Simple one-size-fits-all descriptions and prescriptions of the world – like those who say “more foreign aid is always good” or “this is the way to eliminate corruption”

http://delong.typepad.com/sdj/2008/12/fisman-and-migu.html

December 22, 2008

Fisman and Miguel, Economic Gangsters

Links:

http://www.amazon.com/Economic-Gangsters-Corruption-Violence-Poverty/dp/0691134545

http://www.economicgangsters.com/

Brad: Sub-Saharan Africa looks like it has gone significantly backward in real GDP since 1960 while it has gone significantly forward in literacy and (except for AIDS) public health. Why do education and health seem to evolve according to different logics of corruption and rent-seeking than does the economy?

Ted: You raise an important point, which is that not everything is gloom and doom in Africa. There have been some positive trends, most notably in education and Africa’s recent successes in holding freer democratic elections. But the gains remain fragile, as we witnessed in Kenya’s recent slide towards chaos following elections last year and in the collapse of Zimbabwe and Ivory Coast, which had been held up as African success stories as recently as the 1990s.

Ray: The problem of HIV/AIDS, which you note parenthetically, is more emblematic of future challenges rather than past success. Thus far, public health systems all over Africa have failed abysmally to deal with this mounting problem. It’s hard to separate the continent’s various problems from one another. It’s surely the case that by applying some of the lessons we’ve learned in Economic Gangsters in fighting violence and corruption, the benefits would spill over into education, health, and other non-GDP measures of development success.

Brad: Even the poor of the world today are rich according to the yardstick provided by our ancestors of three centuries ago–as shown by indicators like life expectancy and adult height. Can we take the idea of a “poverty trap” seriously given that if such a thing exists our ancestors of three centuries ago were presumably caught in it as well?

Ray: We’d also side with the view that the evidence for a poverty trap is really thin. Decades of foreign aid, totaling billions of dollars for some countries, haven’t been enough for many poor countries in Africa, South Asia, and Central America to break out of extreme poverty. And some of the world’s greatest economic miracles in recent years, including China, Korea, and the other so-called Asian tigers, have done well without much foreign aid at all. So it can’t be that simply throwing more money at poor countries will jumpstart the growth process.

Ted: One of the goals of our book is to understand why all of this foreign aid hasn’t had the impact you might think it would. We focus on the role played by corruption and violence, and the economic gangsters responsible for these calamities.. Attempts to break countries out of poverty traps – by building schools and roads meant to boost future economic productivity – have too often failed because foreign aid has fallen into the hands of thieving dictators, or the fruits of aid have been destroyed by civil wars. You can’t understand the modern economic development experiences of most poor countries without tackling the issues of corruption and violence head-on.

Brad: A successful developmental state has to be fettered enough to respect entrepreneurship and enterprise while at the same time being unfettered enough to control roving bandits, local notables, and its own functionaries. Isn’t this an impossible state of affairs? Why is life in America today so relatively uncorrupt, anyway?

Ray: There are trade-offs, to be sure. But that’s very different from saying we can’t strike a balance between bureaucratic oversight and unleashing the spirit of enterprise. This is actually a very interesting time to be thinking about this, as the spirit of financial innovation in America seems to have gotten a little out of hand of late, and most sensible people think we could use more oversight of Wall Street’s own bandits. For the many less developed countries that are over-regulated, though, the more important risk at this time is of an anti-market, anti-globalization backlash.

Ted: How did America become relatively uncorrupt? It’s worth remembering that it wasn’t always this way. And there’s been plenty of talk about Chicago political machines and our own lingering corruption in recent weeks, with the Blagojevich Senate seat scandal. We can learn a lot from the American experience but I don’t think there’s a one-line answer. The world is much too complicated for grand unified theories of the economy and society. I’d recommend your readers check out Economic Gangsters for more nuanced answers.

Brad: Someone said that your book is the opposite of Malcolm Gladwell–that he has a simple central theory and a lot of evidence that does not fit it while you have a lot of evidence well-presented but no central theory. If Malcolm Gladwell had written your book, what would it have been called and what would your central theory have been?

Ted: It’s certainly flattering to be compared to one of the world’s best-selling non-fiction authors of the past decade or so! I like to think that if Malcolm Gladwell had written Economic Gangsters, he would have called it Economic Gangsters, too. Our central premise is that lots of global development problems can be understood by thinking about the individual economic incentives to do things that are bad for society as a whole. That’s where the rational, calculating economic gangster comes in. Al Capone, after all, was an accountant before he started applying his skills to such businesses as racketeering, prostitution, and rum running during Prohibition.

Ray: That said, it’s the nature of good economics research to proceed carefully and methodically. So understanding these and other problems will necessarily involve precision bites rather than grand sweeping statements. But the evidence we present – and the stories we tell – do help us chip away at the world’s development problems one by one, using new insights from research.

