China's Economy

CHINA'S ECONOMY....The Chinese leadership is worried:

Chinese President Hu Jintao warned at a weekend meeting of the Communist Party's elite Politburo that China is losing its competitive edge as international demand for its products is reduced, according to official state media reports Sunday.

China's growth rate has been forecast to be about 9 percent in 2008, down from 11.9 percent the year before and close to the 8 percent that economists say China must maintain in order to keep the labor market stable.

For more, see Brad Setser's gloss on a recent World Bank report, which suggests that China's actual problems have been domestic up until now (falling wages and tanking real estate investment) but will indeed start to become export based next year. Regardless, the end result is that China will be buying up even more Treasury debt than ever over the next few years. That's probably a good thing in the short term, but not so good in the long term.

Cassandra Update

CASSANDRA UPDATE....Yesterday I asked for names of people who had given early warning of the global financial meltdown. Not just people who foresaw the housing bubble, mind you, but people who figured out some of the other problems that made a bursting housing bubble into a worldwide catastrophe and were banging the drums about them. Unfortunately, nearly all the answers came in one of three buckets: (a) Nouriel Roubini, (b) people warning about the housing bubble, or (c) people writing in 2006 or 2007.

However, there were a few plausible suggestions for analysts whose warnings went beyond the housing bubble and who did it earlier than 2006, including Peter Schiff, Tanta at Calculated Risk, Mish at Global Economic Analysis, Doug Noland at PrudentBear, and Brad Setser. Martin Wolf provides a few more possibilities here. I don't know enough about their early work to say for sure that these folks were all early and accurate critics of more than just the housing bubble, but they seem to be likely suspects.

On the other hand, commenter Commenterlein offers a counterpoint:

Most of the people listed above recognized that there was some form of housing bubble (at least in some markets), but most of them (imho ex-ante correctly) focused on the U.S.' external balance (i.e., current account deficit) as the main problem. Hence the crisis most economists predicted was a rapid depreciation of the dollar, associated with a massive and pain-full shift of employment from the non-tradeable sectors (i.e., housing) to the tradeable ones.

Bottom line: I have not yet found anyone who predicted that a house price decline would lead to a complete loss of confidence in the financial sector and a massive credit crunch taking down institutions all over the world with essentially no (direct) exposure to the US housing market. And as much as I love Roubini, perpetually predicting the end of the world for ever changing reasons just isn't that useful.

The current account deficit was, of course, a routine topic of concern among economists, but as Commenterlein points out, a dollar depreciation crisis isn't the crisis we actually got. In fact, just the opposite: we're practically in a T-bill bubble right now. That may yet change, causing us even more problems, but so far lack of demand for U.S. debt from the Chinese or anyone else just hasn't been a factor in the world's financial problems.

Tell you what, though: let me ask a much simpler question, since asking "who got it right?" is obviously a little tricky. Back in April 2004 the SEC voted to loosen the capital rules for the five biggest Wall Street investment banks. In retrospect, this was a very bad idea indeed, and it was a bad idea for precisely the reasons that have caused our financial problems to become so dire: it allowed leverage to skyrocket unsustainably and lending standards to deteriorate.

So here's my question: Did anyone object to this at the time? The New York Times identified one person who objected, an Indiana consultant named Leonard Bole, and one SEC commissioner who at least asked questions, Harvey Goldschmid, but that's it. Anyone else? This may have been an obscure ruling to people like you and me, but I'll bet it wasn't all that obscure to people who follow Wall Street closely, and I figure anyone who truly knew what was coming would have sounded a warning about it in 2004 or 2005. Did anyone?

UPDATE: In comments, Ole nominates fellow Dane Jakob Brøchner Madsen, who, according to a Google translation of, "has been proclaimed the country's most pessimistic economist." However, even Madsen admits, "I knew well that the system was rotten. But not that it was so rotten."


OUTLIERS....Should I pick up a copy of Malcolm Gladwell's Outliers and give it a read? I'm sort of disinclined to for two reasons. First, I read Blink this year and was surprised at how bad a book it was. Even at a slim 200 pages, I'd say that a good half of it was unrelated to its putative subject. Second, I gather that the subject of Outliers is that there's a considerable amount of luck involved in becoming successful. But is that something that really needs an entire popular book? It seems like one of those topics that's so obviously true that it hardly bears a detailed dissection.

But then again, maybe it's not quite so obvious as I think. Has anybody read it? Do you recommend it, maybe as something to put on my Christmas list?

Somehow, I got hooked on following the voting on CNN's top picks for heroes. My guy didn't win, but I was struck by something: Most of these unbelievably unselfish philanthropists are women. Ordinary, not rich, not well-connected women.

If you want to be humbled by your own paltry efforts, check these visionaries out.

