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Archive for June, 2012

My Take on “why nations fail”

Just finished reading “Why Nations Fail”, a book written by two academics Acemoglu, a professor of economics at MIT, and Robinson a professor of political science at Harvard.

Loved the book and enjoyed reading it because it dealt with issues like inequality and its consequences. As the world is coming ever closer, no single country could be immune from another nation falling apart. The book also deals with the impressive economic success of China which has enabled China to raise the living standards of hundreds of millions of its citizens, but the authors believe it will not lead China to become a modern prosperous country until its political system becomes inclusive.

The importance of the role of government in the proper running of the economy is not controversial, anymore. Investors go where there is a strong government that protects and guarantees their returns from their investments. This has to be balanced according to the authors, by making the strong centralized governmental power inclusive.

Otherwise, the authors believe it will lead the elites to serve only their interests by using the power of the institutions, thus making the institutions “extractive institutions”. Economic stagnations and inequalities are shared by all societies regardless of their ideological persuasions. The interest of the elite is to be dominant. Therefore, the politics of dominating others by creating “extractive political institutions” is what shapes the economy. The authors argue that the only time the elites see the benefit of sharing power and inclusive institutions is when they are faced with the prospect of “revolution”.

 Central to our theory is the link between inclusive economic and political institutions and prosperity. Inclusive economic institutions are supported by inclusive political institutions, that is, those that distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order.

By referring to the writings of Alvarez, John Bruce, etc. the authors see how “absolutism” was more intense in Ethiopia, even though, similarities existed between European absolutism and the Ethiopian version. It is the conclusion of the authors, that “with absolutism came extractive economic institutions and poverty for the mass of Ethiopians”. What makes the moves toward inclusive institutions more difficult is the absence of “traditional or historical institutions that could check the power of those who would take control of the state”. There conclusion is harsh in not believing that the cycle could be broken.

While the authors have documented a detailed account of how elites have controlled their populations through clear historical examples, they seem to have skipped the role of deregulation in the economy and its resultant global economic chaos. The authors also did not mention the total control Wall Street has on the U.S. political system and its disastrous consequences on the economy and democracy. If there was a glaring example of “extractive economic institution” Wall Street would fill the bill.

The book is clear in stating that those societies that quickly adjust to new modes of technology and make the necessary changes would be able to compete globally and benefit their citizens in a wide spread manner. It seems to fail its readers by not pointing out what the economic reality in the U.S. and Europe is at the present moment and why the economic benefits only belong to a selected few. The enormous gap that exists between those that have too much, and those that have so little in the U.S. and Europe is in its historical high and can’t be sustained. This worrying fact would have been of value to have been covered by the authors.

It is a fascinating book that my colleagues need to read.

Professor Mekonen Haddis

 

 

 

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Revisiting the Greek Tragedy

About three years ago, I wrote an article entitled Neo-liberalism and the Greek tragedy.  I started by penning: the country that gave the world the three most important tragedians, Aeschylus, Sophocles and Euripides is facing a major economic tragedy.  While economists the world over have differing views on the root cause of Greece’s economic problem, as a non economist, I have been immensely concerned with anarcho-capitalism, (an economic system that destroys government regulation of the economy, and creates economic anarchy within the global economic system).

Sadly, Greek is another glaring example of the failure of neo-liberalism. Neo-liberalism is what Susan Strange calls “Casino Capitalism”. She is one of the first to have for seen the dangers of anarcho-capitalism.  She has linked “casino-capitalism”, in to a number of trends among which are: government’s deregulation of the economy, (based on the fallacy that, the market and the banks would regulate themselves), and commercial banks turning in to investment banks. Susan Strange’s work is an essential contribution in de bunking the dominant doctrine of neo-liberalism.

Focusing only on dollars and cents, what usually is left out is any discussion of the impact of neo-liberalism’s creation of political instabilities around the globe. The main crime of neo-liberalism is its unparalleled focus on greed some would say debauchery and social injustice.