Brad: You state somewhere that in Meatu, Tanzania, there are people hacking to death their grandmothers with some regularity–and that this is largely motivated by economics, by the fact that you are in near-famine conditions and that if you off your grandmother for being a witch you get to consume 20% more calories per capita over the next year. But why is the “witch” required? And what is different about Meatu from all the regions that don’t accuse grandma of being a witch and hacking her to death in a famine?

Ted: A witch is certainly not required. In many poor societies there are similarly brutal responses to extreme resource shortages that have nothing to do with witchcraft. Among certain Inuit groups, for example, when food runs short the elderly are placed on ice floes and pushed out into the sea to die. And the Inuit are not alone: related traditions hastening the death of the elderly during lean times have been documented in Iceland, the Amazon, Siberia, Fiji, among North American Hopis, Gabon Fang, and Australian Tiwi, among other groups. It sounds unbelievably barbaric to modern sensibilities, but people living on the edge of subsistence cannot avoid this harsh calculus of survival.

Ray: Some societies have also learned to deal with shortages in less macabre ways. There’s an interesting case we highlight in our book, about the region of Ulanga in Tanzania where witchcraft is similarly strong as in Meatu, but where few if any witch killings take place. The difference? In Ulanga a safety net put in place by local healers saves old women accused of sorcery from an otherwise grim fate,. Traditional healers take in accused witches during hard times, feed them and take care of them, and go through some rituals to “cleanse” them of their witchcraft. Then when the lean times ease up, they return to their families, who later pay the healers back. The same idea is behind our proposal for a new foreign aid mechanism to provide insurance for poor households during economic downturns; you can read the details in Economic Gangsters.

Brad: In what sense was Suharto–who delivered 5% growth in per capita income a year for a quarter century–”corrupt”? Shouldn’t we want more of this kind of “corruption”?

Ray: It’s not that we’d want more corruption (though some economists have in fact taken that point of view in the past). Yet not all corruption is created equal. It’s crucial to understand the differences between the relatively “benevolent” corruption of Suharto, and the destructive kleptocracies of Zimbabwe’s Robert Mugabe and others. In Economic Gangsters we lay out the crucial differences between centralized systems of corruption like Suharto’s from the more chaotic situations that prevail in many of the poorest African countries.

Ted: It’s also the case that Indonesia might have experienced even faster economic growth in recent decades had it not been for the grabbing hands of Suharto and his cronies. Ray’s comments about the different types of corruption also gets to the heart of what sets our work apart from most other recent books on global poverty. Simple one-size-fits-all descriptions and prescriptions of the world – like those who say “more foreign aid is always good” or “this is the way to eliminate corruption” – are unlikely to work out as advertised. We need evidence-based development economics to take hold if we’re going to make real progress in fighting global poverty. Half the world’s population still lives on less than two dollars a day. This is too important a problem to be left to ideologues.

Posted at 01:28 PM in Books, Economics, Economics: Economists, Economics: Growth, Sorting: Front Page, Sorting: Pieces of the Occasion | Permalink

DeLong quoting Kindleberger, Reinhart-Rogoff quoting Kindlerberger. We’re getting alot of  Kindleberger lately.

Who was  Kindleberger? A revered MIT economics prof who worked on the Marshall Plan among other achievements.  He wrote quite a bit ofuseful analysis of the Depression.

http://web.mit.edu/newsoffice/2003/kindleberger.html

Donations in his memory may be made to the Kindleberger Library Fund for Economic History, MIT Libraries, Room 14S-216, 77 Massachusetts Avenue, Cambridge, MA 02139.

Kindleberger wrote 30 books, one before World War II and the other 29 beginning in 1950. His initial research focused on foreign exchange — an early work, “International Economics,” went through five editions during its 25 years of use as a standard economics textbook.

Gradually, his focus widened to international trade, multinational corporations, and economic and financial history.

In history, Kindleberger’s best-known works are “The World in Depression, 1929-1939″ (1971); “Manias, Panics and Crashes” (1978), with new editions in 1989 and 1996; “A Financial History of Western Europe” (1984, with a second edition in 1993).

His most recent substantial monographs were “Centralization vs. Pluralism,” and “World Economic Primacy, 1500-1990,” both published in 1996.

Charles P. Kindleberger

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Charles Kindleberger

Charles Poor “Charlie” Kindleberger (October 12, 1910 – July 7, 2003) was a historical economist and author of over 30 books. His 1978 book Manias, Panics, and Crashes, about speculative stock market bubbles, was reprinted in 2000 after the dot-com bubble. He is well known for hegemonic stability theory.

[edit] Life

His earliest book was International Short-Term Capital Movements (1937).

Kindleberger during the course of his life worked for several American institutions, such as the Federal Reserve Bank of New York (1936-1939), the Bank of International Settlements in Switzerland (1939-1940), and the Board of Governors of the Federal Reserve System (1940-1942).

