Bankers and herd behavior by mattsteinglass
February 28, 2009, 8:34 pm
Filed under: Uncategorized


Wildebeest herd. Photo by wwarby under Creative Commons license.

Wildebeest herd. Photo by wwarby under Creative Commons license.

I think it was around April 2008 that I first became convinced that investment bankers and financial analysts might, while individually acute, be collectively just as dumb as the rest of us. It wasn’t because of housing in the US; it was because of inflation and currency tensions in Vietnam. In 2006 and 2007 Vietnam became an extremely hot investment destination as its export-driven economy took off; growth ran at over 7% from 2000 through 2008. Investment seminars heralded “the next China” and so forth, and there was a stock bubble with the VNIndex going from under 300 to about 1100 in the space of two years. FDI flooded into the country — over $6 billion disbursed in 2007 in what was then a $75 billion economy. Pledges of future FDI were far larger — over $20 billion in 2007, ultimately over $60 billion in 2008. As a result, credit growth exploded, with banks shoveling out money to people who used it to invest in assets. And inflation hit double-digit rates in early 2008, with many people predicting 30% inflation by year’s end.

This kind of inflation was the entirely predictable result of all that investment pouring in, unless Vietnam were to allow its currency to appreciate, which would have hurt exports — which were the reason for all the investment in the first place. One would have thought investment bankers might have figured this out and priced the inflation risk in before pouring in all that money in 2007. But no. Instead, by late spring 2008, foreign investors had gone apoplectic over Vietnam’s inflation rate and started demanding that the government depreciate the currency by 30%, to cope with an inflationary episode that had essentially been caused by…foreign investors. Vietnam went from being “hot investment destination #1” in summer 2007 to being the foreign currency community’s whipping boy in May 2008. If the government didn’t move to gradually depreciate the dong, foreign analysts said, it would face an abrupt currency collapse by the end of the year.

What struck me first was that the same people who had been trumpeting the glories of Vietnam as an investment destination in 2007 were warning of its collapse in 2008, for reasons stemming precisely from the very investor feeding frenzy they had whipped up in 2007. What was even more striking, as the year went on, was that the Vietnamese government beat off the warnings of a currency collapse by following policies that had nothing to do with the foreign analysts’ recommendations. They didn’t gradually depreciate the dong; instead they signaled their intention to defend it, and said they had the reserves to do so. They didn’t make it easier to convert the dong; instead they maintained the State Bank’s monopoly over dollar conversions. Meanwhile, they did pursue other macroeconomic steps recommended by foreign analysts — cracking down on easy credit, raising interest rates, and general anti-inflationary measures. And by the end of the year, it was clear the government had won. The dong is trading today just slightly lower than where it stood a year ago.

The herd behavior in developed country financial sectors that has led to the global financial crisis is vastly more complicated and has taken place on a much larger scale. But for me, the spectacle of foreign investors working each other into a frenzy to pour money into Vietnam in 2007, and then working each other into a panic over the exchange rate and inflationary consequences of their own actions a year later, was pretty instructive.


Not risk, reward by mattsteinglass
February 27, 2009, 10:04 pm
Filed under: Uncategorized

I’ve been reading Niall Ferguson’s The Ascent of Money and I’ve just gotten to the chapter on Milton Friedman and the Chicago School, which Ferguson entitles “The Return of Risk”. Here’s my question: isn’t calling for a return of “risk” distinctly off point? The chapter concerns Friedman’s insight that excessively generous social welfare systems in Britain and elsewhere had removed the incentive to work and to create value, and this was destroying productivity growth. Hence part of Friedman’s message to Chile when he became an advisor to the Pinochet regime was to dismantle parts of the social safety net that discouraged work.

But what’s pernicious about excessively generous non-means-tested social welfare programs is not that they remove risk; it’s that they remove the incentive to work and create value. Indeed, on P.215 Ferguson cites Friedman’s most important disciple in the Chilean reforms, the young Harvard-trained economist Jose Pinera:

What had begun as a system of large-scale insurance had simply become a system of taxation, with today’s contributions being used to pay today’s benefits…This ‘pay-as-you-go’ approach had replaced the principle of thrift with the practice of entitlement…[But this approach] is rooted in a false conception of how human beings behave. It destroys, at the individual level, the link between contributions and benefits. In other words, between effort and reward.

