As my readers know, I have no specific preference for the overall structure of healthcare reform, with a few important caveats. When I worked on the Global Commission on Aging, I became familiar with systems around the world. All of them have problems of one sort or another. What is important to me is do the people have access to reliable healthcare, given the country’s level of development? Poor countries obviously can’t provide the same access that advanced industrial countries can. Access doesn’t mean that every new fangled medical procedure should be paid for by a government created, managed or regulated system. It also shouldn’t mean that every non-essential procedure requires general access. If you want something not covered by the general system, go to physicians and pay for it yourself. Also, no doctor should be allowed to remain outside the new system. Creating two classes of healthcare is disastrous to the body politic in the long-run.

One of the best reforms that could be done is to allow licensed pharmacists to prescribe medications without a doctor’s prescription. This is a common practice around the world, and many of these countries have longer life expectancies than the US. You don’t need to burden an overwhelmed medical system with simple colds, rashes, immunizations, etc. A simple example of this is how much easier, efficient and cheaper it was/is to allow pharmacies to give flu shots. A central shared data base of medications and immunizations among pharmacists is all that is needed to avoid problems. Another benefit is that every year when children are registered in school or camp a parent/guardian could go to any pharmacist and get a print-out of their child’s immunizations instead of requiring another trip to the doctor. Also, over medication, particularly of the elderly, who often have multiple doctors, can be avoided.

Another reform would be to allow nurse practitioners to open their own offices. They could easily handle many medical problems at a fraction of the cost of a doctor. They could then refer more complicated cases to the appropriate physician.

To help physicians, the government should provide low cost malpractice insurance for doctors (and nurse practitioners). Just as the government provides flood insurance, malpractice insurance should become a government program. Right now, one of the biggest expenses doctors have is excessive insurance premiums. Eliminate the problem. Also, that may help reduce frivolous cases. People may be a bit more reluctant to bring cases against a government-run program where the power to investigate is stronger.

As usual, it takes me a bit of time to get to my real point. Governing requires making decisions and following through, no matter what the near-term political consequences. The long-term effects are more important. Moving the Capital from New York to Washington, D.C. certainly wasn’t popular with Northern States, but thank goodness it was done. Imagine if New York was both the financial and political center of the country. It would be ungovernable and the Government subject to too much public pressure.

Great leaders do what they think is right, not what the latest poll says. Winston Churchill, the Prime Minister who won the war for Britain, was ousted after the war. Does that matter? Do most of us even know or care about his successor? Lincoln knew his election would cause states to leave the Union. Did he drop out of the race? Truman made many decisions which were controversial at the time. He desegregated the military and he recognized the State of Israel, both done without any Congressional approval. I could go on, but I think I have made my point.

What leaders should not do is to play politics when their fundamental beliefs are at stake. In the US we saw this happen for much of the latter part of the 19th Century when we had a series of presidents who just avoided making tough reformist decisions. Do we even remember their names? Except for President Grant, who we remember for his efforts during the Civil War, not his scandalous Presidency, the rest remain in the fog of history. The first truly great president to sweep the air clean was Theodore Roosevelt, who spent most of his life reforming both Government and the economy. He we remember.

The last president I will discuss is President Carter, a man who dithered as the US appeared to be crumbling. He is an example of a non-leader, although as I have written on other occasions, he has been one of the best ex-Presidents we have ever had.

What does all this imply for healthcare? It means that President Obama should argue for his core issues about which he should not compromise. Compromise should only occur on the margin. He has no excuse. He is the President and his party controls both houses of Congress. If we don’t like the results, voters can speak in the future and change the programs. Enough said.

Tags: Doctors, Healthcare, Healthcare Reform, Immunizations, Malpractice Insurance, Nurse Practitioners, Obama, Pharmacists, Prescriptions

Before the financial crisis spread around the world, structured products were typically marketed as safe, although generally less liquid alternative products. Another important virtue of the asset class was its perceived diversification value - i.e. the lack of observed price correlation with the broader market. As “safe” went out the window once defaults skyrocketed and prices plunged, so did the diversification value. Structured products triggered the credit crunch and the recession through the balance sheets of financial institutions, resulting in a string of systemic failures. Since structured products were the leading cause of the crisis, observed prices were naturally very correlated with the market. That is as mortgage-related problems got worse, so did the bank balance sheets and correspondingly everything else.

