Buy American, or: The stimulus bill and US trade obligations

Renowned US trade economists Clyde Hufbauer and Jeffrey Schott warn against US protectionism under President Obama's huge stimulus package: US Free Trade Promises Must Be Honored. Excerpt:

In the stimulus bill, Congress insisted that federal funds could be applied only to projects that used US-made goods, unless that condition violated US trade obligations. But funds for many of the projects funded by the stimulus are funneled to state officials, many of whom ignore or don't know the details of US trade agreements and insist on US content for fear of losing federal windfalls. The federal government designed the stimulus program and provided the funds to pay for it. In our view, simply because a state official tenders the contract doesn't void the international obligation. The WTO and NAFTA judges would surely agree. more...

Publikationshinweis

Ein kurzer Leitartikel im Wirtschaftsdienst - Zeitschrift für Wirtschaftspolitik ist jetzt online:

Die G-20 in London: Twitter-Gipfel oder historische Wende?
 

7th Workshop on Money, Banking, and Financial Markets

The Halle Institute for Economic Research, the Department of Economics at Heinrich-Heine-University Duesseldorf and the European Business School jointly organise the 7th Workshop on “Money, Banking, and Financial Markets”.

The workshop aims at offering a discussion forum particularly for young researchers (PhD students and Postdocs) to present their current theoretical or empirical papers to a competent audience. This year's workshop will take place in Duesseldorf (Germany) on June 8/9, 2009. The program is available here.

Information on earlier workshops in this series can be found here.

European Commission Acts on Hedge Funds

The European Commission has tabled a proposal for regulating the activities of hedge fund managers. According to the proposed "Directive on Alternative Investment Fund Managers", the managers will need prior authorisation by the authorities in the Member States in which they have their registered office (art. 4). Moreover, the managers - not the funds they manage! - will be required to hold a minimum capital of 125.000 Euros (art. 14).
Besides, the proposed directive contains the "usual suspects" which are included in all such rules, such as the command to act honestly, rules to avoid conflicts of interest, and disclosure requirements.
But one rule in particular stands out: art. 13, which contains a rule on firms that repackage loans into tradable securities or other financial instruments. What is meant thereby are the notorious Asset-Backed Securities (ABS) or Collaterized Debt Obligations (CDOs). According to the proposed rule, hedge funds managers will only be allowed to invest in such securities if the originator of the securitization process retains a "net economic interest" of no less than 5%. Details will be spelled out by implementing measures to be adopted by the Commission. This rule seems somewhat misplaced in the directive, because it deals with problems that are not directly connected to hedge funds and their managers. It is a kind of indirect regulation of ABS and CDOs, which uses hedge fund managers as an anchor instead of the originators, which often sit in other countries. One can doubt whether this is the appropriate way of limiting the risks that these instruments present.
As was to be expected, the proposal has met with criticism by the industry. For instance, the Bundesverband Alternative Investments (BAI) has cautioned against an isolated European approach. It remains to be seen whether the proposal will be adopted as EC legislation.

The return of the Jedi

In Lucas' (George, not Robert) brilliant Star Wars saga, the dark side of the Force had finally been beaten. The evil converted to the better faith for good.

Incidentally, around the same time this saga started its lasting success, Paul Volcker became chairman of the Federal Reserve. He successfully started to fight inflation (after others made a couple of half-hearted attempts). It was very costly, and - more importantly - it could had been avoided by Volcker's predecessors if they only had considered the long-term consequences of what they were doing in their attempts to prevented the public from seemingly wrong decisions (just like Anakin Skywalker, called Darth Vader, did).

Allan H. Meltzer, a distinguished Monetary Historian, writes in a NYT piece that this lesson has not been well learned by U.S. policy makers and hence, in contrast to the Star Wars saga, the evil is not beaten for good. He claims that economic policy, both fiscal and monetary, are heavily inflationary and that the cost of this policy will come, sooner or later.

[...] no country facing enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation as we are has ever experienced deflation. These factors are harbingers of inflation.

He incuses policy makers, both at the Fed and Congress, to sacrifice the independence of the FED which simply has become the monetary arm of the treasury. It is the same independence that Paul Volcker had to fight for, and which was necessary to achieve the goal of lowering inflation rates.

Meltzer also argues that deflation is certainly not the problem, even though headline consumer price inflation approaches zero:

Some of my fellow economists, including many at the Fed, say that the big monetary goal is to avoid deflation. They point to the less than 1 percent decline in the consumer price index for the year ending in March as evidence that deflation is a threat. But this statistic is misleading: unstable food and energy prices may lower the price index for a few months, but deflation (or inflation) refers to the sustained rate of change of prices, not the price level. We should look instead at a less volatile price index, the gross domestic product deflator. In this year’s first quarter, it rose 2.9 percent — a sure sign of inflation.

Finally, Meltzer is not a friend of deficit-financed government programs.

It doesn’t help that the administration’s stimulus program is an obstacle to sound policy. It will create jobs at the cost of an enormous increase in the government debt that has to be financed. And it does very little to increase productivity, which is the main engine of economic growth.

His argument goes further:

[...] big, heavily subsidized programs are rarely good for productivity. Better health care adds to the public’s sense of well-being, but it adds only a little to productivity. Subsidizing cleaner energy projects can produce jobs, but it doesn’t add much to national productivity. Meanwhile, higher carbon tax rates increase production costs and prices but do not increase productivity. All these actions can slow productive investment and the economy’s underlying growth rate, which, in turn, increases the inflation rate.

In this respect, Meltzer hopefully errs.

Chiang Mai Initiative beschließt Krisenfonds für Asien

Im Rahmen der Jahrestagung der Asian Development Bank vereinbarten die Mitglieder der sog. Chiang Mai Initiative (mehr dazu hier) die Schaffung eines plurilateralen Kreditmechanismus mit dem etwas unhandlichen Namen Chiang Mai Initiative Multilateralisation. Näheres dazu in der Abschlusserklärung der Finanzminister. Textauszug:

The objectives of Chiang Mai Initiative Multilateralisation (CMIM) are (i) to address the short-term liquidity problem in the region and (ii) to supplement the existing international financial arrangements. ... The total size of the CMIM is USD 120 billion with the contribution proportion between ASEAN and the Plus Three countries <d.h. China, Japan, Südkorea (MK)> at 20:80. mehr...