In 1945-1947 he served at the Department of State (Acting Director, Office of Economic Security Policy), and shortly (1947-1948) as counselor for the European Recovery Program.

As a ‘historical’ economist (or economic historian), Kindleberger relied on narrative exposition and knowledge of history rather than mathematical models to prove his point.

Kindleberger described his around-the-clock work to develop and launch the Marshall Plan with singular passion in a 1973 interview.

‘We were conscious of a great sense of excitement about the plan. Marshall himself was a great, great man — funny, odd but great — Olympian in his moral quality. We’d stay up all night, night after night. The first work ever done that I know about in economics on computers used the Pentagon’s computers at night for the Marshall Plan. I had a tremendous sense of gratification from working so hard on it,’ Kindleberger said.

Kindleberger was on familiar terms with noted economists and was a graduate of the University of Pennsylvania and Columbia University (A.M., Ph. D.), later rising to the eminent position of Ford International Professor of Economics at MIT.

He attended Kent School in Kent, Connecticut.

Born in New York City, New York Kindleberger was married to the late Sarah Kindleberger, and had four children: Charles P. Kindleberger III of St. Louis, MO; Richard S. Kindleberger of Cambridge, MA; Sarah Kindleberger of Lincoln, MA; and E. Randall Kindleberger of Machias, ME.

The World in Depression

His 1973 and 1986 book The World in Depression 1929-1939 (University of California Press, 1986 [Revised and Enlarged Edition]) advances an idiosyncratic, internationalist view of the causes and nature of the Great Depression. Blaming the peculiar length and depth of the Depression on the hesitancy of the US in taking over leadership of the world economy when Britain was no longer up to the role after WWI, he concludes that ‘for the world economy to be stabilized, there has to be a stabilizer–one stabilizer’, by which, in the context of the interwar years at least, he means the United States. In the last chapter ‘An Explanation of the 1929 Depression’ Kindleberger lists the five responsibilities the US would have had to assume in order to stabilize the world economy:

1. maintaining a relatively open market for distress goods;
2. providing countercyclical, or at least stable, long-term lending;
3. policing a relatively stable system of exchange rates;
4. ensuring the coordination of macroeconomic policies;
5. acting as a lender of last resort by discounting or otherwise providing liquidity in a financial crisis.

Kindleberger is highly sceptical of Friedman and Schwartz’s monetarist view of the causes of the Depression, seeing it as too narrow and perhaps dogmatic, and dismisses what he characterises as Samuelson’s ‘accidental’ or ‘fortuitous’ interpretation out of hand. The World in Depression was praised by John Kenneth Galbraith as ‘the best book on the subject’.

Works

• Manias, Panics, and Crashes: A History of Financial Crises (Wiley, 2005, 5th edition)
• World Economic Primacy: 1500 - 1990 (Oxford University Press, 1996)
• “The Benefits of International Money.” Journal of International Economics 2 (Nov. 1972): 425-442.
• American Business Abroad (New Haven, London, 1969)
• Europe’s Postwar Growth. The Role of Labor Supply (Cambridge, Massachusetts, 1967)
• Europa and the Dollar (Cambridge, Massachusetts, London, 1966)
• Foreign Trade and the National Economy (Yale, 1962)
• International Economics (Irwin, 1958)
• Economic Development (New York, 1958)

• Short Biography at MIT’s online newspaper

• MIT’s obituary

• Peter Temin (2008). “Kindleberger, Charles P. (1910–2003).” The New Palgrave Dictionary of Economics, 2nd ed. Abstract.

• Historical Economics - Art or Science? (1990) Online Book by Charles P. Kindleberger

Charles Kindleberger: Anatomy of a Typical Financial Crisis

From Charlie Kindleberger, A Financial History of Western Europe:

p. 90 ff: No discretion was allowed in the issuance of bank notes, however…. Sir Robert Peel, the Prime Minister, first contemplated allowing a relaxing power in the 1844 legislation, but ultimately decided against it…. Peel protected himself… in a letter from Windsor Castle, written on 4 June 1844:

My confidence is unshaken that we have taken all the precautions which legislation can prudently take against a recurrence of a pecuniary crisis. It may occur in spite of our precautions; and if it does and if it be necessary to assume a grave responsibility, I dare say men will be found willing to assume such a responsibility (BPP 1847 [1969], Vol. 2, p. xxix).

The difficulty in making the note issue inelastic… is that it became inelastic at all times, when the requirement in an internal financial crisis is that money be freely available….

The Bank of England came to the rescue of the South Sea Company… belatedly, and at a punishing price..,. to dispose of a dangerous rival. Its recognition of its responsibilites in preventing, or at least mitigating, financial crisis in the public interest took more time. There was a lag in understanding the need to have the money supply inelastic in the long run but elastic in the short. A further question was whose task it was to serve as lender of last resort.