Today “safe” is no longer associated with structured products, however diversification may still be of some value. Most structured products today price in some degree of liquidity and credit risk and prices will certainly reflect the developments in these markets. However these developments are likely to be more specific to the product in question, and not necessarily spill out into the broader market.

As the world emerges from the recession markets are becoming increasingly less concerned with systemic failures and doomsday scenarios and are more focused on things like corporate earnings, sovereign deficits, and unemployment - quantities that are not directly related to the fate of structured debt. Also, in a post-TARP world, Government is considerably more alert to the problems of large banks.

As such, on a forward looking basis, structured products are unlikely to continue to influence the macro picture to the extent that they have over the last couple of years. There is some evidence emerging to support this: while we saw a broad sell-off due to the Greek fiscal crisis, structured products generally fared quite well.

So while mortgage woes are likely to continue for some time, it seems that they are unlikely to drive the broader market. Therefore, with relatively attractive yields and diversification benefits that they will likely bring, there is something to be said for having some exposure to the structured space in a credit portfolio. Properly selecting the exposure should prove worthwhile and result in a superior risk/reward.

Tags: credit crunch, Mortgage, prices, recession, safety, structured products

It is not news to anyone that Greece is struggling with a fiscal crisis of major proportions. Unfortunately this is not the first time this has happened. In fact, Greece had to receive special assistance from the European Union (EU) in the early 1990’s, along with Italy, because its domestic debt was turning into an international problem. The interesting thing is that Greece got the assistance it needed even though the Prime Minister of Greece at the time was openly insulting Margaret Thatcher the then British Prime Minister. It didn’t seem to matter. Political realism was more important than personal slights.

The problem Greece faces is the same the other countries on the periphery of the eurozone face, only worse. Greece and a number of other countries on the periphery shouldn’t be in the eurozone! The eurozone is not an optimum currency area. This was the major argument used by economists and political leaders in Britain to avoid joining the euro. For a currency zone to work, the regions that benefit should transfer those benefits to the losers. The rich core always is the beneficiary, with the periphery always on the losing end. Since the EU is not and will not become a truly federal government with massive taxing power, it is not likely to be able to solve the transfer problem.

If we look at the Greek case, it’s nothing more than an exaggerated case of Italy, Spain, Portugal and Ireland. There was a tremendous benefit for all these countries of being in a large currency zone dominated by low inflation Germany, and relatively low inflation Benelux and France. As a result, joining the eurozone caused a sharp drop in domestic interest rates across the eurozone. This caused a housing boom with a vengeance in a number of the countries on the periphery. In the case of Italy, it wasn’t so much a housing boom, but there nothing could be done to deal with the country’s structural problems. Rather, the body politic in Italy is so divided on what economic policy should be – left, right or center – that little has changed to return Italy to its traditionally competitive position in the world. In the past, the exchange rate, which politicians couldn’t control, did the work for them.

Greece is an analogous case. With the worldwide downturn and the risk aversion that followed, Greece was still able to access funds at relatively low interest rates. If we look at the revenue/GDP and expenditure/GDP ratios for Greece, they changed marginally. The real problem was the deterioration in the primary balance which went from +1.2% of GDP in 2006 to nearly -8% in 2009. The primary balance is the deficit/surplus excluding interest. It measures the true health of the government’s fiscal position. That was a dramatic shift in four years. In addition, the important debt/revenue ratio was about 237% in 2007. It could possibly reach nearly 350% in 2010 unless something drastic occurs. A ratio of 350% puts a country at Greece’s stage of economic development at risk of default. Put bluntly, lower interest rates allowed by the euro masked the true deterioration in the country’s fiscal position.

What happens now? First, the Europeans must make a painful choice. Either they bail out Greece to avoid a collapse in the euro exchange rate, or they allow Greece to leave the eurozone and go it alone. On the surface, the latter would seem to make the most sense. The problem is that if Greece leaves, a number of countries should and will likely follow. Are government officials willing to go down that risky route? I personally doubt it, and that’s why despite the benefits to Greece of leaving the eurozone, the more likely scenario is that Greece will be bailed out even if it doesn’t meet whatever criteria the other governments put in place. This is politics, not economics.

