Tag Archives: government

Of What Polity is Merkel Chancellor?

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Spiegel International Online, in an article a couple days ago, insisted that

German Chancellor Angela Merkel has a problem. External pressure on her government to back an increase in the size of the permanent euro backstop fund, the European Stability Mechanism (ESM), is rapidly growing, with Berlin now virtually isolated among the G-20 and the euro zone, with the International Monetary Fund insisting as well.  Even the world’s developing countries are calling for Merkel to agree to boost the firewall….

Internally, however, she is in a bind.  Aid fatigue has set in among Merkel’s conservatives…and the political appetite in her cabinet for countering such skepticism is limited.  …  Renegade lawmakers in the aisles of her governing coalition…meant Merkel fell short of the symbolic “chancellor’s majority,” an absolute majority of Bundestag seats with just coalition votes.

Moreover, which case the article’s author elides, the German people have never favored seeing their hard-earned money, turned over to their government in taxes, sent overseas to reward the irresponsible populations and governments of other countries for their profligacy.

Leaving aside the economic and moral foolishness of continuing—much less expanding—the bailout facility(s), Chancellor Merkel, and her fellow German citizens, need to clarify in their own minds for whom she works—those German citizens who hired her to be their country’s chief executive, or foreign nationals in Europe and elsewhere.  This clarification will eliminate the bind.

Why Would Anyone Buy This Debt?

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Greece, last week, passed its Collective Action Clause legislation in preparation for its upcoming bond swap, wherein bondholders have agreed, in general, to a write down of some 53%: they’ll trade the bonds they hold for new bonds issued by the Greek government that will run out to just over half the value of those original bonds.  This was a—more or less—voluntary swap: agree to the deal or risk losing everything as Greece explicitly defaults.

However.

What the CACs do is force all bond holders to make the swap, whether they want to or not, once a minimum per centage of holders make the swap.  It’s important to note here that this was done retroactively—years after the bonds had been sold, years after a solemn debt agreement had been committed to by the Greek government (and the bond purchasers, but they’re not the ones making this commitment change).  In short, the CACs change the original terms of the debt, and they do so entirely unilaterally, and only after the fact.

There are two problems with this.  One, the most important, has to do with integrity and morality.  The Greek government, and the Greek citizens collectively, can be derided for their foolishness in running up so large a debt compared to the country’s ability to repay, and many of us have done so.  However, to things that are known a priori on any debt sale agreement are that there is a non-zero possibility of default, even on a government debt, and this is priced into the cost of buying a sovereign debt instrument, at however small a premium.  The other thing that is known is that the terms of the deal will be honored by all parties to it, come what may.  Even were the Greek government, for instance, explicitly to default on its bonds—to go through, for instance, the (inter)national equivalent of an American bankruptcy court proceeding—everything would proceed in accordance with already known rules and conditions.

This unilateral, retroactive change to the terms of these debt agreements, though, destroys that integrity, that morality.  An entity that will welch on its commitments as soon as they become inconvenient (albeit a large inconvenience in the present case, but there are more honest alternatives even here) cannot be trusted to honor any future commitments whenever those might become inconvenient.

The other problem is a moral hazard one; although this one has a chance of not materializing.  The moral hazard here is not the classical economist’s moral hazard, but a different kind.  Consider, for example, a basketball or soccer player who hits the game winner as the clock expires.  This player gets credit—gets the positive moral hazard—for hitting the winner.  Never mind that this is wholly unjustified: his teammates and he have spent the entire game keeping it so close that a single shot out of the 150 or so in an NBA game or dozen or so on goal in a soccer match, makes the difference.  Any shot from the first one taken in the first quarter to the penultimate one taken late in game, any of those, has significance equal to that last one made.

So it is with Greek bond holders in a more negative sense.  Suppose the required per centage of bond holders, less one, makes the swap.  The swap fails, and the Greeks default.  It’s easy to identify the game winning shooter and to lionize him.  It’s also easy to identify the bond holders who reject the swap, and I suggest that the last one to make that list will not be lionized.  All bond holders are put into this box, also, though.

Under these circumstances, I ask again my question: why would anyone buy this country’s debt in future?  An actual “I can’t pay, so I default” would bring about sore hits to Greece’s future borrowing capacity, but such a default would not, of necessity, impugn Greek honesty.  They would recover, and in pretty short order.  But having destroyed their integrity?

