Is Copenhagen working? Not the city — which is working just fine, I assume — but the Copenhagen Accord reached last December. At the time, it seemed like a bust: the initial hope had been to get a legally binding global agreement to seriously cut greenhouse gases, but as time went by hopes diminished until, finally, in a chaotic last minute scramble that featured various world leaders wandering from room to room while the Danish hosts desperately tried to get something in writing in the face of opposition from just about every corner, the exhausted conference made only a "decision to note" a short document that was mostly a blank numbered list. Those blanks were intended to be filled in later with pledges for GHG reductions.

At the time, all those blanks seemed emblematic of a historic failure. But now that the dust has settled and some of them have been filled in, how are we doing? There have been a flurry of reports recently about this, but no firm conclusion. First up is Kevin Parker of Deutsche Bank, who released a report last week saying that the Copenhagen conference, far from being a failure, had produced "the highest number of new government initiatives ever recorded [...] in a four-month period."

Fine. But how does that translate into GHG reductions? Trevor Houser of the Peterson Institute takes a crack at an answer. After adding up the various pledges made so far, and then assuming some additional mitigation from "international finance," he figures that Copenhagen has produced pledges totalling something between 4.17 and 7.29 gigatons of CO2e by 2020. That's a reduction of 7-13% compared to business-as-usual (BAU).

Fine again. But how much of that represents new pledges? Andrew Light and Sean Pool of CAP provide the guesstimate shown on the right. Prior to Copenhagen they figure the world had already agreed to reductions in the range of 3.6-9.0 gigatons. After Copenhagen that went up to 5.0-9.2 gigatons. If you optimistically assume that the real number will be halfway between the low and high estimates, it means that pledged reductions went from 6.3 gigatons to 7.1 gigatons. That's 0.8 gigatons better, or about 1.5% of total estimated GHG emissions in 2020.

Obviously this gets us closer to our goal of preventing a catastrophic rise in temperature over the next several decades. But not a lot closer. And even these numbers have to be taken with a grain of salt. The United States, in particular, is a wild card, since our "pledge" is meaningless unless Congress adopts it and then passes legislation designed to enforce it. Pledges from developing countries should be taken with a grain of salt too: they aren't for hard reductions from a base year, but either for reductions in the amount of GHG emitted "per unit of economic growth" or for reductions "below BAU." This is necessarily pretty fuzzy. What's more, the reductions attributed to "international finance" are sort of dodgy, and the assumption that countries will actually beat their low-end estimates is pretty optimistic.

In other words, Copenhagen still doesn't look very successful to me. Light and Pool give this the best spin possible:

One good outcome of Copenhagen is that the accord is still a work in progress. Our calculations of what can be achieved by current pledges under the accord are not final. They can still be improved. It doesn’t make sense to worry that the commitments made so far put us on a disastrous pathway to a world 3, 4, or more degrees warmer. That would only be a legitimate worry if the Copenhagen Accord had been finalized last December as a legally binding document at the current level of commitments. Instead, we still have time to use the accord to get us to a safer world.

I don't think it would have occurred to me to think of it this way. But I sure hope they're right.

Coffee Conservatives

A few days ago I heard the term "coffee conservative" for the first time. I didn't get it until it was explained to me. And now, here's the Raleigh News & Observer to explain it for the rest of us:

To join the Coffee Party in Raleigh, you can't be a screamer, a name-caller, a loud-mouthed zealot or somebody whose idea of politics translates to jabbing a sign in the air, red in the face. All you need are some manners, a good listening ear and a caffeine jones.

Inside a month, this politeness-first political movement has jumped from one meeting at the Hillsborough Street Cup A Joe to five coffee chats scattered across the Triangle. Nationwide, the Coffee Party USA has drawn nearly 200,000 supporters, sipping java and talking turkey in 47 states.

A coffee conservative, then, is a conservative who's not a tea partier. Someone who remains interested in actual policy and doesn't feel the urge to rant tirelessly about decline of the west and the imminent tyranny that Barack Obama is bringing down on us. It's your phrase of the day.

Steve Randy Waldman argues that obsessing over leverage and capital requirements is a lost cause:

Bank capital cannot be measured. Think about that until you really get it. “Large complex financial institutions” report leverage ratios and “tier one” capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.

....Regulation by formal capital has a proud and reasonably successful history, but has been rendered obsolete by the complexity of modern financial institutions. The assets and liabilities of a traditional commercial bank had straightforward, widely acceptable book values. For the corner bank, discretionary modeling mattered only in setting credit loss reserves, and the range of estimates that bank officers, external auditors, and regulators would produce for those reserves was usually pretty narrow (except when all three colluded to fake and forbear in a general crisis). But model complexity overwhelms and destroys regulatory capital as a useful measure for large complex financial institutions. We need either to resimplify banks to make them amenable to the traditional approach, or come up with other approaches more capable of reigning in the brave new world of banking. 