I recently saw a comment by Jim Rogers whom some claim to be an investing legend. Rogers says,” economies built on debt inevitably fail with chaotic and often violent repercussions. The surprise isn’t that Greek Neo-Nazis captured 7% of the popular vote in last Sunday’s election, but rather that it took so long for extremism to get a foothold.

Avoiding short-term pain through activities like propping up “zombie” companies to avoid the pain of failure has one drawback: it has never worked in the history of economics. Japan has been doing it for decades, and the Nikkei remains 80% off highs made in the ’80s.

The situation in Europe is unraveling at a growing clip. For now Germany has the clout and money to coordinate such an effort. If you wait two years from now, five years from now, when no government has any credibility and nobody will give you any more money, then it’s finished… you better get yourself a rifle and a bunker and head to Asia.”

 How scary? I only hope, the misery in Greece would quickly recede before it destroys a country that is the root of European civilization.

Professor Mekonen Haddis.

Please read the following wonderful article, “ The Euro and the Parthenon” by Binoy Kampmark on Greece.

 

The Euro and the Parthenon

The atmosphere on the hills of the Acropolis after the Sunday elections has an immemorial flavour, scented with a certain resignation.  Grape vines cascade over the restaurants of Minissikleous street with tempting promise.  The bouzouki players gather with ease and lazy moves to strum a few tunes as the calamari fries and the octopi cook.  Cold white wine in carafes find their way to colorful tables, and silver haired restaurant owners with streaks of mischief gather customers with an almost pimp-like relish.  Stray cats purr and rest in the baking sun and are shooed off in the fear that they might infect the scene.

In the shadow of the sacred rock, where the Goddess Athena was given a sanctuary that would have made delighted any divinity (she did, after all, win that affection over Poseidon), Athenians are indifferent about the political quandary their country finds themselves.  Parties in the relaxed atmosphere of the rocky hill slopes continue to take place with a pleasantness that would resist revolution.

This might be the pleasure before the fall, the ecstasy before the demise – the parties drum into late night Athens with intense conviction; and the cafes remain full near midnight.  Unemployment is stratospherically high amongst the young, but the young are constantly at play.

Doom is elsewhere, and here, the family business is the only thing that matters.  Divorce rates are some of the lowest in Europe; family bonds are firm, though being affected by the economic crisis.  The cushion, however, is a strong one.

From the Acropolis itself, one can glance down to the site which houses the Temple of Olympian Zeus, peeking, as it were, through Hadrian’s Arch.  Had the temple attained the form as envisaged in the 6th century BC, it would have been one of the most astonishing holy sites of antiquity. But, as is the nature of big finance and big projects, in whatever century, that was not to be.  Its ruins were forged, as it were, in real time.  The bill for its construction was never paid, and it was left to the Roman emperor Hadrian to do some rescue work in the 2nd century AD.

Charting a pathway across the Acropolis and the residential site of Plaka, one is struck by both the other worldliness of the Parthenon as it gazes with its Periclean durability, and its astonishing adaptability.  Whatever happens in Brussels, Berlin or Washington, indeed, whatever happens amongst the scrapping politicians in Greece’s parliament, Greece will adapt.  History has given them no choice.

The story of the Parthenon itself might well be an excellent narrative for Greek survival, with or without the euro.  It has survived admiration of Rome, the invasion of the Goths, the crippling efforts of the Crusades and the Ottomans (having served as both a Church and a mosque), a Venetian shell that hit it in 1687 when it was a munitions site, earthquakes, acid rain and, remarkably, the efforts of the British.

Thomas Bruce, the 7th Earl of Elgin, remains the most distinguished plunderer of the Acropolis.  Populist Greek politicians will point their tiring fingers in the direction of German banksters who made hay while the financial sun was shining, but Greece’s culture vultures have one clear target in their sights: the Elgin marbles.

Lord Elgin seems to offer a fascinatingly contemporary template for the Greek crisis.  He did, after all, seduce the Ottoman authorities of the period who were only too happy for him to make off with a good percentage of the sculptures of the Parthenon.  Both the Erechtheion and Propylaea were also victims.  The looting was subsequently validated by British parliamentary action in 1816.  State-backed thieving has been a laudable act since Francis Drake’s savaging of the Spaniards, and Lord Elgin was filling rather capacious shoes.