Tags: bailout, default, eurozone, exchange rate, greece, Ireland, Italy, Portugal, primary balance, Spain

The DDR deal, the first CMBS deal after nearly eighteen months, was ten times oversubscribed. The following two deals also saw good demand even though they did not allow for TALF financing. So, clearly, there is good demand for CMBS bonds backed by well underwritten loans. Also, borrowers clearly want loans if they can get a reasonable cost of financing. DDR loan, with about 4.25% all-in cost of financing for the borrower, showed that a low cost of financing is possible even in the current market. Yet, prospects of a conduit style multi-borrower deal seem bleak at the moment.
Any CMBS deals that come to market are expected to be single-borrower deals, as in those deals the borrower takes the market risk and not the underwriter doing the deal. Securitization shops do not want to take the spread risk while aggregating the pool because there is no way to hedge that risk, and so are unable to originate loans even though many are eager to restart their lending operation. If they do originate loans without ability to hedge, they would require much wider spread resulting in higher cost of financing than borrowers would find attractive.

Inability to hedge loans while aggregating a pool for securitization is one of the biggest obstacles preventing restarting of conduit lending for commercial real estate properties.

In the past, the conduit originators were able to hedge loans while they were aggregating a pool big enough to securitize. So, they were not exposed to risk from changes in interest rates and bond spreads between loan origination and securitization. The hedging generally involved hedging the interest rate risk by selling interest rate swaps, and hedging the bond spread risk by using Total Return Swaps on Lehman or Bank Of America CMBS indices. These indices allowed loan originators to effectively sell their risk to investors who wanted to gain exposure to CMBS in their investment portfolio. They sold the risk when they originated the loan, and bought it back when they securitized the loans. The hedge worked because spreads on new CMBS deals moved in parallel with the spreads on existing deals.

The problem now is that those indices are no longer appropriate for hedging, especially for new origination loans, because of two problems. One, ratings downgrades have impacted the composition of the indices. Second, and more important, the spreads on new bonds with newly underwritten loans cannot be expected to move in tandem with spreads on old bonds with the old underwriting. This lack of correlation between the two spreads makes the old bonds or indices unusable as a hedge for newly originated better quality loans.

What this means is that to hedge new loans with better underwriting, originators need bonds with better underwritten new loans. In other words, to originate loans, you need bonds with new underwriting, and to create bonds with better underwritten loans, you need the better underwritten loans. That’s the chicken-and-egg type problem of loan aggregation. This is what has prevented loan origination from restarting once the spreads on old bonds widened out.

To solve this chicken-and-egg problem, back in February 2008, I made a suggestion to Markit, which administers the CMBX indices. My suggestion was to create a new CMBX type of index based on future deals that met minimum credit quality. Only deals which met pre-set criteria based on LTV, DSCR, and other credit parameters would be eligible to be included in the new index. Trading of the index would have allowed the market to determine spreads on bonds backed by good newly originated loans, and provided a hedging mechanism for loan originators, solving the chicken-and-egg problem.

Markit discussed the idea in a conference call with the trading desks, but it was thought to require too much work to create, when dealers were busy with the market volatility. Also, the idea was complicated, since it was based on future deals. Additionally, the CMBX is based on CDS (Credit Default Swap), and cash and CDS markets do not always move together, and so the hedge would not have been as good as Total Return Swaps on cash bonds.

Luckily, things have changed since then.

One, MarkIt has created new indices called TRX, which are based on Total Return Swaps on cash CMBS spreads, which will be a much better hedge for loans than a CMBX or CDS type of hedge. Total Return Swaps are what many originators used in the past to hedge the credit spreads.
Second, new deals with newly underwritten loans have been done and exist now. So, it is not necessary to base the index on future deals, avoiding a lot of complexity. That simplifies things considerably.

One solution to the hedging problem for newly originated loans is to create a new TRX index based on the new deals. It will allow the originators to sell risk, and will allow all the investors (many who did not get any allocations in the over-subscribed deals that have been done recently) to get exposure to new CMBS bonds.

Some may argue that three deals is not enough diversity to create an index. Admittedly, it would be better to have a more diverse pool of deals for the index. However, even with just three deals, the index will allow many originators considering starting origination to solve the chicken-and-egg problem. Also, this by itself will not solve all the problems the CMBS industry is facing. Yet, it will be better to have something, even if it is not perfect, than to have nothing at all.