I'm way out of my league arguing about this, but I have a good reason — about which more below. First, though, the argument.

Steve is, of course, right that "regulatory capital" is a surprisingly ephemeral concept. It's hard to measure and it's hard to know even what to measure. (Read his whole post to get the entire gruesome story.) Hell, it's not even entirely clear what the real purpose of bank capital is. And yet, I'm not so sure that measuring capital adequacy is quite as doomed an enterprise as Steve thinks. For example: this hasn't been making the rounds lately, but last year there was a little boomlet in discussion about the value of tangible common equity as a measure of bank solvency. Why? For exactly the reason Steve writes about. Regulatory capital, as it's currenty defined, failed miserably during the credit crash of 2008. Basel II was a disaster, as was the U.S. near-equivalent that allowed banks to judge risk using their own internal models. And as Steve points out, Lehman Brothers was, technically, very well capitalized the day before it collapsed in a heap.

But TCE is a much simpler concept, and much easier to measure. It is, if you want to be simplistic about it, much closer to a measure of "actual money." And over the decade between 1995-2005, TCE ratios dropped dramatically at large banks. I don't know exactly what Lehman's number was before it imploded, but I think it was somewhere in the vicinity of 2.0. That's probably around half of what it was a decade earlier, and quite possibly a third to a quarter what it should have been given the greater risk and complexity of modern banks. If regulators had focused more on the steady drop in TCE during the boom years, the meltdown of 2008 might have been substantially ameliorated.

Now, that's hardly the whole picture. Capital adequacy is a ratio, and even if regulators focus more heavily on TCE they still have a problem with forcing banks to properly value the asset side of their balance sheets. Steve goes into all the reasons that's hair-raisingly difficult, but there are ways of making that simpler too. What's more, there are other rules that, although they don't directly address capital adequacy, have a big effect on it. Reining in off-balance-sheet vehicles is an obvious one, as are rules that put limits on shadow funding sources. More transparent derivative trading would help too. Put all this stuff together and it would go a low way toward making the entire banking system safer. Not perfect, but better.

So why am I wading into this argument in the first place? Because Steve's take is that since trying to govern leverage is hopeless, the only way to make the financial system safer is to radically simplify banking and break up big banks. But that's a counsel of despair. If you think capital adequacy is tough to regulate, what makes you think that we can radically simplify the entire structure of the modern banking system? And if banks will fight tooth and nail to oppose limits on leverage (and they will), what makes you think they'll be any less tenacious about resisting efforts to break them into little pieces?

My take is that that's hopeless. There are things we can do to make banking simpler, but there's just no way that we're going back to the 70s. Not. Gonna. Happen. And the chances that Congress — which is barely willing to approve even watered-down consumer protections — will break up banks the way Teddy Roosevelt broke up Standard Oil? Forget it.

It's useless to declare a problem unsolvable and then suggest instead that we tackle a problem that's even more unsolvable. I don't have much hope that Congress and the Fed are going to crack down on leverage in a way that's anywhere near as broad or as strict as I'd like them to, but there's at least a chance of making progress on this front. If we throw up our hands and declare it impossible, we're effectively giving up on financial reform entirely.

So how's the housing market looking? Well, prices seem to have stabilized and foreclosure rates are down. Hooray! But Mark Gimein warns that the news is not actually as happy as the realtors' PR machine would like you to believe:

Consider, for instance, California. In the first quarter of 2009, according to the Mortgage Bankers Association, banks started foreclosures on 2.15 percent of all mortgages (that is, roughly one in 50). In the last quarter — the latest period for which data are available — that was down to 1.34 percent, a sizable drop....

But if you conclude from this that more folks have gotten their arms around their mortgages, think again. The number of new foreclosures may have dropped, but the number of people seriously behind on their mortgages has risen — from 4.75 percent of mortgage holders all the way up to 6.93 percent, an increase of close to 45 percent....Thanks to some combination of government pressure, genuine efforts at loan modifications, and reluctance to seize houses and try to sell them in a dismal market, banks are simply letting more debtors fall behind without foreclosing.

....The Realtors' association happily reports that housing prices are rising because of tightening “inventory” — the trade term for “fewer houses for sale” — but underneath this is the scary reality that there are ever more folks seriously behind on their loans and waiting for lenders to take their houses and condos. This is something that lenders are reluctant to do because they still have no one to sell them to. The housing market looks stable only because lenders are avoiding flooding it with foreclosed properties.

There's something more fundamental at work too: housing prices may have stablized recently, but they've done so at a level quite a bit higher than their pre-bubble value. Now, I've long thought that when the housing crash is finally over, prices might actually end up somewhat higher than their historical trend rate, but even if I'm right (never a sure bet) my guess is that prices might end up 10-20% higher, not 30-40% higher, which is where they are now. Bottom line: the housing market still has a ways to fall, and when the foreclosure moratorium finally ends it's likely to spark another 20% fall in housing values. Or maybe more. The fat lady hasn't sung yet.