Pinera doesn’t speak of “risk” here. He speaks of effort and reward. It is crucial for economic growth to reward work and value creation. But it is not crucial to maintain risk. Indeed, it’s actually crucial to reduce risk in order to encourage economic growth, because risk discourages people from working and investing. That is the reason for the existence of the insurance industry: in a 17th-century economy where a merchant bore the entire cost if his ship went down in a storm, fewer merchants would invest in shipping, and the economy would be less prosperous. Similarly, if quitting a low-productivity job for a higher-productivity one risks losing your health insurance, fewer people will quit their low-productivity jobs, producing labor market rigidity and inefficiency.

In recent decades wealthy people involved in finance and business have tended to argue that they deserve to keep the overwhelming portion of their incomes rather than see them taxed, because they earned their incomes by braving high levels of risk. This argument may or may not be valid. But Ferguson seems to be implicitly allowing the conservative belief that those who risk more are entitled to greater winnings to morph into a belief that risk, as such, creates wealth, and that therefore a riskier economy will be a more prosperous one. This seems to me to be confused. Many of the greatest characteristics of the American economy — lax bankruptcy laws, for example, which allow people to start up businesses without risking losing everything they’ve got — are precisely devices for reducing risk, to give people greater freedom to experiment, invest, and achieve.

What’s your bottom line on that Raptor? by mattsteinglass
February 27, 2009, 9:56 am
Filed under: Uncategorized

Say you were buying an F-22 Raptor air superiority fighter at a street market in West Africa. (If you’ve ever been to Nigeria, you’ll know this is not as unlikely a scenario as it sounds.) How would you reach an agreement on the price? Here’s how: you would make an obscenely low offer, far lower than you were actually prepared to pay — a thousand bucks, say. The merchant would laugh at you, and refuse to even state his price. You would laugh too, and cajole, and he would finally name you a price — a billion dollars, say. You would shrug and get up to leave. The merchant would call you back — hold on, hold on. How much can you pay, really? You would name a price — a million dollars. And at some point before the bargaining was over, you would name another ridiculously low price and, if it was not accepted, start to walk away, and wait to see whether the merchant called after you.

The F-22 is in production. The research and development is a sunk cost, and while the cost of the total buy of 183 planes works out to some unconscionable price upwards of $200 million each, the cost to order additional planes now is dramatically lower — in the merely obscene range of $120 million each. But the thing is, it’s not really clear that we need any more F-22s, since nobody else in the world has a plane in its class and old-fashioned state-vs.-state warfare is increasingly rare and unlikely. So throwing away $120 million on one more plane seems hard to justify when compared to using those funds to, say, fund Head Start for the entire city of Atlanta, or what have you.

But the F-22 has exactly one customer. If the US government ends its buy, Lockheed and Boeing have to shut down the whole production line, maybe fire some people, and so on.

So why don’t we offer Lockheed and Boeing $50 million a plane for another 100 fighters? If we don’t buy more F-22s we’re going to end up buying a lot of the less-amazing F-35s instead, and while the F-35 was originally supposed to be much cheaper, its program costs are mounting and it’ll be years before it makes it to production. In the end it could easily cost $60 million a plane. So why not offer $50 million bucks for more F-22s, take it or leave it? If Lockheed and Boeing don’t think they can do it for that price, let them say no, and they can shut down their production line and take the hit to revenue and the lost jobs. It’s up to them.

Why the US’s Burma embargo has failed by mattsteinglass
February 26, 2009, 9:18 pm
Filed under: Uncategorized

Today’s Burma news in Vietnam:

Vietnam and Myanmar to expand trade ties

Feb 26, 2009, 7:50 GMT

   Hanoi – Officials and executives at a Vietnam-Myanmar trade fair have signed several deals to boost trade between the two countries, Vietnamese media reported Thursday.

