Quote for the day:

The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history. But now that the man in the street has become aware of what is happening, he, not knowing the why and wherefore, is as full to-day of what may prove excessive fears as, previously, when the trouble was first coming on, he was lacking in what would have been a reasonable anxiety. He begins to doubt the future. Is he now awakening from a pleasant dream to face the darkness of facts? Or dropping off into a nightmare which will pass away?

He need not be doubtful. The other was not a dream. This is a nightmare, which will pass away with the morning. For the resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life—high, I mean, compared with, say, twenty years ago—and will soon learn to afford a standard higher still. We were not previously deceived. But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time.

John Maynard Keynes – The Great Slump of 1930.

A depressing piece in yesterday’s El País reports that Raymond McDaniel, CEO of the disgraced ratings agency Moody’s, who presided over the company’s devastating involvement in the financial crisis, took home $9.2 million in 2010, a 69% rise on the previous year. The justification for this? Apparently Mr McDaniel has “helped restore confidence in Moody’s ratings by improving knowledge of the role and function of ratings.”

The restoration of confidence was undeniably needed. After all, Mr McDaniels’s company it was that gave triple-A ratings to thousands of the sub-prime mortgage loans whose deterioration triggered the global recession. Triple-A, it should be noted, means a bond has less than a 1 in 10,000 chance of defaulting – in Moody’s’ estimation, as Michael Lewis points out in The Big Short, the sub-prime loans were as safe as US Treasury bonds (83 per cent of the triple-A ratings his firm gave to mortgage bonds in 2006 were subsequently degraded). McDaniels’s company, too, was still awarding triple-A ratings to Bear Stearns, Lehman Brothers and AIG shortly before – in part because they believed the ratings and invested heavily in sub-prime bonds – they all went bust and almost brought the whole financial system down with them. Mr McDaniels, as Lewis reports, told an investor in 2007: ‘I truly believe our ratings will be accurate.’

A restoration of confidence is also needed in light of the congressional Financial Crisis Inquiry Commission’s damning verdict on the ratings industry, published in January. The rating agencies, the Commission concluded, ‘abysmally failed in their central mission to provide quality ratings on securities for the benefit of investors…The rating agencies placed market share and profit considerations above the quality and integrity of their ratings.’ The Commission selected Moody’s as its case study for bad practice in the industry.

The sheer ineptness of the companies is documented in embarrassing detail in The Big Short. In one of many examples of their incompetence, Lewis shows how they rated floating-rate mortgages, whereby borrowers would spend two years on a low, “teaser” rate before the rate rose sharply for the rest of the term, more highly than steadier fixed-rate loans. The ratings remained the same even when the interest payable on the loans soared: ‘The rating agencies simply assumed that the borrower would be just as likely to make his payments when the interest rate on the loan was 12 per cent as when it was 8 per cent.’

That floating-rate loans received higher ratings meant that more people were able to take them out – the proportion of US sub-prime mortgages with floating rates rose from 40 to 80 per cent in the five years to 2007. Buoyed by the lively trade in mortgage securities, lenders persuaded tens of thousands of people who could not afford it to saddle themselves with these loans. As Lewis notes, ‘sub-prime borrowers tended to be one broken refrigerator away from default – few, if any, should be running the risk of their interest rate spiking up,’ but Moody’s couldn’t get the loan ratings out of the door quickly enough: the agency went from spending six weeks assessing the credit-rating of a single security to issuing thirty new triple-A ratings on mortgage bonds every day (the Commission called the company a “Triple-A factory”).

But it was not just stupidity that threatened the system; it was also a complete – and sometimes suspicious – lack of transparency. Another passage from The Big Short relates what happened when two investors, Danny and Vinny, went to meet a woman from Moody’s to ask how she went about rating sub-prime bonds:

The woman from Moody’s was surprisingly frank. She told [the investors] that even though she was responsible for evaluating subprime mortgage bonds, she wasn’t allowed by her bosses simply to downgrade the ones she thought deserved to be downgraded. She submitted a list of the bonds she wished to downgrade to her superiors and received back a list of what she was permitted to downgrade. “She said she’d submit a list of a hundred bonds and get back a list with twenty-five bonds on it, with no explanation of why,” said Danny.