I urge Markit and the dealers to make available a new index that will be attractive to both loan originators and investors, and just might help solve one of the major roadblocks preventing restarting of CMBS lending.

Originally published on Malay Bansal’s blog

We have the latest GDP estimates for 4Q09. They were quite good to say the least, even far better than this optimist expected. The economy grew at an annual rate of 5.7%, far above the long-term trend rate. As you know, I always like to look behind the numbers to see where the growth came from. Doing that presents an interesting story, consistent with my earlier views as to why the last recession was going to end last year and not drag on.

Contrary to what many pundits would have had you believe, consumption was not at the root of the recent recession. The last recession was basically investment driven. In 1Q09, when consumption actually rose at an annual rate of 0.6%, we saw a collapse of business investment of monumental proportions. Overall business investment in 1Q09 declined at an annual rate of 39.2%! Investment in business structures fell at annual rate of 43.6%, with equipment and software spending falling at an annual rate of 36.4%. In additional, residential construction fell at annual rate of 38.2%! Unless you believed that we were in the midst of a Great Depression, which we weren’t going to be given the response of the Federal Reserve and the Federal Government, such declines had to shrink, if not reverse themselves relatively quickly. Inventories can only go down so far.

As anticipated, the economy slowly showed signs of improvement, with declines moderating significantly in 2Q09, when overall GDP shrank by a modest but still painful annual rate of 0.7%.
By the third quarter the recession had come to an end. The only question we had left was the shape of the recovery. Given the numbers we saw in 4Q09, it looks likely that we will have a V-shaped recovery.

What happened in 4Q09 was consumption climbed at a modest 2.0% annual rate. Although spending on business structures continued to decline – not surprising since commercial and industrial real estate usually lags the overall recovery, spending on equipment and software rose at an annual rate of 13.3%, and was high enough to compensate for the decline in spending on business structures, causing overall business investment to rise at an annual rate of 2.9%. Also, we actually saw a small rise in residential construction in 4Q09, which increased at an annual rate of 5.7%, following a remarkable 18.9% rise in 3Q09.

Another positive factor in 4Q09is that exports rose at an annual rate of 18.1%, while imports rose by 10.5%. A weaker dollar is good the US, not bad.

Despite all the talk about government stimulus, it contributed almost nothing in 4Q09 at the Federal level (rising 0.1% at an annual rate), with state and local governments remaining a drag on growth (declining at an annual rate of 0.3%).

Inflation remains moderate overall. The overall GDP deflator rose at an annual rate of 0.6%. There is one potentially worrisome sign in that the personal consumption expenditure (PCE) deflator rose at an annual rate of 2.7%, and climbed steadily throughout 2009. My own view is that the more important inflation index is the overall deflator. However, a rising PCE gives ammunition to inflation hawks. The worst thing that could happen in my view is for the inflation hawks to gain traction. This economy still has lots of excess capacity and an excessive rate of unemployment. The interest rate environment should continue to remain low until unemployment declines enough for consumers to regain confidence in their employment. Another good sign on the inflation front is that the employment cost index rose by 1.8%, an acceptable rate given the inclusive nature of this index.

What does this mean for 1Q10? As long as the Federal government continues to maintain appropriate stimulus, and the Fed keeps a steady hand, then we should expect growth to continue. Given that investment activity is likely to continue to improve, especially given the good profit reports we have seen from most companies in recent weeks, we should expect GDP to rise by at least 3.5% at an annual rate in 1Q10. Hopefully we will be surprised on the upside. Unless there is an unexpected shock to the system, downside risk is low.

Tags: business investment, equipment, exports, GDP, GDP Growth, imports, Inflation, interest rates, residential construction, software, V-shaped recovery

For my long-term readers, you know that when I first met Bernanke as a Federal Reserve Governor I found him the least impressive of all the Federal Reserve Governors I had ever met. He seemed to lack the market savvy necessary to do the job right. I was told he was an academic expert on the Depression, which at the time seemed like unimportant academic history.