Thomas Ashton has staed that… the Bank of England was already the lender of last resort in the eighteenth century…. It is true that the Bank of England was pressured… but its response was, on the whole, reluctant and defensive…. The Bank occasionally took steps that increased the public’s fear… 1745… 1772… 1782… 1793….

Critical debate over who should act as lender of last resort… took place behiind closed doors in December 1825…. [Chancellor] Lord Liverpool, having warned the market… that the speculators were going too far and that the government would not save them… threatened to resign if Exchequer bills were provided…. The emergency required action by someone…. Lord Liverpool… applied enormous pressure on the Bank to force it to issue special advances to merchants against inventories….

The lender of last resort function reached full flower under the Bank Act of 1844. ‘Overtrading’ which Adam Smith held to be the cause of financial crises–which were in his lexicon ‘revulsion’ and ‘discredit’–produced incidents in 1847, 1857, and 1866…. [M]en of responsibility, as foreseen by Sir Robert Peel, figured out a way to suspend the Bank Act…. [T]he Chancellor of the Exchequer issued a letter to the Bank of England…

p. 270 ff: The macroeconomic system receives some shock–caused by Hyman Minsky, who virtually alone of modern economists is interested in financial instability, a ‘displacement’ (1982). This displacement can be monetary or real… changes expectations… with respect to the profitability of some range of investments…. [I]t can happen, and historically has happened, that the sum total of all the people reacting to the opportunity is excessive… credit is extended… stimulates business… credit is extended further… euphoria… speculation… more pervasive credit expansion.

Time and time again in these pages it has been stressed that when the macroeconomic system is constrained by a tight supply of money, it creates more, at leaset for a time… bank money, bank notes, bills of exchange, especially chains of bills of exchange, bank deposits, open-book credits, credit cards, certificates of deposit, euro-currencies, and so one….

At some stage… it becomes clear to a few, and then to more, that… positions are extended beyond some limit sustainable in the long run, and that the maintenance of capital gains depends on getting out of assets rising in price ahead of others…. More and more speculators seek to get out of whatever was the object of speculation, to reduce their distended liabilities, and switch into money; and more and more it becomes cleer that not everyone can do so at once. There is a rush, a panic, and a crash–or perhaps the lender of last resort intervenes to make clear it will furnish the market with all the cash it insists it requires. In this circumstance, perhaps belatedly, panic and distress subside….

Historically, the burden of proof runs against a theorist who says that destabilizing speculation is impossible when the record shows displacement, euphoria, distress, panic, and crisis occurring decade after decade, century after century, and noted by such classical observers as Adam Smith in the eighteenth century and Lord Overstone in the nineteenth, quoted with approval by Walter Bagehot (1852 [1978], Vol. 9, p. 273)…. Bagehot adds:

Common sense teaches that booksellers should not speculate in hops, or bankers in turpentine; that railways should not be promoted by maiden ladies, or canals by beneficed clergymen… in the name of common sense, let there by common sense (1852 [1978], Vol. 9, p. 275).

But history demonstrates that common sense in these questions is uncommon, at least at ten-year intervals….

Whether there is a theoretical rationale for letting the market find its way out of a panic or not, the historical fact is that panics that have been met most successfully almost invariably found some source of cash to ease the liquidation of assets before prices fell to ruinous levels. An important question is who has responsibility to provide that cash….

The lender of last resort role is riddled with… ambiguity, verging on duplicity. One must promise not to rescue banks and merchant houses that get into trouble, in order to force them to take responsibility for their behavior, and then rescue them when, and if, they do get into trouble for otherwise trouble might spread….

[T]he central bank presumably seeks to follow rules of helping only sound houses with good paper. The dilemma is that if it holds off too long, what had been good paper becomes bad…. Lending to sound houses introduces a note of discretion and judgment… questions of insider-outsider, favoritism, and prejudice…. [T]here are bound to be questions raised as to whehter the Establishment took care of its own and rejected the outsiders and pushy upstarts…

Posted at 12:46 AM in Economics, Economics: Federal Reserve, Economics: Finance, Economics: History, Sorting: Front Page, Sorting: Pieces of the Occasion | Permalink | Comments (3) | TrackBack (0)

http://delong.typepad.com/sdj/2009/01/charles-kindleberger-anatomy-of-a-typical-financial-crisis.html

Very tasteful, Brad.

http://delong.typepad.com/sdj/2009/01/raghuram-rajan-is-my-guru-now.html

Raghuram Rajan Is My Guru Now…

Milton Friedman became lord king guru of the world’s economists by standing up at the end of 1966 and warning everybody that the high-pressure economics of the Kennedy-Johnson administration was about to make inflation a real problem.

Raghuram Rajan stood up in 2005 and warned everybody that increased financial complexity had made the world’s financial markets riskier places. He is now my guru–along with Michael Mussa.