The newly built Acropolis Museum eagerly awaits the return of Elgin’s vandalizing handiwork, a partially empty space that craves to be filled.  In the meantime, the Greek authorities have been happily endeavoring to vandalise the Athenian legacy by undertaking their own restoration projects that had led to the removal of the Temple of Athena Nike.  Culture, it seems, is all too often the pretext for managed destruction and theft.

As the music strumming continues like a faint heartbeat, the sense is that Greece, whose civilizational cradle may have been ransacked, filled and re-plundered at stages of its history, will plod along in the shadow of the grapes.  The soldiers of Syntagma Square will still march with strained ceremonial comedy in pompom shoes.

The euro, if it already has not moved into the stage of inevitable demise and dismantling, is now beyond the Greeks. But every day living, and the Parthenon’s own existence, is not.

Binoy Kampmark was a Commonwealth Scholar at Selwyn College, Cambridge.  He lectures at RMIT University, Melbourne and is currently in Athens. 

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Remarks on the G 20 meeting in Los Cabos.

The G20 meeting in Los Cabos, Mexico is over without any definitive solutions to European financial crisis. It seems the leaders are still divided and unable to come to an agreement as to whether more stimulus spending is needed or decisive austerity measure is the way out of the financial crisis.

Those that push for budget cuts are led by Germany and the UK, while those that support stimulus spending and job growth are led by Brazil and France. It was astonishing that the G20 final communiqué still talks about the “absence of international standards on derivatives and reiterates commitment that no bank or other financial institution is “too big to fail”, while G20 member governments still continue to endow tax payers’ funds to banks.

Other topics of particular interest to Africa, “sustainable agricultural productivity, innovations in crop quality technologies in sub-Sahara Africa, support to fulfil MDGs, support infrastructure investment, and green growth in the context of sustainable development and poverty eradication” were included in the final communiqué.

At Los Cabos, Europe has let its intentions of working towards taking “concrete steps to integrate its banking sectors” known, which of course would require nations to give up more sovereignty.

Professor Mekonen Haddis

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Stop Working All Those Hours

Stop Working All Those Hours

“He’s one of my best employees. He always puts in ten-hour days, sometimes much more.”
Is this how your boss judges you and your colleagues? Probably yes, according to a 2010 study published in Human Relations. In the study, a group of researchers led by business professor Kimberly Elsbach conducted extensive interviews of 39 corporate managers. They found that these managers generally considered their employees who spent more time in the office to be more dedicated, more hardworking, and more responsible.

At first glance, this seems perfectly reasonable. Hourly wages and the classic 40-hour work week have trained us to measure our labor by the number of hours we log. However, this mindset is dead wrong when applied to today’s professionals. The value of lawyers, consultants, and analysts isn’t the time they spend, but the value they create through their knowledge.

Even worse, when managers judge their employees’ work by the time they spend at the office, they impede the development of productive habits. By focusing on hours worked instead of results produced, they let professionals avoid answering the most critical question: “Am I currently using my time in the best possible way?” As a result, professionals often use their time inefficiently.

Business meetings are a perfect illustration. Very few professionals would say that attending meetings is the best use of their time. In one survey, white-collar workers estimated that two thirds of meeting time is pure waste. I agree: all too often, information is repeated or the discussion goes off-topic.

Yet, many meetings are too long, too large, and too unfocused. Why? Consider one manager’s description of an employee, as reported in Elsbach’s study:

“So this one guy, he’s in the room at every meeting. Lots of times he doesn’t say anything, but he’s there on time and people notice that. He definitely is seen as a hardworking and dependable guy.”

In other words, this manager praised his or her employee not for the value that he added to the meetings that he attended, but merely for his physical presence. Given this structure of rewards, it is no surprise that we keep seeing unnecessary and unproductive meetings.

More broadly, many professionals use their time inefficiently because their firm’s hour-oriented culture hasn’t forced them to think rigorously about what’s really important. Sometimes, this leads professionals to spend an inordinate amount of time perfecting one particular task — say, the formatting of an internal presentation — instead of spending time where it might be more useful.