…

“Here’s what I don’t understand,” said Vinny, hand on chin. “You have two bonds that seem identical. How is one of them Triple-A and the other one not?”

“I’m not the one who makes those decisions,” said the woman from Moody’s, but she was clearly uneasy.

“Here’s another thing I don’t understand,” said Vinny. “How could you rate any portion of a bond made up exclusively of subprime mortgages Triple-A?”

“That’s a very good question.”

It’s a question the ratings agencies prefer to duck. Ray McDaniel, of course, is not alone in benefiting from the mess he helped cause – most of the heads of the investment banks that conned or bullied the agencies into upgrading sub-prime ratings (Moody’s complied not just because it didn’t understand the complex bond packages but because of the threat that the banks would go to its rival, S&P, if the rating wasn’t high enough to sell the securities on to pension funds and insurance firms), or that bet on the dodgy bonds themselves, are still in their jobs, and still raking in obscene bonuses.

Those banks are again making profits, thanks to being bailed out by the US taxpayers they had already shafted once. Moody’s net annual profit, on the other hand – despite the alleged restoration of confidence in the company – was 10% lower in 2010 than it was in 2005 when McDaniels took the helm. During that time, according to El País, the salaries of top staff have doubled. Why there hasn’t been a revolt against these people (not least from the shareholders who are so obviously being taken for a ride) is a mystery, but as with the Middle Eastern dictators they resemble, who are finally being punished after years of pillaging their countries, the day of judgement is surely only deferred.

Two years ago, Georgian forces shelled the capital of the breakaway region of South Ossetia hitting the base of Russian peacekeepers as well as civilian housing. Russia responded immediately with a massive ground and air assault and in five days inflicted a heavy defeat on its tiny neighbour, occupying a band of Georgian territory into the bargain.

The conflict had several immediate results.

Already fraught relations between Moscow and Tbilisi plunged to new depths and diplomatic relations were severed.

Russia and three other countries recognised the independence of the breakaway Georgian regions of South Ossetia and Abkhazia.

And relations between Russia and the West – the US and the EU – deteriorated to their worst level since the collapse of the USSR – there was even talk of a new Cold War from western politicians.

The Cold War analogies led some commentators to argue Russian foreign policy had taken a decisive anti-western turn and things could and/or should never be the same again

Two years later, the one thing that seems unlikely to ever be the same again is the shape and size of Georgia. If recognition from Russia was not enough, the recent International Court of Justice opinion that Kosovo’s unilateral declaration of independence was not against international law, makes it even less probable Tibilsi could regain control of its lost regions. (more…)

- This week’s Economist sees Lexington bemoan those advancing the discourse of American exceptionalism, suggesting that “[t]he last thing the country needs is to be distracted from its practical problems by the quest for an elusive greatness”. Elsewhere, The Spectator’s Coffee House blog remembers Jimmy Carter’s fabled 1979 speech in which he spoke of a US “crisis of confidence”.

Delivering the annual lecture at The Ditchley Foundation last week, Strobe Talbott suggested that the “promise” of the Obama Presidency – both in the domestic and the international arenas – is now “at risk”. “[W]hatever fate is in store for the current president of the United States”, Talbott argued,

“one thing is for sure.  His success in tackling the major issues of our time will depend on his establishing a degree of common purpose with his partners in national governance at the other end of Pennsylvania Avenue and with his partners in global governance around the world.”

- Elsewhere, over at The Cable, Josh Rogin reports on the slow progress of reviews into US development policy – the Presidential Study Directive on Global Development and the Quadrennial Diplomacy and Development Review.  The Economist, meanwhile, highlights Brazil’s growing identity as a significant aid donor.

- Finally, the head of the UK Financial Services Authority, Adair Turner, cautions against the default acceptance of prevailing economic ideology, suggesting that policymakers would do well to draw on a diversity of economic opinion. Joseph Stiglitz, meanwhile, explores the Keynesian prescription for the global economy.

- Writing in the The New York Review of Books, Paul Krugman and Robin Wells highlight the importance of historical perspective in understanding the financial crisis. Experience, they suggest, shows that a failure to implement significant post-crisis reforms leads to “a resurgence of financial folly, which always flourishes given a chance.”