Or maybe this is better described as insourcing…

The Pittsburgh Pirates hope Rinku Singh and Dinesh Patel really do have million-dollar arms.
The two 20-year-old pitchers, neither of whom had picked up a baseball until earlier this year, signed free-agent contracts Monday with the Pirates. They are believed to be the first athletes from India to sign professional baseball contracts outside their country.
Singh and Patel came to the United States six months ago after being the top finishers in an Indian reality TV show called the "Million Dollar Arm" that drew about 30,000 contestants. The show sought to find athletes who could throw strikes at 85 miles per hour or faster.

The article notes that when Singh and Patel (picture) first came to the United States and began playing catch, they "were mystified by the concept of gloves and had to be taught not to try to catch the ball with their bare hands." But the article also notes that the pair has athletic experience throwing the javelin, so this will definitely end well.

SEARCHING FOR CASSANDRAS....Brad DeLong says he was keenly aware of the housing bubble and fully expected it to burst. Me too! But he didn't expect any of the following:

(3) the discovery that banks and mortgage companies had made no provision for how the loans they made would be renegotiated or serviced in the event of a housing-price downturn.

(4) the discovery that the rating agencies had failed in their assessment of lower-tail risk to make the standard analytical judgment: that when things get really bad all correlations go to one.

(5) the fact that highly-leveraged banks working on the originate-and-distribute model of mortgage securitization had originated but had not distributed: that they had held on to much too much of the risks that they were supposed to find other people to handle.

(6) the panic flight from all risky assets — not just mortgages — upon the discovery of the problems in the mortgage market.

(7) the engagement in regulatory arbitrage which had left major banks even more highly leveraged than I had thought possible.

(8) the failure of highly-leveraged financial institutions to have backup plans for recapitalization in place in the case of a major financial crisis.

(9) the Bush administration's sticking to a private-sector solution for the crisis for months after it had become clear that such a solution was no longer viable.

So then: who did expect any/all of this stuff? Commenter macheath offers a few heroes:

Some people saw pieces of it, but were largely ignored or marginalized. Dean Baker was hammering on the house price bubble for years, and several people (including Gary Gensler at Treasury) called for stronger capitalization of Fannie and Freddie, saying their business model was not sustainable, and they were beaten up by Congress, Democrats and Republicans alike. Brooksley Born at the CFTC wanted to start investigating derivatives in the mid-1990s, and was slapped down by Greenspan, Rubin, and Summers, leading to legislation (backed by Summers) to prohibit the CFTC from regulating derivatives.

Is that it? Was anyone else warning us about Brad's seven points back in 2004? Or 2005?

CLIMATE CHANGE IN THE HIMALAYAS....Joe Romm passes along the news today that Himalayan glaciers are melting faster than anyone has previously predicted. You can add this to Romm's list of other climate change impacts that are happening faster than most climate models predict, including the canonical IPCC models:

This is why climate scientists have been running around with their hair on fire for the past couple of years. It would be nice to think that perhaps our current climate models are too pessimistic; or even that they're right but maybe we'll end up at the low end of the predicted warming ranges; or at worst that the models are right and we'll end up right at the center. But that just doesn't seem to be the case. What it really looks like is that our current models aren't pessimistic enough and that the growth in greenhouse gas emissions is exceeding even the modelers' highest estimates. We are fast approaching a point of no return that will likely kill hundreds of millions of people, destroy much of the world's food supply, and spark resource wars that make Rwanda look like a mild family quarrel. More from Romm here and here on what's happening and what to do about it.

Depends on if you're considering General James Jones, likely National Security Advisor in the upcoming Obama Administration, or Senator Hillary Clinton, likely Secretary of State. Their professional histories send conflicting messages about Obama's intentions in the region. Check out Eli Lake in TNR for more.

There are two great stories out discussing what we should do with all the national security secrets that, if made public, could (1) expose the full extent of the Bush Administration's torture, detention, rendition, and wiretapping programs, (2) make Bush Administration officials vulnerable to criminal prosecution, (3) create a public circus that overshadows the Obama Administration's early actions and spoils a moment of goodwill that Obama wants to exploit, and (4) potentially make our defenses weaker in the war on terror.

Result (1) is obviously a good thing. Is (2)? Even if it comes with effects (3) and (4)? Is there a way to do this that avoids (4) entirely?

Check out the thoughts of Dahlia Lithwick in Slate and Charles Homans in the Washington Monthly. Obama seems interested in establishing a commission that ferrets out the who/what/where/when/why, but doesn't initiate criminal proceedings. That's probably the approach the majority of the country would prefer, but is bound to anger some on both the right and the left.

QUOTE OF THE DAY....From Emile Earles, a Cadillac owner in West Point, Georgia, on buying American:

"You can only be patriotic until you can't afford it anymore."

And this riposte from Eddie Striblin, a salesman at the local GM dealership:

"Let me ask you a question: You ever heard of anybody braggin' on a '57 Honda?"

That's the American car industry in a nutshell, isn't it?