The recent political turmoil in European elections has isolated Germany as the sole remaining champion of austerity as the principal policy response to the eurozone crisis, and the Germans seem to be aware of this development. Germany’s interpretation of this change is affected by its knowledge that it remains the only real source of money for the eurozone, even if it remains isolated. The key now is how domestic politics in Germany responds to this unique circumstance. It could signal a change in the austerity policy, or it could make the Germans more adamantly opposed to any stimulus policy.
The Office of the Special Inspector General for the Troubled Asset Relief Program (TARP) issued its quarterly report today. Its conclusions are devastating. Some highlights:
- “After 3½ years, the Troubled Asset Relief Program (“TARP”) continues to be an active and significant part of the Government’s response to the financial crisis. It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost).”
- “In 2008, Treasury and regulators were caught by surprise by the bursting of the housing bubble and the realization that the distress of even one too-big-to-fail institution could shake the very foundation of our financial system. The largest U.S. banks still dominate the industry – just as they did in 2008. The largest banks have gotten larger and more concentrated as a result of the financial crisis because some too-big-to-fail institutions acquired the assets of other banking institutions. According to Federal Reserve data, five financial institutions – JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. – held $8.5 trillion in assets at the end of 2011, equal to 56 percent of U.S. economic output, whereas before the financial crisis, these institutions held approximately $6.1 trillion in assets, equal to 43 percent of U.S. economic output.”
- “Additionally, many of TARP’s goals have not been met. Even though the explicit goal of TARP’s Capital Purchase Program was to increase lending to U.S. consumers and businesses, the recent Federal Reserve working paper confirmed that the largest banks that received TARP funds did not increase their lending. In fact, these institutions have been lending less than their counterparts that did not receive a bailout.”
- “Many smaller and medium-size banks are still feeling the effects of the crisis and are not exiting TARP with the same speed as the larger banks. More than 400 financial institutions remain in TARP. After 3½ years, Treasury has no concrete plan to help the remaining institutions get out of TARP and get back on their feet.”
- “During a crisis of record numbers of foreclosures and high unemployment, TARP is not reaching homeowners as was originally intended by Congress. TARP’s explicit goals of preserving homeownership and promoting jobs were evidence that Congress wanted to help homeowners during this crisis, not just banks. However, these TARP goals have not yet been met while foreclosure filings have remained high (3.8 million in 2010, 2.7 million in 2011, according to RealtyTrac).”
In short, we are worse off now than we were in 2007-08, and the “too-big-to-fail” banks are even bigger now than they were then. Not much to show for $700 billion.
Argentina has passed the necessary legislation to nationalize the oil company, YPF, which is 51% owned by the Spanish oil company, Repsol. This act is sure to set off tense relations between Argentina and many other countries. Nationalizations are perfectly permissible under international law, but the terms of repayment are always hotly contested. I am certain this case will not be an exception.
The covert war against Iran continues. This time a computer virus has attacked the oil terminals in Iran, making transport of Iranian oil virtually impossible. The timing is right on target for the oil embargo against Iran to come into effect. Iran will obviously try to get the terminals back into operation as soon as possible in case either India or China decide to ignore the embargo against Iranian oil.
One of the biggest mistakes states make about other states is believing that all other states know exactly what is going on. We are very familiar with the discord within our own states, but find it hard to believe that similar discord exists in other states, particularly competitors. THe US made this mistake time and time again with respect to the Soviet Union. It also seems to be making the same mistake with respect to China.
The election in France has highlighted the serious issues brought about by the austerity programs implemented under the European Union rules. The political backlash against these programs is making governance more and more difficult. Right now, the right-wing seems to be benefiting the most from this instability. It remains to be seen if political stability can be regained without a change in economic policies.
The quiz on 25 April 2012 will be on the news articles from 20-23 April and the Defense Department Report on Climate Change, Chapters 2 and 3, pp. 22-74.
The first round of the French election seems to have gone to the Socialist candidate, Hollande. President Sarkozy came in a close second, but the pollsters are suggesting that the second round vote (between only Hollande and Sarkozy) will lean toward Hollande. The far-right candidate, Le Pen, came in very strong with nearly 19% of the vote. The only strategy available to Sarkozy is to appeal to the far right in the second round–a strategy that will only strengthen the right wing in the near term.
We all tend to think of China in terms of its total population: it is, and remains, the most populated country in the world. But how the ages of that population are distributed has important effects on the economic growth of the country, and China is looking at a serious drop in the number of working young people. How this may affect China’s future role in world affairs, is a topic addressed by The Economist.
The politicization of the Syrian violence has been going on for some time and the Washington Post, upped the ante with a news report that the rebellion is being infiltrated by Islamic jihadists. If one reads the article carefully, there are only references to “reports” and a small number of known individuals of only rumored political affiliation crossing the border. There is, of course, always the possibility that more radical elements are moving into the country, but this report is clearly politically driven by sources who wish to heighten the fears of the West for what is happening in Syria. We should keep an eye out for more substantive reports.
The UN has approved sending 300 additional observers into Syria. It’s hard to figure out the decision since the 30 observers already there have witnessed serious breaches in the “cease-fire.” I suspect it is a signal that the Security council is serious about the cease-fire, but the UN should not commit itself to a course of action unless it is prepared to back it up. There is a possibility that back-room deals have been made between the Assad government and the UN, but it’s hard to figure out what they may include. We’ll continue to monitor the situation.