Michael Pomerleano explains the need for a new institution with the necessary legitimacy to provide global financial stability, arguing that “[n]ational public policies can no longer be independent of global collective-action problems”. Amartya Sen, meanwhile, explores the continuing significance of the 18^th Century ideas of Adam Smith to contemporary global economic troubles.

- Elsewhere, in an interview with The Christian Science Monitor, Henry Kissinger offers his views on Obama’s recent nuclear initiatives, US-China relations, and coherence among the BRICs. Over at World Politics Review, Nikolas Gvosdev reports on the lack of support forthcoming among BRIC countries for strict sanctions on Iran and highlights some of the other options open to the US administration in dealing with Tehran. Jonathan Holslag, meanwhile, assesses China’s recent diplomatic “charm offensive”, concluding that this will yield little over the long-term if words aren’t backed up by meaningful action.

- Finally, two television debates and nearly three weeks into the British general election campaign, David Marquand explains why this is “a moment for careful historical reconnaissance”. Assessing the rise of Nick Clegg and the Liberal Democrats, he explores comparisons with the three-party politics of Britain in the early 1920s. The FT’s Philip Stephens, meanwhile, assesses the impact of the debates and the implications of a hung parliament for the British electoral system.

It’s commonplace to describe the financial crisis as a once-in-a-century event, but I question whether that is the case. Perhaps we’re not in the midst of a short-lived financial shock, but a long crisis that stretches back into the 1990s.

Here’s Paul Blustein on Alan Greenspan:

The Fed chief told the G-7 that in almost fifty years of watching the U.S. economy, he had never witnessed anything like the drying up of markets in the previous days and weeks.

Greenspan wasn’t speaking in Autumn 2008 when Lehman’s collapsed, however, but ten years’ earlier in the wake of the spectacular blow-up of Long-Term Capital Management, which lost $4.5 billion almost overnight in what the fund’s principals post-rationalised as a 100-year flood.

Long-Term (with its superbly hubristic name) was brought low by derivatives, just as Lehman’s would be a decade later.

(Robert Rubin, Clinton’s Treasury Secretary, was one of those left picking up the pieces – part of ‘the committee to save the world’, with Greenspan and Larry Summers. Rubin went on to preside over Citigroup as it needed a succession of massively expensive bailouts, when its derivatives tanked in the subprime crisis.)

The proximate cause of Long-Term’s failure was Russia’s Rouble crisis, when the country defaulted on its debt after the IMF refused to mount a second bailout.

The Russian crisis itself came in the midst of a long series of dramatic economic failures that hits the world between 1997 and 1999, mostly in East Asia (Thailand, South Korea, Indonesia etc), but which also battered Brazil and would devastate Argentina in 2002. Blustein again:

Time and again, panics in financial markets proved impervious to the ministrations of the people responsible for global economic policymaking.

IMF bailouts fell flat in one crisis-stricken country after another, with the announcements of enormous international loan packages followed by crashes in currencies and sever economic setbacks that the rescues were supposed to avert.

(more…)

Michael Lewis, in his highly entertaining new book, The Big Short, has a pop at ratings agencies (amongst a bazillion other targets). All the big Wall Street firms, he writes, were highly effective at manipulating Moody’s and Standard and Poor’s:

Everyone on Wall Street knew that the people who ran the models were ripe for exploitation. ‘Guys who can’t get a job on Wall Street get a job at Moody’s,’ as one Goldman Sachs trader-turned-hedge fund manager put it.

Inside the rating agency there was another hierarchy, even less flattering to the subprime mortgage bond raters. ‘At the rating agencies the corporate credit people at the least bad,’ says a quant who engineered mortgage bonds for Morgan Stanley. “Next are the prime mortgage people. Then you have the asset-backed people [dealing with sub-prime mortgages, for the most part], who are basically like brain dead.

Wall Street bond trading desks, staffed by people making seven figures a year, set out to coax from the brain-dead guys making high five figures the highest possible rating for the worst possible loans. They performed the task with Ivy League thoroughness and efficiency.

