral exchange rates against the dollar needed to approach as closely as possible the target set of effective exchange rate changes.
Topic:
Economics and Foreign Exchange
Political Geography:
United States

795. Educational Exchange between the United States and China

Publication Date:
07-2008
Content Type:
Policy Brief
Institution:
Institute of International Education (IIE)
Abstract:
Few countries have seen such rapid economic and educational change in so short a time period as China. Since 1978, when Deng Xiaoping began to send students and scholars to study abroad in large numbers as part of his broad modernization efforts, some 800,000 Chinese students and scholars have studied outside their home country. These numbers make China the overall largest supplier of international students to countries around the world over the past decade. The liberalization of the education sector, which accompanied China's entry into the World Trade Organization in 2001, has also permitted more students from outside China to enter the Chinese educational system. The number of Americans studying abroad in China increased by over 500% in the past ten years, making China one of the top 10 study abroad destination countries for U.S. students, and one of the top 10 host countries for all internationally mobile students.
Topic:
Foreign Policy, Economics, Education, and International Affairs
Political Geography:
United States and China

796. Evaluating Iraq's Provincial Reconstruction Teams While Drawdown Looms: A USIP Trip Report

Author:
Sam Parker and Rusty Barber
Publication Date:
12-2008
Content Type:
Policy Brief
Institution:
United States Institute of Peace
Abstract:
Since their 2005 inception in Iraq, PRTs have struggled to fully define their mission, overcome structural problems, learn to work alongside their military counterparts and assist Iraqis down the path to self-governance and stability so that U.S. forces can withdraw. While the concept was born in the Afghan conflict, PRTs in Iraq bear little resemblance to their Afghan cousins, which are led and largely staffed by military officers. PRTs in Iraq are largely civilian-led and are required to address a host of issues including local governance, economic and women's development, health, agriculture, rule of law and education. In this respect, they resemble mini development task forces, harnessing civilian expertise sourced from the U.S. and augmented by military civil affairs officers.
Topic:
Conflict Resolution, Security, Economics, Health, Terrorism, War, and Governance
Political Geography:
Afghanistan, United States, Iraq, and Middle East

797. Governance Indicators: A guided Tour

Author:
Per Botolf Maurseth
Publication Date:
12-2008
Content Type:
Working Paper
Institution:
Norwegian Institute of International Affairs
Abstract:
In recent years, countries' governance has been paid increasing attention. At the same time, the availability of governance indicators has also increased. Such indicators are used by investors, aid donors and researchers. This paper reviews some commonly used governance indicators. Their construction and their usefulness are discussed. It is con-cluded that governance indicators are a useful tool for evaluating countries' performance, but that they should be complemented with other sources of information.
Topic:
Development, Economics, Humanitarian Aid, Post Colonialism, and Foreign Aid
Political Geography:
United States

798. Social Cohesion in China: Lessons from the Latin American Experience

Author:
Mariano Turzi
Publication Date:
01-2008
Content Type:
Journal Article
Journal:
The Journal of Diplomacy and International Relations
Institution:
School of Diplomacy and International Relations, Seton Hall University
Abstract:
China's economic development over the last three decades has been dazzling critics and supporters alike. Since the launching of the “Four Modernizations” reform process in 1978, growth has averaged 9 percent annually. As a result, according to IMF data released in July 2007, China is poised to overtake Germany as the world's third-largest economy. As growth has slowed in Europe, Japan, and the US the Chinese economy grew at a staggering rate of 11.9 percent in the second quarter of 2007. The IMF report also pointed out that if exchange rates are adjusted to equalize the cost of goods in different countries (purchasing-power parity) China is already the world's second-largest economy.
Topic:
Economics
Political Geography:
United States, Japan, China, Europe, Germany, and Latin America