Strange Bedfellows

In the LA Times today, Dean Baker has co-authored an op-ed with Kevin "Dow 36,000" Hassett. So a guy who was right about (almost) everything is paired up with a guy who's been wrong about (almost) everything. This has serious implications for the space-time continuum.

Should the Fed have done more to fight the housing bubble of the past decade? Dean Baker says yes, Brad DeLong says probably not, and Matt Yglesias comments:

I have no opinion on how much monetary policy influenced the bubble or could have counteracted it. I know economists don’t like to talk about this sort of thing, but if you ask me the biggest influence policymakers had on the bubble wasn’t so much what they did as to an extent what they said.....Throughout this period, Alan Greenspan and Ben Bernanke were extremely famous, very well-known public officials charged with economic policy. If Greenspan had said something like “seems to me that price:rent ratios are totally out-of-whack and bubbly, so even though I’m not convinced there’s anything the Fed can do to pop a bubble in the housing market, I’m going to put my house on the market and start renting while the going is good” I think that would have made a big difference in the common understanding of what was going on.

I think what's missing from this discussion is what else the Fed could have done. Yes, they could have raised interest rates earlier and faster, but as Brad points out, that's a blunt instrument that would have hurt the wider economy — and in any case, when they did finally raise short-term interest rates it had precious little effect on longer-term rates. Likewise, Greenspan and Bernanke could have jawboned more, but that might or might not have had any real effect.

But what about everything in between? After all, the Fed regulates banks and it regulates mortgage loans. Would commercial banks have been able to shovel so much leverage off their balance sheets if the Fed had glommed onto what they were doing and prohibited it? What if the Fed had decided to regulate overdraft fees as loans, putting a big dent in the credit/debit card frenzy of the aughts? What if the Fed had taken a tough stance against deceptive mortgage practices, as consumer groups continually begged them to do based on FBI reports that such practices were rampant? What if they had performed more vigorous oversight of bank affiliates — Wells Fargo Financial, CitiFinancial, Countrywide Home Loans, etc. — that played such a big role in the subprime bubble? And keep in mind too that the Fed also has considerable influence over other regulators. Would the SEC have lowered capital limits on investment banks if the Fed had vigorously opposed it?

I haven't read Dean's book yet, and it might go into all this stuff. But just for the sake of the immediate conversation, I want to point out that raising interest rates was far from the only possible response by the Fed to the credit bubble. They probably couldn't have stopped it completely, but if they had seen it coming they had plenty of tools in their toolkit to keep it from spiraling out of control the way it did.

False Profits

In a review of Dean Baker's False Profits, Daniel Davies notes that although Wall Street's infamous financial legerdemain (along with dollops of occasional fraud) helped to amplify the financial bubble that crashed to earth in 2008, it wasn't the primal cause:

It’s necessary to be clear here — the original sin here was the real estate bubble, a bubble which could and should have been the object of anti-bubble policy, and which wasn’t, because of a massive, ghastly policy error on the part of the Federal Reserve. This is Dean’s thesis, and he names the guilty men.

....None of the arguments made by housing bulls during the bubble made a lick of sense, for the simple reason that the ratio of house prices to rents was constantly increasing — any fundamental change in the economics of housing ought to have shown up equally in the rental market as in the market for house purchase, and the “buy versus rent calculation” wasn’t an anomaly or a quirk — it was a simple and easily comprehensible piece of information showing that prices were in a bubble, which was almost universally ignored.

There's a lively debate in the economics community about whether it's possible to recognize bubbles as they're happening. For example, we still don't know for sure if the 2007-08 oil runup was a bubble or whether it was caused by fundamental issues of limited supply and rising demand. (Probably a bit of both, it turns out.) But as both Dean and Daniel point out, housing is different. In the housing market there are several well known and historically rigorous metrics that do a pretty good job of telling you whether prices have become untethered from reality. The ratio of price to rents is the most fundamental, but there's also price-to-median income and mortgage payments as a share of income. By 2002 all three had started to rise dangerously, and by 2004 they were plainly in bubble land. Even if it's true generally that bubbles are hard to distinguish reliably, this one was easy.

I've mentioned before that I sort of waffle about how important all the other stuff was (the overseas savings glut, the credit derivative free-for-all, reckless abuse of leverage, ratings agency corruption, etc.), but no matter how important it was, the housing bubble was plainly the ur-cause underlying everything else. The Fed should have been doing something about it, not egging it on.