Despite their pivotal and disastrous role in the financial crisis, business for the ratings agencies is booming. If anything, their influence, meanwhile, has grown, especially over governments, as they threaten countries with a sovereign debt downgrade.

I was especially intrigued by media coverage for a recent report from Moody’s, which claimed that the US, UK, Germany, France and Spain are all at risk of social unrest as governments struggle to get their finances under control. According to Moody’s Chief International Economic and Financial Policy Analyst, Pierre Cailleteau:

Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.

We are not talking about revolution, but the severity of the crisis will force governments to make painful choices that expose weaknesses in society.

Strong stuff. And interesting too. One of the key questions for the next few years is whether the fallout from the financial crisis will be toxic enough to damage, or even break, some societies.

So I thought I’d read Mr Cailleteau’s report, rather than just relying on the Telegraph’s summary. I wondered how strong his analysis was. Was he a smart guy or one of those dubbed in Lewis’s book as the ‘brain dead’?

But then I hit the buffers. Go to Moody’s website and there’s no content at all available unless you register (which includes pretending to read a 6103 word user agreement – the site knows if you haven’t at least scrolled through it).

Once I’d gone through all this rigmarole and logged in, I was told that access to Cailleteau’s report “is not part of your current service”. (I was allowed to read the report’s press release. Big deal. I struggle to think of another organisation that requires registration for that.) Nor could I find a biography for Cailleteau. Only one of his reports was freely available to subscribers (a research note on methodologies). And even the link to pricing information for his ‘social unrest’ report was not working.

So I am left none the wiser about Cailleteau’s argument or credentials. All I do know is that he dismissed talk of a systemic global banking crisis in August 2007, a year before [corrected] Lehman’s nearly brought down the world’s economy.

Of course, anyone can make a mistake (though that one’s a doozy) – but surely it is no longer acceptable for the ratings agencies to hype their work to the press and lord it over the world’s economies, without letting us see the evidence on which they base their diagnosis and prescriptions.

More transparency please. Either on a voluntary basis. Or enforced through regulation.

- The FT has news that London’s position as the dominant global financial hub is slipping, with the UK capital now tied with New York for top spot in the latest rankings. Elsewhere Barry Eichengreen and Kevin H. O’Rourke examine the latest economic data comparing the present crisis with the Great Depression across a range of indicators (including global output, world trade, and equity markets). Robert Shiller, meanwhile, explains the difficulties of using past experience to predict the course of the current crisis.

- European Geostrategy suggests that EU security and defence policy is like a jazz band and explains why a White Paper providing a “grand strategy” is needed. EUobserver, meanwhile, has news on the emerging shape of the European diplomatic service – its structure and staffing – as member states gear up to secure the important EEAS secretary general post.

- Elsewhere, Constanze Stelzenmüller takes an in-depth look at the travails of German security policy, offering insights into how it might evolve. Highlighting the lack of strategy, she argues that “fundamental decisions regarding German security policy have been repeatedly forced into the Procrustean bed of moral necessity, domestic imperatives, or the demands of external alliances.”

- Finally, over at openDemocracy, Andy Yee explores the “hedgehog’s dilemma” between China and the West, highlighting a gradual acceptance of different core values. TIME magazine, meanwhile, assesses the slow progress toward democracy in Hong Kong and the possible wider implications from Beijing’s perspective.

- With the US and Russia reportedly close to agreeing a successor START deal, Gareth Evans and Yoriko Kawaguchi chart the next steps for a secure nuclear future. Details of their recently published report on nuclear non-proliferation and disarmament can be found here. Henry Kissinger, meanwhile highlights the importance of kick-starting progress on six-party talks with North Korea.

- Elsewhere, Nouriel Roubini reflects on “gold bubbles” and the need to beware the calls of “gold bugs”, given that the “recent rise in gold prices is only partially justified by fundamentals”. The FT’s Alphaville blog offers an alternate view.