When McDonough was replaced as the President of the Federal Reserve Bank of New York, Geithner seemed a natural choice. After the Chairman of the Federal Reserve, being Governor of the New York Fed is the second most important position at the Fed for a variety of practical reasons. Given the financial whirlwind we were facing, Geithner becoming Treasury Secretary, given Bernanke’s lack of market savvy (totally different from Greenspan’s experience), it seemed a perfect fit in my eyes.

In recent weeks, people have talked about both Bernanke and Geithner as though they were villains in the bank bailouts. Let’s get real. Why are people angry? Besides the lack of action on the part of the legislative branch of our illustrious Federal Government, people seem to be angry that the banks are now making too much money. HELLO! Less than two years ago we were worried that the whole banking system was on the verge of collapse. Having banks return to profitability was the whole idea behind the bailout.

Bailouts take place to keep your deposits safe and the economy from imploding. There are a number of options to keep banks open, from outright nationalization, forced consolidation between stronger institutions and weaker ones (BoA Lewis was doing what any large bank CEO would have done for the last sixty years by helping bailout, at the “government’s request,” a crippled financial institution), or a government can indirectly inject capital through interest rate policy. The last point basically means that the central bank keeps the cost of funds low and allows banks to continue to lend at higher rates so that the spread between the cost of money and “sale price” (the interest borrowers pay) grows, causing profits to rise. In other words, it grants a hidden subsidy. Given our history, the US followed a multipronged approach.

Why do banks need higher profits? I don’t care who owns them, if you want solvent banks, then you need banks with adequate capital, either to deal with existing bad loans or loans which might turn bad in the future. Higher profits give rise to the potential for higher capital; they don’t produce higher capital. This is why there is such a disagreement among the political and economic elites about bank bonuses. The higher the bonuses paid, the lower retained earnings or bank capital is. I am going to stay out of the fight about which ratio is best. That is purely a political matter. Nonetheless, higher bank profits are necessary. If those profits are not put into capital, and if there is an agreement at the political level about the distribution between bonuses and bank profits, then if the profits are distributed and not retained as capital, once again, it is a political question, not an economic question about how one distributes the “excess profits.” That’s the center of the debate over bank taxes.

As usual, it takes me a while to get back to my main point. What about Bernanke and Geithner? Don’t crucify them, humiliate them, or criticize their overall handling of the worst financial crisis since the Great Depression. These two people almost single-handedly saved us from financial Armageddon. They deserve our thanks, not our opprobrium. Remember, our fears that the recession would be long and deep! It ended this past summer. We seemed to have lost sight of that, never mind that the stock market has recovered significantly.

I need to remind new readers, I already did a mea culpa in an earlier blog about my initial impression of Bernanke. I reiterate my parents’ warning not to rush to judge people. As always, thanks Mom and Dad for good advice.

Tags: bank bailout, bank bonuses, bank profits, bernanke, Federal Reserve, Geithner

As a former member of the Global Commission on Aging, in that forum the one thing everyone seemed to agree on was that pensions were only a piece of the long-term demographic problem. The crux of the problem for most countries would be healthcare.

Fortunately, medicine has advanced and continues to advance at rates unimaginable just a century ago. For instance, some argue that at the peak of the Roman Empire, in the most advanced centers, life expectancy reached between 50-55 years old, something not seen again until the early 20thy century. Between those periods, you were lucky if you lived until around 30.

One reason the Romans probably had longer life expectancies than most ancient peoples was that water was rarely if ever used for washing clothes. Clothes were “dry-cleaned.” I won’t go into the process they used (horrendous from our perspective), but effective and lucrative it was nonetheless. Clean water brought into cities from aqueducts was used for drinking and bathing – and the Romans were clearly fanatics about bathing. Once the system broke down, and the barbarian hordes poured in, life expectancy plummeted to levels noted above.

With the advent of modern medical practice, and especially the knowledge gained following the advance of vivisection during and following the Renaissance, medicine was on a non-linear uphill trajectory.

As usual, it’s time to get back to the point-at-hand. Most Americans, and here I will concentrate on Americans, because the fight is front-and-center in the US, are both satisfied and dissatisfied with their healthcare coverage. Those with resources are quite content, and are likely to live well into their 80’s, if not longer. In fact, centenarians are the fastest growing demographic group in most advanced countries, including the US.

Again, if a family has adequate resources, either of its own or through employer assisted health insurance, then their children are also covered, at least through college (according to most plans).

