Unintended Consequences

A working paper produced by an economist within the IMF recently warned about possible unintended consequences of regulations "aimed at financial stability" that focus on "building equity and reducing leverage at large banks/dealers."

Here is an abstract to the work, by Manmohan Singh.

As you'll see if you visit that page, those of us who allude to the existence of this paper are sternly warned that it "should not be reported as representing the views of the IMF." It represents the views of Mr Singh alone.

Coincidentally, Mr Singh has the same name, first and last, as the current prime minister of India. This has fueled conspiracy theories about the prime minister as a "world bank/IMF agent".

The name, though, is the only connection. The IMF economist didn't leave that employment to become PM of India!  He is still there, and this paper bears a quite recent release date as if to illustrate the point.

At any rate, the paper appears to me to be sound work and I hope it draws a wide audience.

When Markets Collide

When Markets Collide is the title of a quite well-written book by Mohamed el-Erian, an economist who worked at the International Monetary Fund for 15 years, and has since worked at Salomon Smith Barney, the Harvard Management Company, and PIMCO.

(Gee, he can't keep a job, can he?)

I read large chunks of it during my train rides Wednesday, from Stratford CT to Manhattan in the morning and back the other way in the evening.

Love that spinning top cover art. The "equator" of the globe presented as a top is considerably to the north of the actual equator, though. the pseudo-equator seems to pass through the Yucatan peninsula.

More seriously: I don't agree with the author's Keynesianism in macro-economics but ... disagreement is why they run the horse races.


I appreciated his summary of theories about the "market for lemons."

Used cars are a product with non-obvious defects. Consumers are aware of this, of the danger that they'll end up with a lemon, but they sometimes do have to enter this market anyway. With what result?

With the result, as el-Erian tells it, that perfectly fine non-lemons end up selling for a price less than they would were accurate information more generally available and appreciated. The fear of a lemon forces a discount on the whole second-hand jalopy markets, and some people get non-lemons cheap.

I suppose something like that was the theory behind early versions of the TARP [Troubled Asset Relief Program]. The troubled assets on banks' books include, to simplify considerably, the rights to the flow of money from mortgaged homeowners. Some of these homeowners are "lemons." They'll likely default. Others won't default, though, and the troubled banks might under ideal circumstances sell the rights to the good mortgages for significant chunks of needed cash. But as with cars, the taste of the lemons infects the non-lemons.

But this still leaves us with the age-old question durected by citizens to those who would govern them: "Why do you think you're smarter than us?"

Why are the administrators of the TARP presumed to be better at deciding what is or isn't a lemon than the private sector?

I'll say no more, but parts of this book do help frame the discussion nicely.

Wolfowitz scandal: Who Should Care?

I'm just trying to think my way into this one. Just getting my feet wet.

As regular readers know, I don't believe in sovereignty. Sometimes when I say so, people reply, "ah, you must be pushing world government, then." Or harsher words with that implication.

Why do they say that? Chiefly because the word "sovereignty" is nowadays often used to imply "the sovereignty of nations." The antithesis of sovereignty, then, is international organization and law.

But no, I reply when the question arises. I reject that antithesis. International organizations come about through agreements among and to serve the ends of the national governments involved. The same issues of command-and-control or hierarchy, the issues of unearned privilege, are at stake in the one case as in the other. We as humans have to think our way toward better ways of relating to one another than those implied in the myth of sovereignty, and this requires a rejection both of nationalism and of internationalism.

The Bretton Woods organizations in particular (the IMF and the World Bank) have outlived any utility they may once have had by anybody's measure, and they should close up shop.

It is with these biases that I look rather gingerly at the scandal that seems for the moment to have immobilized one of those institutions, the World Bank. Its president, Paul Wolfowitz, has come under fire for showing favoritism to a particular staffer, Shaha Raza, allegedly due to their romantic relationship.
As usual, the basics are at wikipedia, http://en.wikipedia.org/wiki/Shaha_Ali_Riza

There is no principled difference between romantic cronyism and the more traditional all-guys-who are-golfing-buddies sort of cronyism. In either case, such favoritism is inevitably because human beings are hard-wired for dealing with each other, with a small group of acquaintances, rather than with masses and big abstractions. This means that organizations devoted to serving the masses and big abstractions, but nonetheless composed entirely of human beings, rather than robots, are in a biologically determined bind from the start.

What this leads to is an endless trench warfare in which factions profess enduring commitment to the masses and the big abstractions, while using the other factions' scandals as ammunition to advance their own aims. I haven't quite psyched out the hows of this in the Wolfowitz/Raza matter, but I'm pretty sure (a priori, if you will) that this is what is happening.

Which is to say, again, that we need to move toward less absurd and inherently hypocritical ways of dealing with each other than the ways that the latest contre temps would seem to embody.

Here, for those of you who may enjoy bureaucratese, is the URL for an official inquiry. http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21297732~pagePK:64257043~piPK:437376~theSitePK:4607,00.html