- Catherine Ashton, the EU’s High Representative for Foreign Affairs and Security Policy, outlines her vision of a “quiet diplomacy” keenly focused on “getting results”. The BBC’s Europe Editor, Gavin Hewitt, assesses the upcoming challenges she is likely to face – whether a winter energy crisis, shaping a coherent EU policy towards the Middle East, or establishing the much-trumpeted EU diplomatic service. Charlemagne, meanwhile, argues that when it comes to European foreign policy there are simply “too many cooks”. Philip H. Gordon, US Assistant Secretary of State for European and Eurasian Affairs, offers his thoughts on what the post-Lisbon landscape is likely to mean for US-EU relations.

- Finally, Prospect presents 25 key public intellectuals that have helped us navigate the squalls of the financial crisis – Simon Johnson, Avinash Persaud, and Adair Turner make up the top 3. Niall Ferguson, meanwhile, offers his take on the most influential thinkers of the past now showing renewed relevance – Keynes, Polanyi, Kindleberger and Darwin, among others, have places on his list.

- With the upcoming anniversary of the fall of the Berlin Wall, Timothy Garton Ash surveys the current debate about the causes behind those dramatic events twenty years ago. Commenting on the role of the superpowers, he suggests: “They made history by what they did not do… both giants stood back partly because they underestimated the significance of things being done by little people in little countries.” Adam Roberts, meanwhile, explores how civil resistance has fared around the world since 1989. When confronted with the reality of power politics, he suggests, choosing the right time for action from the bottom-up is critical.

- Looking to Copenhagen, Bruce Bueno de Mesquita propounds the predictive capacity of game theory and rational choice theory to explore what the climate negotiations might hold. Der Spiegel, meanwhile, has a report about the Danish island of Samso – at the forefront of the country’s green revolution.

- Elsewhere, Robert Skidelsky assesses the current debate raging between New Keynesian and New Classical economists over the financial crisis. Fully grasping the “implications of irreducible uncertainty for economic theory”, he suggests, would lead to a better understanding.

- Finally, Mihir Bose explores the contemporary state of Anglo-Indian relations, suggesting that fragility, rooted in history, is still very apparent. And with Indian and Chinese officials set to meet, Kapil Komireddi argues that rivalry between the two rising superpowers will come increasingly to define the 21st century.

- With Czech ratification of the Lisbon Treaty now looking increasingly likely, attention shifts to the implications for the EU’s global influence. Benita Ferrero-Waldner, the current External Relations commissioner, offers some thoughts on the future EU foreign policy setup here. Hugo Brady, meanwhile, identifies some of the qualities needed in a new President of the European Council – “the job appears”, he suggests, “to require its holder to be a walking paradox: charismatic but modest, highly effective but non-intimidating, a consensus builder but also a decision-maker”. Pascal Lamy, he argues, might just fit the bill.

- In the London Review of Books, David Bromwich explores President Obama’s tendency toward the conciliatory gesture and major pronouncement, assessing the consequences for delivering meaningful outcomes. “[H]is pattern has been the grand exordium delivered at centre stage”, Bromwich argues, “followed by months of silence”.  Writing in the WSJ, meanwhile, Bret Stephens offers a critical perspective on the President’s commitment to human rights.

- Elsewhere, Dani Rodrik rails against those raising the spectre of protectionism, suggesting that “the world economy remains as open as it was before the crisis struck” and that the “international trade regime has passed its greatest test since the Great Depression with flying colours”. The Economist, meanwhile, provides an analysis of the falling dollar, while Jean Pisani-Ferry and Adam Posen assess the limitations of the Euro as an alternate global currency.

- Finally, behind the scenes of the financial crisis, and based on in-depth interviews throughout, Todd Purdum chronicles Hank Paulson’s time in office. Reuters has an extract from Andrew Ross Sorkin’s new book offering another take on the former US Treasury Secretary’s actions during the crisis. Daniel Yergin, meanwhile, examines the importance of finding a narrative for the crisis – crucial, he suggests, not only in understanding what happened but also offering a “framework for organising thinking for the future”.

- With the anniversary of Lehman Brother’s demise, the FT recalls the events of that fateful weekend last September. The NYT has reflections of three former Lehman employees, while a Guardian roundtable asks what lessons, if any, we’ve learned from the bank’s fall. Niall Ferguson, meanwhile, rails against those who argue “if only Lehman had been saved”. He suggests:

Like the executed British admiral in Voltaire’s famous phrase, Lehman had to die pour encourager les autres – to convince the other banks that they needed injections of public capital, and to convince the legislature to approve them.

