Dodd goes back and forth

Our chattering and governing classes are working themselves into a mutual lather over a matter that is at best of tangential significance to the present world financial crisis: the $165 million in bonuses that AIG appears to owe to some of its employees and former employees.

On Monday, Senator Grassley suggested the US import the Japanese tradition of hari-kari in reaction to this outrage. Most of the press reported on this remark in a jolly spirit -- oh what a state of jesters is Iowa!

It is in this climate that Senator Christopher Dodd, chairman of the Banking Committee, has just executed a rapid flip-flop on the question of how language that seems rather receptive toward the payment of those bonuses found its way into the stimulus legislation enacted last month.

Here's the key language: "The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary."

Even without knowing what clause (i) says, you can see that this is a grandfather clause, protecting certain bonus payments from a prohibition that might otherwise have applied.

But the Dodd flip-flop is the neat thing here. He has gone from (Tuesday) adamantly rejecting the notion that he could have drafted such a clause to an explanation that he had to do it because otherwise the section limiting bonuses would have been "lost entirely" and an apology (Wednesday) over "if we had some confusion">.

In that CNN clip to which I've linked you, Wolf has some nice language at about 5:00 and shortly thereafter about the above quoted clause, which he calls a "mysterious loophole that was added at the last minute."

Dodd keeps it mysterious, containing that administration officials asked him to make the modifications, and refusing to name them, "someone at the staff level."

Great material. Leno and Letterman's writers are working on this stuff, I'm sure. But tangential to the real problems. And $165 million? To you and I, reader, that is real money. But on the scale of TARP or of the stimulus bill? Peanuts.

Questions for Senator Dodd

I recently wrote a piece for an eMag my employer publishes in which I discussed China's investments in the US and related matters. Two of the experts I interviewed for this story made unflattering references to a bill on "currency manipulation" now before the US Senate, a bill sponsored by Senator Christopher Dodd, of Massachusetts.

Naturally, I offered the Senator, through his office, every opportunity to respond to these comments. In fact, I formulated the gist of them into five specific questions.

The replies I got from his staff members were unfailingly polite and unfailingly unproductive of any reply, either in time for inclusion in the eMag piece or subsequently.

Okay, the Senator's a busy guy. He's busy managing a much-ignored Presidential candidacy and all that. Still, I'm going to post the questions here, because its as good a form of typing practice as any.

1. Is currency manipulation (or misalignment) really a large factor in the US/China trade imbalance? Wouldn't there be a huge imbalance in wage levels at any plausible yuan/dollar rate of exchange? And if China disappeared from the picture, wouldn't a lot of the manufacturing/outsourcing simply move to Vietnam, Indonesia, or elsehwhere -- again for wage rather than for currency-specific reasons?


2. One view I encountered, in discussing the matter with experts, is that the US has made a virtue of necessity by making a diplomatic push for the free float of every currency against every other currency. From the Bretton Woods period until the Nixon administration, fixed rates of exchange were US policy, after all. Does your bill assume that everything must float freely against everything else? If so, why? Given the volatility such a situation allows (as exhibited starkly in east Asia just ten years ago) aren't there good reasons why a particular sovereign nation might want to avoid convertibility altogether?


3. I understand that the Financial Times may soon run a letter-to-the-editor from several economists -- including, for example, T.J. Marta, fixed income analyst, Royal Bank of Canada -- who maintain that Senator Dodd and the other sponsors of the bill "audaciously pretend to have a certainty over something that's fundamentally uncertain." The bill, the letter says, is plainly directed at China, yet there is no certainty that the yuan and dollar are badly misaligned, intentionally or otherwise. Would you like to respond to that general critique?


4. Although there seems to be a majority view, among observers of the question, to the effect that if the yuan were freely convertible and allowed to float, it would strengthen vis-a-vis the US dollar, there is also a contrarian view expressed by some experts, that the yuan would fall. This is (the contrarian theory goes) in part because China's elites would likely prefer to keep their own money offshore, and in other nation's denominations, and in part because foreign corporations doing business in China would likely find it easier to repatriate their profits by holding them in dollars, or something other than the yuan. If the yuan is in fact over-valued already relative to the dollar, isn't any alleged manipulation working in favor of the US?


5. Do you see the investment this year by a China state agency of $3 billion in an American investment fund management firm as a good sign of mutual interdependence, of the repatriation of dollars, etc.? Or is it ominous, as many thought when China considered the purchase of Unocal? Are the Blackstone/Unocal cases markedly different?

Currency and Chrysler

The senior of my two home state Senators, Christopher Dodd, has a bill pending before the U.S. Senate that would in effect declare the People's Republic of China guilty of "currency manipulation," and would demand that it be pressured into allowing convertibility and free float.

http://dodd.senate.gov/index.php?q=node/3690

The idea is this: if the yuan were made convertible and allowed to float freely, traders and investors around the world would want to hold some of their assets in yuan, or yuan-denominated assets, in preference to, say, U.S. dollars. They'd convert, the value of the yuan vis-a-vis the dollar would increase, and that would reduce the corporate advantage of buying Chinese products or raw materials or outsourcing the manufacturing work there. This (Dodd's view implies) would assist U.S. manufacturers and employees.

The new Chrysler/Chery deal is likely to add appeal to this argument. Just as Chrysler itself is "coming home" in a sense, rescued from those darned Germans, it's outsourcing assemblage to China. Like the kid who comes home from college just long enough to drop off his laundry and then is out gallivanting.

I was speaking to an authority on China's economy earlier this week. He said, "The U.S. makes a good many products, but what we make best is a virtue out of necessity." In the Bretton Woods period, 1944 - 1970, fixed exchange rates were the international norm. The value of the US dollar was pegged to gold and the value of other currencies were pegged to the dollar. That situation wasn't sustainable, and Richard Nixon famously "closed the gold window." The move was a raction to a monetary crisis, not the quasi-religious conversion to the ideal of freely-floating currencies!

Yet in the decades since, the necessity (as it was then) of letting the dollar float has become an ideal, and a central pillar of US foreign/economic policy. Everybody's currency should float freely against everybody else's! The notion that China should adhere to something analogous to the old Bretton Woods system, insofar as it can unilaterally instate it, has become a blasphemy, a manipulation.

There is also something delicious about the fact that it's Dodd, given his reputation as one of the last of the unapologetic liberals, who should pick up a Nixonian banner in this way.