This “privileged” group, and I say privileged with care since this group doesn’t likely view itself as privileged because the cost of healthcare and/or insurance is rising faster than almost any other family cost. When these people hear that anyone is going to tamper with the system, given past experience either with private sector deregulation or new government programs, history has taught them that somehow things don’t turn out as planned. Unintended consequences usually result. As a consequence, we have a cynical population, both regarding companies and government.

As the old Irish expression puts so succinctly, “The Devil you know is better than the Devil you don’t.” This group is fearful of any change.

If, however, you are among the nearly 50 million people in the US (give or take a million or so), you probably have neither the means to pay for either healthcare on your own, or insurance. What is particularly vexing about the US problem is that this group is not usually the poorest of the poor, since they are often covered by various existing government programs like Medicaid. The morally and politically difficult problem centers around the fact that working class families form a major portion of this “medically deprived” group. Somehow, this wasn’t part of the American dream. Almost everyone knows someone who is in this category, either because their salaries are too low, they lost their employer healthcare insurance through unemployment, or because of their legal status in the country. The reasons why new people are in this category grow by the day. We are even approaching a point where even those covered by plans find that the plans are getting so costly or difficult to work with that they are worried about the affordability of existing coverage, Medicare being a good example.

The uncovered group and those who are stretched to the limit by rapidly rising medical costs are less likely to participate in the political process with the exception being seniors suffering from Medicare cutbacks.

Why is this a problem? It’s a problem because the medical costs can actually bankrupt even advanced industrial governments. The economic reason is that there is no upward limit on demand facing an inelastic supply curve.

Does this mean we do nothing? My answer is an emphatic, “No!” We have no choice but to reform the system to control costs and improve coverage, yet not bankrupt the government. Will the present reforms being discussed solve the problem? I guarantee that none of them will. Yet we must move forward through compromise. Do I have a preference? Yes, but that’s dependent upon my own circumstances. What is more important is for the leaders of Congress and the Administration to come together and pass something, even if it isn’t perfect. We are going to be dealing with this issue for decades to come. It is not going to be solved overnight. New reforms will emerge.

If veto threats cause nothing to be passed, then Congressional leaders might need use other parliamentary means to pass something. We haven’t had veto-proof majorities for years, yet laws have been regularly passed. Common sense, not ideology must prevail, and this goes for conservative and liberals. Politics is the art of compromise. Ronald Reagan produced a revolution with a Congress controlled by the opposition!

I repeat from my last blog, if the Massachusetts election tells us anything, it’s time for Government to do something. Contemplating one’s navel is not helpful, nor is disrespect for the other side’s heartfelt views. Nonetheless, legislative majority rule is still the law of the land, as long as the Constitutional rights of the minority are respected. The worst thing about the Carter presidency was that nothing ever seemed to get done. Government appeared at the mercy of events, not in control of them. As a president, I believe Carter was a failure in most areas, although I have to admit in his post-presidential years he has proven to be among the most articulate and effective of out-of-office presidents. I have no idea what the Obama legacy will be like. Will he look like another Carter or another Reagan?

Tags: Carter, Compromise, Congress, Health Insurance, Healthcare, Life Expectancy, Obama, Reagan, the Administration

This is obviously one of the main topics of the day given the nature of the economy, especially given the disagreement over bank lending and compensation; are lending/compensation becoming too aggressive or too small. One thing I can assure you of is that the Fed needs to keep money flowing until unemployment starts falling fast. Otherwise, we could wind up with a rather slow and anemic recovery.

Given that I firmly believe, despite some pronouncements which might come out of Federal Reserve officials, the money will flow. The real question now is fiscal policy. What if any additional stimulus is needed by the Treasury?

We know people must be upset, but no one is sure why. For me, the best evidence is when Massachusetts can elect a new opposition senator who posed nude for a magazine. In the 1960’s the country was aghast when LBJ simply showed his recent gall bladder operation scar, never mind, everything else he had to offer.

They are possibly angry because nothing seems to be happening outside the Federal Reserve. Health care, which is the central long-term problem for the country, is never going to be reformed at once to everyone’s satisfaction. Otherwise, the nation would either be broke or totally sick. That’s why I called for anything to be passed that moved us in the direction of reform, and reduced direct health care costs to firms.