The economic crisis in Europe is beginning to affect the formerly strong northern European states. The situation in the Netherlands, once considered a country on a par with germany, is going through a difficult budget process as it tries to make sure that its budget deficit remains within the 3% EU rule. The right-wing parties once again seem to be critical to a possible coalition. We’ll see what happens in France on Sunday–that election will determine much about the future of Europe. The Czechs are also expressing great discontent.
Many people are trying to develop algorithms that can predict civil war. The effort is at least a century old, but recent quantitative techniques are making the process more reliable and usable. For those of you who are interested in a more scientific and quantitative approach to the study of world politics, this field should be of great interest.
In a sign of how seriously it regards the deterioration of the European economy, the IMF has agreed to increase the size of a financial fund that might be necessary to bail out the larger European countries in case they face an imminent default. It’s not clear that any amount would persuade some bond investors that a default can be avoided, but it does give great support to less aggressive financial institutions. At the G20 meeting it also seems as if the emerging market countries are going to get greater representation within the IMF voting structure. It is an overdue move, but better late than never.
India has tested a new long-range missile which has a range that includes China. Strangely, there was little comment from most of the world, including from the Chinese, in direct contrast to the furor over the failed test of a similar missile by North Korea. The different reactions are a strong testimony to how regular some nuclear expectations are, and how resistant to change the nuclear regime is. The lesson cannot be lost on the Iranians.
The Economist ran an interesting graph on the change in military spending globally between 2002-2011. I won’t ask any quiz questions on the chart, but there are some striking outliers. What’s up with Azerbaijan?
The national security implications of climate change are difficult to assess. It does seem, however, that many nations are preparing for political and military competition in the Arctic as the evidence mounts that the polar seas are melting. One would hope that with the likely lead time before any real competition can be established the nations of the world could come up with a cooperative approach to sharing the likely resources of the Arctic. Unfortunately, it doesn’t appear as if an enlightened approach is forthcoming.
The US candidate for President of the World bank, Dr. Jim Yong Kim, has been elected to the position, pushing back challenges from candidates from Nigeria and Colombia. I am conflicted about the appointment. I would have liked a non-American to have been selected. On the other hand, Kim is not an economist, but rather a public health expert. Such a shift in emphasis on the Bank’s activities might be a salutary corrective to traditional aid patterns. We should hope for Kim’s success.
The economic signals from Europe suggest that the calm after the Greek storm is abating. Spanish bonds are selling at very high interest rates–close to the 7% level that would likely suggest a high chance of default. The economic conditions in Europe seem to be worsening and, if Europe slips back into a recession, could quickly infect other parts of the world.
The quiz on 18 April will be on the blog articles from 12-16 April and the following readings from the syllabus: Grier, Simon, and the Leveretts.
The Chinese have announced a wider trading band for their currency, the yuan. Previously, the Chinese had not allowed their currency to change more than 0.5% in either direction. Now they will allow fluctuations of 1.0%. The change is not highly significant, but it will disarm some politicians who wish to label China a violator of world currency rules. The net effect will be to make imports into China a little cheaper, and exports from China a little more expensive. So China’s trading partners will find a little less money flowing out and a little more flowing in.
President Obama was in Colombia for a summit meeting of Western Hemisphere states. Once again, the US (and Canada) tried to pass a resolution condemning Cuba, but the Latin American states were adamantly opposed to the resolution and none was passed. The US has had an economic embargo on Cuba since 1961 and it ranks as history’s most futile diplomatic action. It has caused great misery in Cuba, but the regime has outlasted every American Administration since Eisenhower (Kennedy, Johnson, Nixon, Ford, Carter, Reagan, Bush, Clinton, Bush, and Obama). I would say that it is long past time to change policies.
The world’s newest state, South Sudan, has had an uneasy relationship with the state from which it seceded, Sudan. The relationship is extraordinarily complicated, but the recent fighting erupted over control on an oil field on the border. It’s unclear whether the fighting has stopped as of now, but an open war would be devastating to both sides. The people of that region have suffered tremendously over the last decade, and the oil reserves have been the reason why the outside world has helped both sides to carry on the fighting. Another example of the curse of oil.
Russia and China voted in favor of sending 30 unarmed observers from the UN to monitor a “cease-fire” in Syria. Fighting is still going on in Syria, but there seems to be some sort of an agreement to declare an end to the shooting. I’m not sure what the observers will be able to accomplish, but it is way past time for the UN Security Council to acknowledge its responsibility to address the slaughter going on.
The economic situation in Spain is beginning to cause serious worries in Europe. The recent actions of the European Central Bank relieved some of the pressure on Spanish bonds, but, now that the ECB lending program is over, the yields (interest rates) on the bonds are going up again. Spain’s economy is significantly larger than Greece’s economy, so it will be difficult to bail out Spain in the same way Greece was bailed out. It appears as if a Spanish default is probably inevitable. The world’s major banks will be seriously affected if such a default occurs.
Supporters of the Palestinian people had planned a “fly-in” to the West Bank. Israel has decided that these 1,200 individuals will not be allowed to show their support for building a school in the West Bank. The Israeli response will be to send the protesters back immediately, or to prevent them from flying into Israel.
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