Worst of all, if you measure your productivity by time spent, your only way to get ahead is to spend more hours in the office — to the detriment of the rest of your life. In research published in HBR in 2006, Sylvia Ann Hewlett and Carolyn Buck Luce reported that 62 percent of high-earning individuals in America (whom they define as the top 6% of earners) work 50 hours or more per week; 35 percent work 60 hours or more per week.

That fits my observation of New York law firms, where associates routinely bill 3,000 hours each year. That equates to 60 hours per week during a 50 week year; including non-billable hours, these 3,000-hour lawyers generally worked 12 hour days, six days a week. They barely had enough time for sleeping — let alone caring for their families, or just having fun.

What You Can Do About It

How can you remove yourself from this treadmill of long, wasted hours at work? Start by constantly evaluating your use of time — even if your organization’s culture doesn’t force you to.

That means knowing what’s important to you, your organization, and your boss — and, vitally, what’s not important. So think critically and rigorously about your priorities.
Then, be prepared to say “no” to requests that don’t matter:

  • Decline meetings, whenever you can. To be polite, you can explain your workload and request to see the meeting’s minutes instead.
  • Don’t be afraid to use the “delete” button when reviewing your inbox.
  • If you can’t say “no” to a certain request, recognize that it may only require a B+ effort. Don’t spend hours bumping it up to an A+ unless you really need to.

While individual employees can change their own habits, organizations need strong-willed leaders to make more radical changes. These leaders must thoroughly reform their organization’s implicit and explicit reward structure. Are employees praised for coming in on Saturday — even if only to finish work that could have been completed during regular hours? Are employees suspicious of others who leave early for the day in order to watch their child’s Little League games?

Of course, this change won’t come easily. It’s easy to count hours. It’s much harder to set project metrics or make subjective evaluations. But smart leaders realize that the only way they can succeed is by getting the most out of their employees. And the only way they can get the best out of their employees is to focus on results, not hours.

 

Robert C. Pozen

Robert C. Pozen is a Senior Lecturer of Business Administration at Harvard Business School. His forthcoming book, Extreme Productivity: Boost Your Results, Reduce Your Hours, will be available in October

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Spanish Prime Minister Rajoy sent a text to his finance minister in the midst of negotiations on the terms of a bailout for Spain’s banks. Urging him to hold out for a good deal, it said: “We’re the number four power in Europe. Spain is not Uganda.”

Rajoy and his illiterate colonial mentality. Hey, Rajoy, you are in deep DOO DOO. Focus on your high unemployment and how Spain is going to pay the billions you are borrowing.

Neo liberalism will continue to destroy Spain’s economy. Rajoy is not part of the solution.

Professor Mekonen Haddis

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The last thirty years has seen governments become under the spell of neo liberal delinquent plan of deregulation and paralyzing the state in favor of private sector capital. Continuing in this nonsensical agenda, European bailout of up to 100 billion Euro has been hastily granted to Spanish banks ahead of Sunday’s elections in Greece. May I point out that this bailout nor ensuing bailouts will solve the problems of high unemployment, grave debt crisis, and abhorrent  income disparity in societies that are under the yoke of neo liberalism.

Professor Mekonen Haddis

June 11, 2012

The Bailout of Spain

“The burden of recapitalizing insolvent banks or loss-making acquisitions of solvent banks will fall on Spanish citizens.”

– Karl Whelan, economist at University College, Dublin.

Before EU finance ministers approve the 100 billion euro bailout for Spain, they might want to ask themselves one question: Will it really help?

Sure, it’ll keep the markets bubbly until mid-week when fears of the Greek elections set in, (June 17) but that’s about it. It won’t fix the eurozone’s underlying problems, in fact, it doesn’t even address them. The narrow purpose of the bailout is to keep insolvent banks propped up to avoid another Lehman Brothers-type catastrophe. That’s it. In other words, the 100 billion will not boost competitiveness, spur growth, reduce unemployment, or increase fiscal and political integration. It doesn’t do any of these things, in fact, Spain’s debt-to-GDP ratio will widen even more due to the new burden its leaders have taken on. That means, Spain’s working people will have to endure even harsher conditions for a longer period of time to repay the obligations assumed by Madrid. How does that help?