Most firms outside the US don’t provide company health insurance, or if they do, it is just supplemental to government coverage. Therefore, how can one compare US firm profitability or efficiency with foreign firms when they have fewer fixed costs? US company pension costs have and are being dealt with simply because the problem is not immediate and most workers have been so confused by the move from defined benefits to defined contributions, that most but not all companies were able to level the international playing field in that area with much less difficulty. There are important exceptions, and we know who they are: traditional manufacturers, especially the auto sector much of which had to go through bankruptcy protection because of healthcare and retiree benefits.

Back to the point at hand, what needs to be done, and done soon?

I have probably already bored you enough; I don’t want to be another Lou Dobbs.

Tags: bridges, foreign exchange rates, Government stimulus, highways, housing, immigration, infrastructure, ports, railways, Social Security, supertax, Tax Credits

Some friends already know that I was fortunate to get degrees in both economics and international affairs. For my international affairs education I was lucky to get into Georgetown’s School of Foreign Service. It was the first university program dedicated to such a degree. It has been copied successfully by a number of other universities since that time. I was also fortunate enough to have studied with some of the greatest minds in the field. Besides Prof. Mikus, a true friend and mentor, one of my favorite professors was Jeanne Kirkpatrick, who was not only a brilliant professor, but one of the best story/joke tellers I have ever met. It was certainly no surprise to me when she was named U.S. Ambassador to the UN.

I have traveled a bit over the decades. So far I have lived in four countries, been to over 100 countries, traveled to Europe at least 250-300 times, with trips to Asia and Latin America probably about 100+ times each. My knowledge of Africa is more limited, having been there probably only 10-20 times.

When I first started traveling, international travel was quite difficult and cumbersome. You just didn’t make hotel reservations on the internet. It often took overnight telexes (young people probably don’t even know what telexes are.) To set up appointments took weeks of preparation. International newspapers were usually only available in most places about one week after the date of publication. The first thing you did on arrival was to reconfirm your departing flight; many times it had to be done in person. To keep in touch with the outside world, unless you were fluent in the local language, you needed to carry a short-wave radio with you. The best source of English language news was BBC international. Then there was Voice of America. When you were in a Godforsaken place, then you might have to turn to Radio Moscow’s English language service, which was available everywhere, but pretty useless.

When I first started traveling, the world seemed a strange and exotic place. In recent decades, the world looks like New Jersey writ large – I can say that because I was born and now live in New Jersey.

I can still vividly remember the first time I saw CNN on cable TV abroad – it was in Algiers of all places. I was in awe.

Why am I writing about diplomacy and not sticking to my normal economic discussions? The reason is simple and complicated at the same time. From my personal and anecdotal experience, people around the world are basically the same. Only the details are different. That has pluses and minuses in a shrinking world. Humans are not always nice to each other – that’s putting it mildly.

Recently, President Obama was ridiculed for not meeting with some world leaders. Snubbed was the usual word used by the talking heads. However, I have a very different perspective. If a CEO of a company is supposed to meet with people, and then glitches occur, one doesn’t blame the CEO, one blames his/her handlers. People responsible for his scheduling should look for other work. That is minor however.

What is really significant is that the Administration should keep any “snubbing” that occurred in perspective? It should avoid over-reacting. Although I never met him because he died before I was born, I was told on many occasions that my paternal grandfather often said that the “stupidest” Italian peasant was smarter than the best American diplomats (I/he am/was of Italian descent, so that’s why an Italian peasant was chosen as an example). I guess my grandfather may have been on to something because the US has worked hard on producing better diplomats.

What is diplomacy? It is the use of interpersonal relationships to get things done that benefit both sides. Peasants are usually good diplomats because they have to stay friendly with their overseers who dislike or look down on them. What may come as a surprise to many Americans and some Europeans, is that other cultures often look down on their cultures. How can that be? I am not an anthropologist, so I can only give my personal experience.

I remember sitting next to one of China’s most senior leaders in Beijing at a dinner at the private compound for foreigners. The question turned to ethnicity. He asked me my ethnic background. I said my family left Italy over a century ago. What was his reaction? “Ah, you come from an old culture like ours, not like the other barbarians here,” waving at my colleagues far more senior than I was. His view was that ethnic history mattered.