Justin Lahart tells the story:

Mr. Rajan Was Unpopular (But Prescient) at Greenspan Party: o outline his fears about the U.S. economy, Raghuram Rajan picked a tough crowd. It was August 2005, at an annual gathering of high-powered economists at Jackson Hole, Wyo. — and that year they were honoring Alan Greenspan. Mr. Greenspan, a giant of 20th-century economic policy, was about to retire as Federal Reserve chairman after presiding over a historic period of economic growth…. Rajan… chose that moment to deliver a paper called “Has Financial Development Made the World Riskier?” Mr. Rajan quickly came under attack as an antimarket Luddite, wistful for old days of regulation. Today, however, few are dismissing his ideas….

He says he had planned to write about how financial developments during Mr. Greenspan’s 18-year tenure made the world safer. But the more he looked, the less he believed that. In the end, with Mr. Greenspan watching from the audience, he argued that disaster might loom. Incentives were horribly skewed in the financial sector, with workers reaping rich rewards for making money, but being only lightly penalized for losses, Mr. Rajan argued. That encouraged financial firms to invest in complex products with potentially big payoffs, which could on occasion fail spectacularly. He pointed to “credit-default swaps,” which act as insurance against bond defaults. He said insurers and others were generating big returns selling these swaps with the appearance of taking on little risk, even though the pain could be immense if defaults actually occurred.

Mr. Rajan also argued that because banks were holding a portion of the credit securities they created on their books, if those securities ran into trouble, the banking system itself would be at risk. Banks would lose confidence in one another, he said: “The interbank market could freeze up, and one could well have a full-blown financial crisis.” Two years later, that’s essentially what happened….

The Jackson Hole contretemps followed by a few months another set of attacks on Mr. Rajan for a study he co-wrote at the IMF that concluded foreign aid didn’t help developing countries grow. Mr. Rajan says the twin controversies didn’t deter him. At the IMF, he pushed the research department to focus on financial-sector issues, and continued to sound alarm bells about financial-market risks. By summer 2007, as the crisis began unfolding in earnest, Fed bank presidents Janet Yellen and Gary Stern were citing Mr. Rajan’s critiques in their speeches….

Mr. Rajan is now focused on coming up with ways to avoid a regulatory backlash akin to what happened during the Great Depression, when governments around the world threw up protectionist barriers and clamped down on financial markets. Instead of heavy regulation, he says, the incentives of Wall Streeters need to change so that punishments for losing money are in line with rewards for earning it… bonuses that financial workers make during boom times should be kept in escrow accounts for a period of time. If the firm experienced big losses later, those accounts would be drained.

Facing withering criticism over the bonuses paid out in the boom, financial giant UBS and Wall Street firm Morgan Stanley have recently announced they’re adopting policies along the lines of what Mr. Rajan proposed…

Posted at 05:42 PM in Economics, Economics: Finance, Sorting: Front Page, Sorting: Pieces of the Occasion | Permalink | Comments (9) | TrackBack (0)

Oil hits $50 as Middle East conflict escalates

By Chris Flood

Published: January 6 2009 11:32 | Last updated: January 6 2009 21:28

Oil prices hit the the $50 a barrel level on Tuesday amid escalating violence in the Middle East as fighting between Israel and Hamas showed little prospect of ending quickly.

Nymex February West Texas Intermediate fell 23 cents to $48.58 a barrel after touching a high of $50.04.

EDITOR’S CHOICE

Outlook for 2009: Fledgling return for risk - Jan-05

Germany warns gas shortage imminent - Jan-06

Lex: Gazprom/Ukraine - Jan-05

Moody’s downgrades Bahrain outlook - Jan-06

In depth: Oil - Dec-11

Commodities deflated - Dec-28

ICE February Brent gained 91 cents at $50.53 a barrel after reaching a high of $51.40.

WTI has risen almost 53 per cent since its 2008 low reached in mid-December, supported by mounting geopolitical tensions in the Middle East, the dispute between Russia and Ukraine over gas supplies, production disruptions in Nigeria following attacks on pipelines by militants and, crucially, to mounting evidence that supply cuts by Opec are tightening the market.

The price spread between Dubai, the Middle East benchmark, a lower quality, heavy, sour crude, and Brent, a light, sweet oil, has narrowed sharply.

The front month Brent/Dubai Exchange of Futures for Swaps (EFS) reached parity on Tuesday for the first time in a decade, and sharply below the spread of more than $4 a barrel reached in October.

Nauman Barakat, analyst at Macquarie, said the narrowing of the sweet/sour differentials was an indication that the physical market has started to tighten.

Mr Barakat also noted that the spread between near-term prices at the front end of the curve and far forward futures had narrowed, reversing the trend when the market was in freefall.