In the Wall Street Journal today, Carl Bialik has some startling news about weight loss:

How many calories must a dieter cut to lose a pound? The answer most dietitians have long provided is 3,500. But recent studies indicate that calories can't be converted into weight through a simple formula.

....Consider the chocolate-chip-cookie fan who adds one 60-calorie cookie to his daily diet. By the old math, that cookie would add up to six pounds in a year, 60 pounds in a decade and hundreds of pounds in a lifetime.

But new research [suggests] the cookie fiend probably will see his weight gain approach six pounds, and then level off, pediatrician David Ludwig and nutrition scientist Martijn Katan wrote in the Journal of the American Medical Association earlier this year. The same numbers, in reverse, apply to weight loss.

There's a disturbing lack of common sense at work here. The handy illustration on the right, taken from the article, is for a 210-calorie cookie, not a 60-calorie cookie, but still: does anyone believe that adding a single cookie to your daily diet will take you from 200 pounds to 320 pounds in six years? Has anyone ever believed that? Of course not. It defies reason.

Not surprisingly, then, no one has ever suggested such a thing. Ceteris paribus, a certain number of calories will sustain a certain amount of weight. Take, for example, this calorie calculator from the fine folks at the American Cancer Society. It says that 2,818 calories per day will sustain a sedentary 200 pound man. Now add in that 210-calorie cookie. According to the ACS, 3,028 calories will sustain the same man at a weight of 215 pounds. It does not say that after 30 years he will weigh 830 pounds.

This is not based on dazzling new science. It's the same result you'll get from every calorie calculator in the world. It's possible that new research will change the simplistic formula this is based on, but it's going to be a rather more subtle change than 6 pounds vs. 600. Common sense should have sent this story back to rewrite.

I happen to like this picture a lot, so Friday Catblogging this week is turned over entirely to Inkblot, the great snoozeball himself. He is, perhaps, dreaming of tuna Easter eggs. Or something. I myself am dreaming of old school chocolate Easter eggs. Have a good weekend, everyone.

China and Us

So then, what's going on with China? Things have been testy for a while, but now suddenly we're hearing reports that U.S.-China relations may be on the mend. No currency war, a bit of agreement on Iran sanctions, and sort of a mini-detente over Taiwan and Tibet. Hooray! But Dan Drezner points us to the FT's Gideon Rachman, who says the long picture isn't quite so hunky dory, especially this:

The mega-trend in the background is the rise of China and the relative decline of the US — and the expression of this will be the gradual challenge to American military hegemony in the Pacific. This will not be a comfortable process.

Maybe not. But it presupposes that China is going to keep growing at the blistering rate we've seen for the past couple of decades — a pace they have to keep up just to keep from falling behind. Gordon Chang, writing in World Affairs, thinks they've already missed their chance to do that:

The analysts and the conventional wisdom they peddle are wrong. China’s economic model, which allowed the Chinese to take maximum advantage of boom times, is particularly ill suited to current global conditions. About 38 percent of the country’s economy is attributable to exports — some say the figure is higher — but global demand at this moment is slumping.

....Chinese technocrats, goaded by a multitude of analysts and foreign leaders, have known for years that they would have to diversify the economy — steer it away from investment and exports and toward consumption. Yet [Prime Minister Wen Jiabao], in office since 2003, has not made much of an effort to do so....So the Chinese economy, once in an upward super-cycle, is now headed on a downward trajectory. Beijing’s leaders had the opportunity to fix these problems in a benign period of growth, but they did not because they were unable or unwilling to challenge a rigid political system that inhibits adaptation to changing circumstances. Their failure to implement sensible policies highlights an inherent weakness in the system of Chinese governance, not just a single economic misstep at a particular moment in history.

Now, Chang is a longtime doomsayer about the Chinese economy. His book, The Coming Collapse of China, predicted that China would collapse in 2006. So like any good doomsayer proven wrong, he's just pushed out his prediction a bit.

In other words, take him with a big shaker of salt. Still, I think there's a germ of truth here that gets missed too often: Chang is right that China's economy is probably shakier than we usually give it credit for. Not only is it built on a foundation of booming exports, but its political system requires fantastic growth rates just to remain stable. As China's economy grows, however, its wage base will grow too and this will hurt their ability to keep up the flood of exports. Without internal demand to make up for it, growth rates will fall below the magic number of 8% per year. For them, that would be about as painful as a sluggish growth rate of 1-2% would be for us.

Now, maybe China will make the transition better than Chang thinks. And in any case, they'll certainly continue to grow both their economy and their influence even if they don't do it quite as manically as they have since the 80s. In other words, I'll leave the doomsaying to Chang. Still, I suspect that China is going to run into a few more hiccups on the way to domination of the Pacific than the alarmists think. Their brand of autocratic government is going to have a very hard time coping with a restive middle class once per capita income starts to bump up against $10,000 or so. That's still a ways off, but it's not that far off.