I have had other bizarre experiences. In Argentina, several decades ago, I met with a senior central bank leader. At the time I worked for a small North Carolina bank, which eventually grew to become the Bank of America. The central banker saw my last name. He leaned over across the myriad of telephones on his desk – phones rarely worked in Argentina at the time. He said in a whisper, as if someone might hear, “You must answer me one question. What is it like to live with Anglo-Saxons?” I said, I had never given it any thought. He was a bit disappointed.

I could go on and on about what we would call racist comments I have heard from leaders around the world. What do we need to learn from this? Everyone carries prejudices of some kind. My advice is simply to recognize it, but make sure it doesn’t cloud our relations with these people. It is usually out of a lack of familiarity or personal knowledge. All diplomacy, especially international financial diplomacy must be run from a realistic perspective. Ideology must be kept behind the scenes. In recent years, certain neo-con ideologists tried to impose their view on the US and others. It proved a dismal failure. I would hope that the recent European summit, and the supposed “snubs” against the US President do not cloud US views of other world leaders. These leaders suffer the same problems our leaders do, only the details are different. Their histories, prejudices and their views of reality differ. However, in the end, most, excluding possible megalomaniacs, usually have the best interests of their people in mind. Don’t be fooled by pleasantries, but don’t over-react to slights. As I said earlier, we are basically all the same.

Tags: Argentina, China, economic diplomacy, economic realism., neo-cons, Obama, prejudice, realism

There has been a lot of talk recently about Brazil, Russia, India and China (BRIC for short) and the G-7. Some argue BRIC will overtake the G-7 by the end of the next decade. There is a reason I added an “et al” to the title. What we are really talking about is if the advanced industrial countries as a whole will be overtaken by the emerging market countries.

I don’t think so. We have seen unprecedented growth around the world in the last decade because of an unprecedented confluence of events. The advanced industrial countries, after the collapse of communism in the late 1980’s-to-early 1990’s set in motion an ability for these countries to redirect their resources from the military to other more productive uses. It took a while for the full reality to set in, but once it did, worldwide economic policy changes occurred. On top of this, the US and other English-speaking countries, among others, went on a consumption spree caused by a multitude of forces. One of the most important was a loose monetary policy in the US in response to what seemed liked an endless stream of mini-crises from Mexico, to East Asia, to Russia, to 9/11, etc. In most cases this wouldn’t have mattered, but because the US dollar has been and will likely continue to be the world’s principal currency for years to come, it set in motion a worldwide growth spurt, which triggered a worldwide economic euphoria.

I remember being at a Council on Foreign Relations breakfast a number of years ago, and one of the Financial Times’s most senior commentators said we all know it will end, but we don’t see how or why. It was an interesting comment but not helpful, because we could say that about almost anything. I only put this comment in, not to denigrate the FT, but rather to point out as you have heard me say before, if you see a crisis coming and know what it is, you no longer have a crisis, but rather a problem.

Then there are others who are always predicting doom and gloom. If you do that enough, once in a while, you will be right. Another not so helpful point.

Back to BRIC et al — we are not likely to see a set of circumstances similar to what we saw in the last decade, and not even in the last two years. For very good reason, the US and a number of other advanced industrial countries have adopted the loosest monetary and fiscal policies since World War II. As with all good things, this will eventually end. It won’t end soon, but it will end by mid-decade at the latest.

Once this happens, the emerging market world will once again be at the same mercies it has been at since the 19th century, and that is it will depend on economic policies made among the great powers.

One might say that China is on its way to becoming a superpower. It might, but it’s biggest risk remains how does it successfully wean itself off its export led growth without causing political turmoil at home. If it can do that, and that is a big “IF,” it may prove an exception. India just needs a few bad monsoons for disaster to strike or some agricultural blight; Brazil, a few leaders similar to the past; and, Russia is nothing more than a commodity-based exporter. Just ask the Texans what that feels like over time.

Rest assured, the most likely scenario is that the world will change marginally, and that some emerging market countries will eventually emerge, but definitely not as a group.

One final point is that how does one measure success? GDP growth, a successful democracy, a rising stock market in local currency, a successful stock market measured using some international numeraire? The list of possibilities is quite long. In the end, the rich countries will remain rich.

Tags: Brazil, China, crisis, economic growth, Euphoria, G-7, India, Key Words: BRIC, Russia, US