Gold retreated to $841 a troy ounce, moving between a high of $858.85 and a low of $840.15, after ending trading in New York on Monday at $858.

Gold came under pressure as the dollar strengthened against the euro following eurozone data which showed a sharp decline in headline consumer price inflation.

Copyright The Financial Times Limited 2009

http://www.ft.com/cms/s/0/eba66cc6-dbe3-11dd-b07e-000077b07658.html

• JANUARY 6, 2009

Obama’s Back-Tax Bonanza

By PETER EAVIS

There are few better feelings than getting a windfall tax rebate when you are feeling broke. Large loss-making banks could experience this pleasure very soon.

As part of economic stimulus efforts, the incoming Obama administration is considering tax changes that could give stumbling financial companies increased tax rebates. Right now, companies can use losses to reduce taxes on any future earnings, as well as on profits going back two years.

Getty Images

President-elect Barack Obama answers questions from the press after a meeting with his top economic advisors, including Chief of Staff-designate Rahm Emanuel and Treasury Secretary-designate Timothy Geithner, at the transition headquarters Jan. 5, 2009.

In theory, a company that lost $10 billion in 2008 would be able to claim back taxes paid on an equivalent amount of taxable income in 2006 and 2007.

The key Obama change is to extend the retroactive application to five years, theoretically increasing the amount of past taxes that qualify for rebate. The move could clearly benefit banks where losses in 2008 and 2009 are going to be so large that they overwhelm profits from the last two years.

The change also could soothe investor concern over the value of deferred tax assets that sit on bank balance sheets. They aren’t small. At the end of 2007, Citigroup’s net deferred tax asset was $13.6 billion.

These assets can be used to reduce future taxes. But currently investors view them skeptically at those companies that may struggle to make profits in the future. That is because deferred tax assets can get written down if a company’s future profit projections fall too low.

The extension of retroactive claims to five years may increase the usefulness of such assets, and bring much needed cash into some companies, within as little as 45 days, according to New York tax expert Robert Willens.

Write to Peter Eavis at peter.eavis@wsj.com

Copyright 2008 Dow Jones & Company, Inc.

http://online.wsj.com/article/SB123120797394956289.html

 http://online.wsj.com/article/SB123125893419357707.html

Obama Pushes States to Cover More Unemployed

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By JONATHAN WEISMAN

WASHINGTON — President-elect Barack Obama plans to offer states $7 billion as incentive to permanently change their unemployment-insurance laws to cover part-time workers and prevent other laid-off workers from falling through cracks in the coverage.

The proposal, which is set to be included in the president-elect’s two-year economic-stimulus plan, will seek to use short-term aid to cash-strapped states to force long-term changes that the Obama team believes are overdue, Obama aides said Tuesday.

But the proposal, along with others to subsidize health insurance for the laid-off and expand Medicaid to out-of-work Americans, are sparking bipartisan concern over the potential, long-term impact on a federal budget deficit that is expected to hit $1 trillion this year, even before the stimulus plan.

A new Congressional Budget Office forecast due out Wednesday is expected to put the fiscal 2009 deficit at about $1 trillion, more than double the $438 billion in red ink CBO foresaw in September.

Sen. Judd Gregg of New Hampshire, the ranking Republican on the Senate Budget Committee, said that would put this year’s deficit at 7% of the gross domestic product, a level not seen since World War II.

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Reuters

Barack Obama, shown Tuesday after meeting with economic advisers, aims to use short-term aid to bring about long-term changes.

On Wednesday, Mr. Obama is set to speak about deficit-control measures he plans to include in his first budget, due next month, an Obama aide said. The aide stressed that the president-elect is inheriting a fiscal disaster not of his makingThe goal of the stimulus package, which will include tax breaks for businesses and individuals and is estimated to cost $775 billion, is to generate jobs and spending to jump-start the country’s ailing economy. But concerns are growing over the potential, long-term cost of some of the policy changes being considered. Republicans and even some Democrats said some of the items show too little concern for the long-term impact on the national deficit.

“Any additional tax cuts, where there will be pressure to make them permanent, or spending proposals that have a permanent nature to them, give me pause,” said Senate Budget Committee Chairman Kent Conrad (D., N.D.).

Amid such criticism, the president-elect huddled with his economic team on Tuesday to discuss ways to contain the long-term deficit. Attendants included budget director-designate Peter Orszag, Treasury Secretary-nominee Timothy Geithner and National Economic Council director-designate Lawrence Summers.

“Potentially we’ve got trillion-dollar deficits for years to come, even with the economic recovery that we are working on at this point,” Mr. Obama said. “We’re going to have to stop talking about budget reform. We’re going to have to totally embrace it. It’s an absolute necessity.”

Obama aides defended the proposals that have drawn the most fire. The unemployment insurance program would entice states to make changes recommended by a bipartisan commission in 1994. Fewer than half of the unemployed currently receive unemployment benefits, either because they work part time or because outdated regulations don’t define them as having been working recently. Many states use older wage data to establish work histories and exclude the most recent three to five months of employment when determining eligibility.