   Vietnam government representatives signed a memorandum of understanding Wednesday to import more than 5 million dollars of wood from Myanmar by 2010 at the Vietnam-Myanmar Joint Conference on Trade Exchanges in Ho Chi Minh City.

   At the conference, which attracted more than 50 entrepreneurs from the two countries, the Vietnamese importing company DIC said it had signed an agreement to buy 14,000 cubic metres of the tropical hardwood pyinkado from Myanmar.

   ‘This wood is not listed on the embargo lists of the US and the European Union, so it presents no problem for us,’ said Nguyen Thanh The, director of DIC’s wood department….

   Trade between Myanmar and Vietnam reached 108.2 million dollars in 2008, up 10 per cent from 2007. Vietnamese companies, including the state-owned oil company PetroVietnam and state-owned telecommunications firm Viettel, have operations in Myanmar.

Time for a new strategy.


It is difficult to blame AIDS in Africa on Stonewall by mattsteinglass
February 26, 2009, 11:11 am
Filed under: Uncategorized

Andrew Sullivan points to this Rod Dreher post, which he disputes in terms far more reserved than I would:

The God of Hedonism and Sexual Indulgence, whose devoted high priest Bill Maher is, has given us a world of broken marriages, shattered families, the destruction of the traditional family, miserable deaths from AIDS…

The overwhelming majority of worldwide deaths from AIDS have been in Africa. Much of the rest of the world’s HIV+ population is in Asia. There is no evidence that norms of sexual behavior have altered significantly in Africa or Asia over the past 50 years, and homosexuality remains taboo (though, obviously, as widespread in practice as anywhere else) in both regions of the world. There is a developing consensus that high HIV rates in Africa are due to the practice of long-term simultaneous partnerships, particularly on the part of men who work in one area while maintaining a family a long distance away. This has nothing whatsoever to do with the changes in heterosexual norms or increased acceptance of homosexuality that took place in the US in the 1960s and ’70s.

Opening with human rights by mattsteinglass
February 26, 2009, 10:30 am
Filed under: Uncategorized

The US State Department’s new 2008 Human Rights Report: Vietnam is out. It’s the first broad official statement on Vietnam released by Sec. of State Clinton under the Obama administration, and is highly critical, as is typical of such reports. Summary:

The government’s human rights record remained unsatisfactory. Citizens could not change their government, and political opposition movements were prohibited. The government continued to crack down on dissent, arresting political activists and causing several dissidents to flee the country. Police sometimes abused suspects during arrest, detention, and interrogation. Corruption was a significant problem in the police force, and police officers sometimes acted with impunity. Prison conditions were often severe. Individuals were arbitrarily detained for political activities and denied the right to fair and expeditious trials. The government continued to limit citizens’ privacy rights and tightened controls over the press and freedom of speech, assembly, movement, and association. The government maintained its prohibition of independent human rights organizations.

One should note that these summaries can seem more critical than they really are in context, because only the offending points make it into the summaries. For instance, 5+ years ago there would undoubtedly have been something in there on repression of religious freedom. But freedom of religion has improved steadily in Vietnam, and by last year’s report the summary sentence read: “Overall respect for religious freedom improved during the year, but the government persisted in placing restrictions on the political activities of religious groups.” By this year the assessment is that religious freedom is broad enough that the issue no longer even makes it into the lead paragraph.

Curious to hear what reaction the Vietnamese government will have, and what tone this sets for US-Vietnam relations under the new administration.

Acquired tone deafness by mattsteinglass
February 26, 2009, 9:57 am
Filed under: Uncategorized

Kristol on Obama’s failure to mention Iran in his speech: “This was not the speech of a man who even contemplates the possibility of using force within the next year to prevent Iran from acquiring nuclear weapons.” (Hat tip Steve Benen.)

Does he actually imagine that anyone in the world, apart from a tiny faction of neocon dead-enders who have become an embattled minority even within their own party, will be alarmed rather than reassured to hear that Obama will not attack Iran this year? Bill Kristol didn’t leave America, but over the past couple of years it seems America left him.