799. Deeper Than Kelo: The Roots of the Property Rights Crisis

Author:
Eric Daniels
Publication Date:
09-2008
Content Type:
Journal Article
Journal:
The Objective Standard
Institution:
The Objective Standard
Abstract:
On June 23, 2005, the United States Supreme Court's acquiescence in a municipal government's use of eminent domain to advance "economic development" goals sent shockwaves across the country. When the Court announced its decision in Kelo v. City of New London, average homeowners realized that their houses could be condemned, seized, and handed over to other private parties. They wanted to know what had gone wrong, why the Constitution and Fifth Amendment had failed to protect their property rights. The crux of the decision, and the source of so much indignation, was the majority opinion of Justice John Paul Stevens, which contended that "economic development" was such a "traditional and long accepted function of government" that it fell under the rubric of "public use." If a municipality or state determined, through a "carefully considered" planning process, that taking land from one owner and giving it to another would lead to increased tax revenue, job growth, and the revitalization of depressed urban areas, the Court would allow it. If the government had to condemn private homes to meet "the diverse and always evolving needs of society," Stevens wrote, so be it. The reaction to the Kelo decision was swift and widespread. Surveys showed that 80 to 90 percent of Americans opposed the decision. Politicians from both parties spoke out against it. Such strange bedfellows as Rush Limbaugh and Ralph Nader were united in their opposition to the Court's ruling. Legislatures in more than forty states proposed and most then passed eminent domain "reforms." In the 2006 elections, nearly one dozen states considered anti-Kelo ballot initiatives, and ten such measures passed. On the one-year anniversary of the decision, President Bush issued an executive order that barred federal agencies from using eminent domain to take property for economic development purposes (even though the primary use of eminent domain is by state and local agencies). The "backlash" against the Court's Kelo decision continues today by way of reform efforts in California and other states. Public outcry notwithstanding, the Kelo decision did not represent a substantial worsening of the state of property rights in America. Rather, the Kelo decision reaffirmed decades of precedent-precedent unfortunately rooted in the origins of the American system. Nor is eminent domain the only threat to property rights in America. Even if the federal and state governments abolished eminent domain tomorrow, property rights would still be insecure, because the cause of the problem is more fundamental than law or politics. In order to identify the fundamental cause of the property rights crisis, we must observe how the American legal and political system has treated property rights over the course of the past two centuries and take note of the ideas offered in support of their rulings and regulations. In so doing, we will see that the assault on property rights in America is the result of a long chain of historical precedent moored in widespread acceptance of a particular moral philosophy.Property, Principle, and Precedent In the Revolutionary era, America's Founding Fathers argued that respect for property rights formed the very foundation of good government. For instance, Arthur Lee, a Virginia delegate to the Continental Congress, wrote that "the right of property is the guardian of every other right, and to deprive a people of this, is in fact to deprive them of their liberty." In a 1792 essay on property published in the National Gazette, James Madison expressed the importance of property to the founding generation. "Government is instituted to protect property of every sort," he explained, "this being the end of government, that alone is a just government, which impartially secures to every man, whatever is his own." Despite this prevalent attitude-along with the strong protections for property contained in the United States Constitution's contracts clause, ex post facto clause, and the prohibition of state interference with currency-the founders accepted the idea that the power of eminent domain, the power to forcibly wrest property from private individuals, was a legitimate power of sovereignty resting in all governments. Although the founders held that the "despotic power" of eminent domain should be limited to taking property for "public use," and that the victims of such takings were due "just compensation," their acceptance of its legitimacy was the tip of a wedge. The principle that property rights are inalienable had been violated. If the government can properly take property for "public use," then property rights are not absolute, and the extent to which they can be violated depends on the meaning ascribed to "public use." From the earliest adjudication of eminent domain cases, it became clear that the term "public use" would cause problems. Although the founders intended eminent domain to be used only for public projects such as roads, 19th-century legislatures began using it to transfer property to private parties, such as mill and dam owners or canal and railroad companies, on the grounds that they were open to public use and provided wide public benefits. Add to this the fact that, during the New Deal, the Supreme Court explicitly endorsed the idea that property issues were to be determined not by reference to the principle of individual rights but by legislative majorities, and you have the foundation for all that followed. . . .
Topic:
Development and Economics
Political Geography:
United States, America, and London

800. Anatomy of a Train Wreck: Causes of the Mortgage Meltdown

Author:
Stan J. Liebowitz
Publication Date:
10-2008
Content Type:
Policy Brief
Institution:
Independent Institute
Abstract:
Why did the mortgage market melt down so badly? Why were there so many defaults when the economy was not particularly weak? Why were the securities based upon these mortgages not considered anywhere as risky as they actually turned out to be? This report concludes that, in an attempt to increase home ownership, particularly by minorities and the less affluent, virtually every branch of the government undertook an attack on underwriting standards starting in the early 1990s. Regulators, academic specialists, GSEs, and housing activists universally praised the decline in mortgage-under- writing standards as an “innovation” in mortgage lending. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble. The price bubble, along with relaxed lending standards, allowed speculators to purchase homes without putting their own money at risk. The recent rise in foreclosures is not related empirically to the distinction between subprime and prime loans since both sustained the same percent- age increase of foreclosures and at the same time. Nor is it consistent with the “nasty subprime lender” hypothesis currently considered to be the cause of the mortgage meltdown. Instead, the important factor is the distinction between adjustable-rate and fixed-rate mortgages. This evidence is consistent with speculators turning and running when housing prices stopped rising.
Topic:
Economics, Government, Markets, Financial Crisis, and Minorities
Political Geography:
United States