- Sticking with matters financial and economic, Der Spiegel has an interview with the head of the IMF, Dominique Strauss-Kahn, on the Fund’s actions during the crisis and the potential for a new role for the institution going forward. Former MPC member, David Blanchflower, meanwhile, offers a telling insight into the inner workings of the Bank of England’s decision-making as financial meltdown ensued.

- Elsewhere, the WSJ reports on President Sarkozy’s call to broaden indicators of economic performance and social progress beyond traditional GDP, following the findings of the Stiglitz Commission. Richard Layard, expert on the economics of happiness, offers his take here, arguing that “[w]e desparately need a social norm in which the good of others figures more prominently in our personal goals”.

- Wolfgang Münchau, meanwhile, assesses the implications of an Irish  “No” vote in the upcoming referendum on the Lisbon Treaty.  “There is an intrinsic problem for the Yes campaign in Ireland”, he suggests, “which is that the core of the treaty was negotiated seven years ago. This is a pre-crisis treaty for a post-crisis world… If we had to reinvent the treaty from scratch, we would probably produce a very different text”.

- Finally, last week saw the German Marshall Fund of the US publish its Transatlantic Trends survey for 2009. Unsurprisingly, a majority of Europeans (77%) support Barack Obama’s foreign policy compared to the 2008 finding for George W. Bush (19%); though the “Obama bounce” was less keenly felt in Central and Eastern Europe than Western Europe. A multitude of other interesting stats – on attitudes to Russia, Afghanistan, Iran, the economic crisis, and climate change –  can be found here (pdf).

The financial crisis has led to a lot of talk about the failure of ethics in the banking sector. Greed overtook wisdom, we’re told. No doubt this is the case. Yet whilst bankers are to blame, it’s hopelessly naïve to suppose that a ‘return’ to some golden age of ethical business will solve all our problems.

There is a parallel with the expenses claims of British parliamentarians. Caught with their hands in the till, some cried out that the system was to blame for letting them get away with it. For all the cheek of that response, there is a lesson in it.

Individuals must take responsibility for their sins. But if we’re serious about making sure that these things cannot occur again, it really isn’t enough to call for more ethics in business. In fact, I’m beginning to suspect that this is a way to avoid having to enact any real change. As the crisis seems to be settling down, the British Chancellor of the Exchequer Alistair Darling has shied away from significant reform of the regulatory system and chose instead to blame bosses for being irresponsible. ‘Don’t worry,’ we seem to be being told, ‘we’ll just ask bankers not to be greedy any more.’ Forgive me, but I had hoped for something more robust.

It must be conceded that in sharp contrast to the plans of the British government, Barack Obama’s planned reforms are substantive and bold. But on a global level, concerns are growing that the opportunity for broader reform that this crisis provides is being missed as optimism returns alongside talk of ‘green shoots of recovery’. The Bank for International Settlements (BIS), often described as the central bankers’ central bank, published its annual report on Monday. According to the FT, the BIS:

said it was vital that thought be given to the ongoing structure of the financial system while the patient was still on life support. Efforts so far, it concluded, had been a “messy mixture of urgent treatment designed to stem the decline, combined with an emerging agenda for comprehensive reform to set the foundations for sustainable growth”.

It highlighted two main risks: first, that not enough will be done to ensure a durable recovery from crisis; and second, that the emergency action to stabilise the financial system will undermine efforts to build a safer system.

The G8, too, is jumping on board the ‘return to ethics’ bandwagon. MBA graduates have set up their own code of ethics, taking inspiration from the medical profession’s Hippocratic Oath. This is welcome. We do need to create a public environment in which ethics and responsibility are more emphasised (and more respected), but to expect a firm whose raison d’etre is the pursuit of profit to apply the brakes is painfully naïve. Business (and politics) should be conducted on more ethical grounds. This year’s Reith Lectures, given by Michael Sandel, address this point well. But in the meantime (between now and hell freezing over), we need rules that acknowledge people’s tendency to ignore ethics, especially in the heat of the moment. The great theorists of capitalism itself, such as Adam Smith, knew well that the system wasn’t moral. But neither is capitalism immoral – it’s simply amoral. If we want a moral system, we have to bring in the morality ourselves. But to expect bankers to do so on their own is to invite a conflict of interest. We do not expect the players at Wimbledon to make line calls on their own shots and, similarly, we should not expect the financial sector to judge the morality or wisdom of its own practices.