The changes sought by Mr. Obama would ultimately be financed by employer contributions to the unemployment insurance system, not by federal taxpayers, Obama aides said.

Another Obama program would offer federal subsidies to laid-off workers trying to purchase continued health insurance through the COBRA system. Under the 22-year-old COBRA law, laid-off workers must be offered access to the insurance offerings of their former employers, but for many unemployed, such plans have been unaffordable.

For the first time, workers laid off from jobs that didn’t include health insurance would be allowed to buy into Medicaid, the federal-state insurance program for the poor.

Aides said these programs would expire with the two-year stimulus program.

Robert Bixby, executive director of the budget watchdog Concord Coalition, said turning off such programs will be difficult. A program established in 2002 to subsidize health insurance for workers displaced by free-trade agreements is still in existence, despite that less than 15% of eligible workers have enrolled, said Stan Dorn, a researcher at the Urban Institute, who has studied the program.

“Those aren’t stimulus,” Rep. Paul Ryan of Wisconsin, the ranking Republican on the House Budget Committee, said of Mr. Obama’s health and unemployment proposals. “Those are ideological accomplishments in the guise of economic stimulus.”

Write to Jonathan Weisman at jonathan.weisman@wsj.com

 http://online.wsj.com/article/SB123120545511856037.html?mod=googlenews_wsj

• THE GAME
• JANUARY 6, 2009

Answering Morgan Stanley Riddle

CEO Selection Holds Key to What the Firm, and Wall Street, Become

• By DENNIS K. BERMAN

Who will succeed Morgan Stanley’s chief executive, John Mack? The Wall Street bank’s board has begun exploring the answer as it contemplates Mr. Mack’s probable retirement in 2010.

Associated Press

Morgan Stanley’s direction might rest on whether the next CEO is Walid Chammah, above, or James Gorman, below.

On one level, it is a succession tale, as co-Presidents Walid Chammah and James Gorman compete to helm one of Wall Street’s last two surviving icons. On another, it is an existential one. Because to answer the question of who succeeds Mr. Mack is to answer the riddle of just what the battered firm eventually becomes.

Listen to enough Morgan Stanley executives and a clear, perhaps unwitting, consensus emerges: that the firm will change just enough to keep the market from driving it out of existence. Underneath, there is a mounting confidence that its conversion to a bank-holding company isn’t a revolution but rather short-term appeasement.

As they see it, Morgan will go back to making money at a steady, if not profligate, clip. That means an annual return on equity of about 13% to 15%. Eventually, the urgencies of last fall — to secure bank deposits, especially — will fade quietly away. If Wall Street is dead, word hasn’t made its way to 47th and Broadway. “Anyone who wasn’t carried out in a stretcher will be well positioned,” says one banker.

Reuters

Of course, so much has changed. Like its rival, Goldman Sachs Group Inc., the 73-year-old firm converted into a bank-holding company to secure a government cash infusion. It has turned more than 20% of itself over to Japan’s Mitsubishi UFJ Financial Group and an additional 8% to a Chinese government investment fund. The leverage with which it made trading bets is more than halved.

At the center of this maelstrom is 64-year-old Mr. Mack, cajoling, bullying and rallying to keep the firm together during the bleak days of October and November. In one fit of black humor before the Mitsubishi investment, he even passed out blood-pressure cuffs to top executives, say people familiar with the matter.

Among those taking their reading were 54-year-old Mr. Chammah, a 15-year Morgan Stanley veteran with tours of duty in Morgan Stanley’s core financing and investment-banking businesses. He is a colleague of Australian Mr. Gorman, 50, a co-president from Merrill Lynch who previously ran Morgan’s retail-brokerage unit.

From outside appearances, the elevation of Mr. Chammah would represent a vote for Morgan Stanley’s core institutional securities business. This side of the house, which includes its trading operations, has made the vast majority of the firm’s profits and losses. Since 2003, this business has earned $24 billion in pretax profit, six times the stock-brokerage unit.

Paul J. Taubman

Mr. Gorman’s elevation, meanwhile, could appear to be a vote for deeper retrenchment, in which Morgan would look more like a traditional bank, attracting additional assets under management, bank deposits and individual brokerage accounts.

The more this is required, the harder it will be to hit those stated return-on-equity targets. Indeed, that 13%-to-15% range is already below Morgan’s 18% average over the past 15 years, a period when it also was capable of delivering ROEs in the 30s. To deliver in the future, Morgan will have to become consistent in a cyclical business, all while taking less risk. It is possible. But not easy.

Neither Mr. Chammah nor Mr. Gorman has distinguished himself as a front-runner. Mr. Chammah has expressed ambivalence about taking the top job, while Mr. Gorman, described by one colleague as “from CEO central casting,” may be too new to Morgan Stanley to win full support.