The Eurogroup has agreed to lend Spain 100 billion, but they have no way of knowing how much more the country will need in the future. Just take a look at this and you’ll see what I mean:

“Spain’s banks have over €300 billion in exposure to the real-estate sector, mostly through loans to developers. Around €180 billion of this exposure is considered “problematic” by Spain’s central bank.

Estimates suggest that there are about 700,000 vacant newly built homes, but including repossessed properties the total could be as high as one million or even higher. At current sales levels, it will take many years to clear the backlog, which will be compounded by more properties being completed and coming onto the market. Housing prices have fallen by 15-20% but are forecast to fall eventually by as much as 50-60%. A severe recession and unemployment of 25% means that losses on Spain’s over €600 billion of home mortgages loans are likely to also rise.” (“The Spanish “Bailout”, Whoops – “Assistance”!, Satyajit Das, Naked Capitalism)

Housing prices have a long way to fall which means the slump is going to drag on indefinitely putting more pressure on bank balance sheets. Expect more bailouts to come. The 100 billion is just the tip of the iceberg.

And, keep in mind,  the bailout will not ease credit conditions either. The money will be used to roll over debt, and to restructure and recapitalize underwater banks. The truth is, that none of the bailouts have eased credit conditions. Even after the ECB launched its trillion euro Long-Term Refinancing Operation (LTRO)–which provided 3-year, low interest loans to financial institutions– lending is still in the doldrums with no sign of improvement. So, don’t expect the bailout lead to another expansion.

The same rule applies to borrowing costs. The bailout  doesn’t ensure that yields on Spain’s debt will fall or that the ratings agencies won’t continue to downgrade its banks and sovereign bonds. (which will make borrowing more expensive) In fact, adding 100 billion to the country’s debt load will probably trigger more downgrades, lowering Spanish debt to junk status.

Finally, the bailout will not stop the slow-motion bank run that’s seen 100 billion euros exit Spain in the last year. (How’s that for symmetry?) The country is borrowing the exact same amount that it’s lost due to the flawed architecture of the eurozone which does not provide blanket guarantees on deposits.

Here’s an excerpt from the Eurogroup’s statement on Spain:

“The Eurogroup supports the efforts of the Spanish authorities to resolutely address the restructuring of its financial sector and it welcomes their intention to seek financial assistance from euro area Member States to this effect….

The financial assistance would be provided by the EFSF/ESM for recapitalisation of financial institutions. The loan will be scaled to provide an effective backstop covering for all possible capital requirements estimated by the diagnostic exercise which the Spanish authorities have commissioned to the external evaluators and the international auditors. The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to EUR 100 billion in total….

The Eurogroup considers that the Fund for Orderly Bank Restructuring (F.R.O.B.), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned. The Spanish government will retain the full responsibility of the financial assistance and will sign the MoU.”

So, Prime Minister Mariano “We don’t need help” Rajoy will have accept an IMF monitoring team that will sift through the books of distressed Spanish banks and expose the boundless red ink and corruption that lies therein. The involvement of the IMF means that a lot of shareholders are going to be wiped out while bondholders take severe haircuts.

Spain will now join the other bailout-dependent countries, Greece, Portugal and Ireland, although it will not be asked to increase austerity measures which Rajoy has already implemented with gusto. With the economy already in deep recession and unemployment tipping 25 percent, EZ finance ministers believe that more belt tightening would be counterproductive. Accordingly, the European Commission has agreed that Spain should be given an extra year to bring its budget deficit down below the EU limit of 3 percent of GDP. Here’s how Greek economist Yanis Varoufakis summed up recent developments in Spain:

“Spain’s current predicament is instructive: To get money to give to its decrepit banks, the nation must be humiliated and undergo further fiscal waterboarding so that Italy and others are deterred from turning to the EFSF (European Financial Stability Facility) for help. In this sense, when Europe’s functionaries say that there is no need for further action on Spain since the EFSF is available to help, they are inviting the Spanish to enter the Workhouse for a life of undeserved misery on behalf of their bankers. And they have the audacity to call this ‘solidarity’ with the Spanish people.” (“Solidarity Euro-Style: Finnish loans, ECB bond purchases, EFSF tough love and assorted horror stories from the postmodern Euro-Workhouse”, Yanis Varoufakis)

The Spanish bank bailout is only going to make matters worse for working people who’ll see the losses of corrupt financial institutions heaped onto their shoulders via higher taxes, cuts to social programs, and a firesale of publicly owned assets. They’ll pay the price while the crooks walk away scot-free.

by MIKE WHITNEY 

 

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Can Obama Stop Casino Capitalism


The recent JPMorgan scandal where billions of dollars were lost in risky bets has re-ignited the move to properly regulate the U.S. banking system.

Among those asking for new regulations is Robert Reich, former labor secretary to Bill Clinton. Recently Reich made a plea of sorts to President Obama, whom he wishes would take the commonsense approach to bank regulation by re-installing the depression-era regulation, the Glass-Steagall Act.

Reich’s first sentence places him among those who naively hope that Obama would listen to reason and act boldly, instead of merely putting forth populist catch phrases while obsequiously serving corporations:

“I wish President Obama would draw the obvious connection between Bain Capital and JPMorgan Chase.”

This quote alone proves that Obama’s vilifying of Mitt Romney’s former business venture is hypocritical, since Obama has been simultaneously protecting and praising JPMorgan. Obama’s populist-style attacks on Mitt Romney are cynical election campaigning.

Reich’s article also points out Obama’s incredible lack of action against the banks that happened during the post financial crisis, assuring that such a crisis will emerge yet again, as the recent JPMorgan scandal has foreshadowed:

“As a practical matter, the Volcker Rule [Obama’s still incomplete regulation attempt] is hopeless. It was intended to be Glass-Steagall lite — a more nuanced version of the original Depression-era law that separated commercial from investment banking. But JPMorgan has proven that any nuance — any exception — will be stretched beyond recognition by the big banks.”

Reich goes on to admonish the banking system’s dominance of the economic system in general, partially the result of the lack of financial regulations:

“It’s the substitution of casino capitalism for real capitalism, the dominance of the betting parlor over the real business of America, financial innovation rather than product innovation. It’s been terrible for the American economy and for our democracy.”

What Reich fails to mention is that he worked directly under a Democratic President, Bill Clinton, who helped tear down key aspects of the financial regulations that Reich hopes to reconstruct, including first and foremost the Glass-Steagall Act. Jimmy Carter, too, helped weaken banking regulations that encouraged the boom of the big banks.

The question that must be asked, then, is why did the Republicans and Democrats alike take turns at undermining banking regulation over the course of decades? And why do they both continue to agree — in varying degrees — that reconstructing the original regulatory policies would be undesirable?

The answer is that the version of capitalism that Reich would like to see cannot be re-created by regulation alone; the idyllic capitalism that Reich waxes nostalgia about has evolved into what we have now: an economy dominated by the highly profitable but volatile financial institutions while manufacturing has migrated to other countries in search of a higher rate of profit.

The capitalists, then, insured themselves that they would have a profitable place to invest their money. The billionaire Warren Buffett, for example, recently invested $5 billion in Goldman Sachs with a guaranteed annual rate of return of 10 percent. The U.S. banking system is one of the few U.S. industries that competes well internationally, and is propped up — as we saw by the bank bailouts — by the U.S. government itself. The industry is now so rich and powerful that it routinely reinforces and expands its power by the purchase of lobbyists and congressmen, not to mention presidential candidates.

The number of politicians calling for real banking reform are insignificant. The banking industry has captured Congress and regulators alike. The banking oligarchy is so intertwined with the political and economic establishment at this point that real regulatory change cannot happen until the system itself is transformed from below, by a powerful social movement. Pleading to politicians to fix so-called Casino Capitalism is increasingly naive, and Reich should know better.

By Shamus Cooke

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