This is an important moment, but it’s not a moment of a new ethical kingdom, or of a new form of capitalism. Instead, we need to return to an older scepticism about the role of private interests in our society and the degree to which the doctrine of self-regulation is a realistic solution.

Like most of you, I spend most of my days weeping at the fate of rich. But I don’t think I’d realised how bad things were, until I came across Gabriel Sherman’s definitive account.

You should probably get your senior executive assistant to read you the whole thing, but if you’re been forced to cull the hired help, the key themes are: (i) Make sure we, the rich, are paid more than anyone else, even if we go bust. (ii) Don’t expect us to foot the bill from the bailout – tax the sheeple instead. (iii) Money isn’t enough – we demand deference and respect.

Here are some of the quotes that made me tear up:

Citigroup exec: “No offense to Middle America, but if someone went to Columbia or Wharton, [even if] their company is a fumbling, mismanaged bank, why should they all of a sudden be paid the same as the guy down the block who delivers restaurant supplies for Sysco out of a huge, shiny truck?”

Bankrupt Wall Street exec: “I think [Obama] doesn’t have an appreciation for how hard it is to build these companies, the blood, sweat, and tears that goes into them. It’s just that he has no passion for it.” 

Bear Stearns senior managing director: “Honestly, you can pick on Wall Street all you want, I don’t think it’s fair. It’s fair to say you ran your companies into the ground, your risk management is flawed-that is perfectly legitimate. You can lay criticism on GM or others. But I don’t think it’s fair to say Wall Street is paid too much.”

Wall Street exec: “Why are [we] being punished for making a lot of money?”

Hedge fund guy: “The government wants me to be a slave!”

Another hedge fund guy: “JPMorgan and all these guys should go on strike—see what happens to the country without Wall Street.”

I’d also highly recommend reading the Economist’s typically incisive analysis. The stakes are high, it warns. Raise taxes on the rich and you’re on a slippery slope towards fascism, genocide and global conflict:

Barack Obama has suggested raising the tax rates on high earners and closing loopholes such as the carried-interest privilege enjoyed by private-equity managers. Such tax changes may suit the public mood. The danger is that popular anger, once released, can fasten on targets beyond the rich; immigrants, say, or foreigners generally. The 1930s Depression led to fascism in Germany and the second world war. Even if such apocalypses are avoided, the anti-rich backlash can [still] go too far. 

So, repeat after me, “They came first for the rich, and I didn’t speak up because I wasn’t rich. Then they came for the Jews…”

As David just noted, this morning’s Lex column in the FT is relatively upbeat about the dangers of protectionism, arguing that “the disaggregation of global supply chains, the source of the huge efficiencies that companies pass on to consumers, will not be easily undone.”

Whether or not that’s right (and like Willem Buiter, Martin Wolf is also a good deal more downcast than the Lex team), it’s interesting to compare today’s Lex column with what they had to say about capital flows to emerging markets just a couple of days ago.  Here’s the bit that made me sit up:

Take Brazil and India, the globe’s ninth and 12th biggest economies, according to the International Monetary Fund’s latest estimates. While the developed world is expected to shrink by 2 per cent this year, the IMF reckons Brazil will grow by 2 per cent, and India by 5 per cent. Why? One answer is that they have stable banks, relatively closed economies, and large internal markets. This has insulated them from much of the global turmoil.

The contrast with East Asia is stark. Singapore’s economy shrank at an annualised 17 per cent rate at the end of last year, South Korea by some 20 per cent. Yet this is not for lack of capital. Asian economies, after all, are global creditors. Their economies have shrunk instead because they are heavily oriented towards collapsing international trade. Meanwhile, their local markets are undeveloped and weak. Asia’s challenge is how to best deploy its accumulated surpluses to boost domestic demand.

(more…)