Colm Kelleher

Chief Financial Officer Colm Kelleher, 51, and Paul J. Taubman, the 48-year-old investment-banking chief, are dark horses, say people familiar with the board’s thinking, and outsiders aren’t out of the question.

“It’s way premature” to speculate on successors, says one person involved in the board deliberations. “We’ll know more in three or four months.”

It may be too early to name names. It isn’t too early to try to peer into Morgan Stanley’s future. Can it really be both a commercial and an investment bank? Can it satisfy the market’s need for safety and its eventual need for profit growth? Is it even worth staying independent if ROEs continually fall below 10%?

The CEO pick will say a lot about the firm’s vision of itself. And whether Wall Street has, at last, died or survived.

Write to Dennis K. Berman at dennis.berman@wsj.com

Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved

http://online.wsj.com/article/SB123120545511856037.html?mod=googlenews_wsj

GE’s finance arm launches $10 billion FDIC-backed debt

Mon Jan 5, 2009 4:53pm EST

Debt Syndicate Book Pricing:

$2.0 bn 2-year notes at mid swaps + 15 bps,

$4.5 bn  3.5-year notes at mid swaps + 30 bps …

$2.5 bn  18-month Qly FRNs at LIBOR offered + 5 bps,

$1 bn  3.5-year FRNs at mid swaps + 30 bps.

Market News

Oil steady above $48 on MidEast, Russian tensions

Dollar dips vs yen after hitting nearly 1-month high

By Dena Aubin

NEW YORK (Reuters) - General Electric Co’s (GE.N) finance arm on Monday launched a $10 billion sale of FDIC-backed debt, the largest sale under the government guarantee program since its inception last November.

The General Electric Capital Corp sale will push total issuance under the government program to over $115 billion, according to Thomson Reuters data. Before GE Capital’s deal, the largest sale under the program was $9 billion on December 1 from Bank of America (BAC.N), according to Thomson Reuters data.

The so-called Temporary Liquidity Guarantee Program was created in November to fill a financing gap for banks shut out of the corporate bond market by skyrocketing yields. The new asset class is being sold to a combination of traditional corporate, agency and Treasury investors, strategists said.

“TLG paper has been widely accepted in the United States and is still catching on in Asia,” Jim Vogel, a strategist at FTN Financial Capital Markets in Memphis, Tennessee, said in an emailed message. European investors also bought aggressively when spreads were wider relative to London interbank offered rates in early December, he said.

Despite top “AAA” ratings enjoyed by GE Capital, yields on its unsecured bonds had soared earlier this year amid worries that the credit crunch was making it more difficult for the massive finance company to roll over debt. GE Capital depends on easy access to funding to make loans for everything from office space to planes.

“They can borrow much more cheaply with the government guarantee, very simply,” said Spencer Lee, head of trading at SCM Advisors in San Francisco.

Now is a good time for company debt sales, he added.

“You’ve got historically low Treasury yields despite the sell-off of last few days and tightening credit spreads.”

GE SEEN SELLING $2 BLN IN 2-YR NOTES

GE Capital is expected to sell $2 billion in two-year notes at mid swaps plus 15 basis points and $4.5 billion in 3.5-year notes at mid swaps plus 30 basis points, according to IFR, a Thomson Reuters service. It is also expected to sell $2.5 billion in 18-month quarterly floating-rate notes at five basis points over the London interbank offered rate and $1 billion in 3.5-year floating-rate notes at mid swaps plus 30 basis points.

The joint lead managers on the sale are Banc of America Securities, Citigroup, Goldman Sachs, JP Morgan Chase and Morgan Stanley.

Mark MacQueen, co-founder of Sage Advisory Services in Austin, Texas, said he did not participate in GE Capital’s new deal because he bought FDIC-backed bonds from the company last year when spreads were wider.

“I know that some government funds are buying this paper and I know that’s what’s creating the demand at these much tighter spreads,” he said.

Yields on GE Capital’s unsecured debt had ballooned to nearly junk levels in early October amid worries that the global credit crunch was raising its financing costs to uneconomical levels.

In an effort to shore up its finances, GE has raised $15 billion through stock sales and has said it will scale back the finance arm and lower its leverage ratio.

Weighed down by troubles at GE Capital, GE’s shares lost about half their value last year. Its shares fell again on Monday after an analyst said the U.S. conglomerate might have to lower its dividend or see its triple-A credit rating downgraded.

GE officials have repeatedly said keeping the “AAA” rating is a top priority. Standard & Poor’s on December 18 lowered it rating outlook on GE to “negative” from “stable,” saying there is a one-in-three chance of a downgrade over the next two years.

(Additional reporting by Scott Malone; editing by Leslie Adler)

© Thomson Reuters 2009 All rights reserved