Regulations Impacting Free Speech

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Now we see this from the New Jersey Law Journal [emphasis added]:

As corporate money continues its steady flow through the post-Citizens United world of U.S. elections, general counsel may soon have a new disclosure item to worry about. Last Friday, commissioner Luis Aguilar of the Securities and Exchange Commission called for the agency to consider a new rule requiring public companies to disclose all political spending. Shareholder proxy proposals seeking disclosure of corporate political donations are at a new high this year, according to the National Association of Corporate Directors. Aguilar says shareholder pressure is working, because nearly 60 percent of the S&P 100 companies had political disclosure policies in place as of December 31, compared with only a handful seven years earlier.

Never mind that, if shareholder pressure is working, a Government rule controlling free speech in this arena is plainly unwarranted.  This is just another cynical Progressive administration attempt to regulate free speech.

Managed Economies and Real Estate

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The People’s Republic of China offers a demonstration of the…complexities…involved in centrally managed a national economy, and the risks to those who attempt to operate in such an environment.

The present example centers on the Chinese real estate market.

Real estate was once one of the nation’s most successful industries. [D]evelopers plowed billions of dollars into huge developments—with apartments, commercial space, pools and golf courses—outside top-tier cities such as Beijing and Shanghai.

Now, having been drawn in by expansive government policies, those players are being damaged, if not destroyed, by that same government changing its rules.

Policies enacted since 2010 include restrictions on the purchase of second homes, higher down payments and tighter credit [, and] China’s two-year push to drive down property prices has punished many of the nation’s once highflying property developers and stymied a number of upscale projects.

And so we have this:

Today, the Xi Shui Dong development [for example, a 59-acre complex in Wuxi] stands less than half complete, hamstrung by its parent company’s high debt and tough new government restrictions. Last year, unit sales fell 25% from 2010, despite steep discounts. Construction cranes loom over mostly empty streets boasting only a handful of retailers.

Real estate developers are victims of the vagaries and capriciousness of government control over the nation’s real estate sector—controls which change as government changes its mind unpredictably, and as new members of government, anxious to make their own mark, decide they have a Better Idea and push it through.

Energy Then and Now

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I’ve been going back through a book I first read 30 years ago, the National Academy of Sciences’ Energy in Transition 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems.

At this point I’m less interested in specific predictions (over a future 25 year period?) than I am in the thinking and policies espoused by the NAS (and later by a variety of government administrations, as it will have turned out) to achieve the report’s goal of reduced energy consumption by the US.  Thus, the book leads off with this (remember, this is a 1980 copyright):

Slowing the growth of energy demand will be essential, regardless of the supply options developed in the coming decades.  In fact, the demand element of the nation’s energy strategy should be accorded the highest priority.  …this reduction could be accelerated by such explicit government policies as taxes and tariffs on energy and standards for performance….  [G]rowth of demand for energy in this country could be reduced substantially…by price-induced shifts toward less energy-intensive goods and services.

So much for recovering our manufacturing capacity.  The NAS continued [emphasis added]:

A major conclusion…is that technical efficiency measures alone could reduce the [energy/GNP [the earlier measure of US economic output]] ratio to as little as half its present value….  (This conclusion is sensitive to the prices assumed in the analysis,…result of this magnitude is attained only if prices…increase more rapidly than probable in a market at equilibrium.)

In some cases the price increases necessary…would have to be secured by taxes that would open up a wedge between consumer prices and the cost of producing and delivering energy.

The NAS had this to say about the impact of such measures [again, my emphasis]:

To avoid economic penalties, the rate of replacement must generally depend on the normal turnover of capital stock…though rising energy prices will accelerate this turnover in most cases.

“Normal turnover,” carefully manipulated by government interference with free market pricing through those taxes and tariffs and standards.

The real problem is finding a new balance between energy supply and energy demand, consistent with generally satisfactory overall economic performance. …

Tax, tariff, and price control policies…are important influences on the demand for energy.  But energy consumption can also be molded directly—for example, by imposition of mandatory standards for the efficiency of energy-using equipment….

Here is the NAS’ endorsement of economic management from the center—from government—preferring that to the clutter of a market of free actors freely interacting; i.e., we individual Americans acting in our own self-interest, unfettered by government, and achieving our own balance and defining for ourselves our “generally satisfactory performance.”  A free market at equilibrium is not to be tolerated.

Does any of this sound familiar in today’s political (I hesitate to say economic) environment?