Is stay-in the new bail-in?

It’s worth noting a flurry of Greece-related chatter coming into a quiet news cycle on New Year’s Eve.  The context: Greece has a 3 year stand-by arrangement from the IMF and a parallel arrangement with the EU, meaning that it gets the money over those 3 years, but has to repay fairly soon afterwards.  It’s easy to lapse into the Greek mythology to find a metaphor for the looming repayment schedule from 2014 onwards but suffice it to say that no one likes the look of it.  So for over a month, reports have circulated that a loan extension was close to a done deal — up to 11 years according to one report.

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Of Gods and Men: non-premature evaluation

In my role as the AFOE occasional film critic, off to the Curzon Mayfair for Of Gods and Men/Des dieux et des hommes. After the DICKHEADS, we’re going to deal with some much more serious terrorism in this post.

Of Gods and Men is a classic peace movie, in the sense that there are classic war movies. In fact, it mirrors quite a lot of the structure and tropes you expect from a war movie – a neat trick. The film deals with the hostage-taking and eventual murder, by unidentified gunmen, of a group of French monks in the high Atlas mountains of Algeria in 1996, during the grim worst of the Algerian civil war. The monks, to begin with, are living at peace – in fact, as we learn from some of their conversations, their elected leader Brother Christian sees their mission (that word, already) as a project in deliberately waging peace, a continuation of the alternative-leftist dream of 1968. Every time the monks have a meeting, Christian takes his seat directly in front of an icon of 1980s internationalists, the world map redrawn to make the size of Africa and Latin America more obvious.

The monks tend their land, produce honey and wine, worship. Christian is writing a book. They practice social service – one of them, Luc, is a doctor, who holds a weekly surgery for the poor. They live in apparent harmony with the Algerian villagers across the valley in their structural-tile favela settlement.

Nobody wants to be involved with the war, but the war wants very much to be involved with them. A group of Croatian engineers working nearby are murdered by insurgents. Gradually, the violence infects everything else. They try to refuse it – Christian meets with the Algerian governor, who offers to post troops near the monastery, and he refuses as a matter of principle. As a result, the monks fall out among themselves, not so much about the troops but because he has acted without getting their approval first. The war draws progressively closer, and they debate endlessly whether to abandon the whole project and go back to France, to move temporarily to a place of safety, to go back on the governor’s offer, or to stick it out. One night, the insurgents appear and demand medical assistance. Christian persuades their leader to stay outside the monastery, and they accept drugs and dressings.

Things rapidly become more serious. It becomes obvious that one side, or another, wants them dead. The insurgent leader is killed in action with the army and Christian has to identify his body, thus becoming suspect to both the insurgents and the army. A succession of monks struggle with their fear and doubt, but Christian talks them around one by one. Eventually, gunmen kidnap all but two monks (who succeed in hiding) and march them off into the mountains. They ended up dead in reality; who killed them, and how, remains a mystery.

I liked the way this film showed people at work – the monks, the Algerians, like the village haji who they hire to bring his Polish tractor and plough their patch. We see him hit a sticky patch, carefully raise the hitch, reverse, and try again. The doomed Croats boom around the site with their Caterpillars and a sort of proud working-class confidence.

I also liked the role of time. The monks initially seem to be blessed with the gift of all the time in the world, but as the film progresses, the slow progress of time becomes a source of cranking suspense and maddening waiting.

That’s another war-movie trick, of course. Among other things, Brother Bruno makes a dangerous journey through the checkpoints and the debatable lands to bring in an urgent supply run, including cheese, medicines, and several hundred rounds of communion wafers. People write home illuminatingly. One of the monks demands of their leader “What are we doing here – trying to be heroes? Martyrs?”, and his leader talks him down reminding him of the importance of their mission and his obligations to his brothers (another telling word). The characters seek out their leader one by one to talk to him in confidence, and he pays out the big cheap words used on all such occasions. After they are captured, one after the other, the hostage-takers make them read out their name, age, and monastic affiliation. (Monks don’t have serial numbers.) In fact, it’s arguable that this is how the war seeps into the monastery – the monks get pressganged into a war movie.

As well as being a great war movie about peace, it’s a pretty good peace movie about war. The Algerian regional governor honestly doesn’t want the monks to get killed, but he also has political motives – it would be welcome if they were to simply leave, but he would prefer they stay, so he can install a detachment of troops in the village and establish the government’s authority there on the pretext of protecting them. He would like to make the monks part of his counter-insurgency plan. And if the insurgents were to butcher them, despite all he could do, that would make useful propaganda.

The insurgents would much rather have the monks in place – it’s always possible to slaughter them if a dose of revolutionary terror is required, and they are a source of medical assistance. Although the insurgent leader doesn’t give Brother Christian any assurances, he does let others believe that the monks are under his protection.

And the people, it turns out, are hoping that the presence of the monks will deter the insurgents from doing anything to them, for fear of committing an atrocity awful enough to wreck their reputation. They don’t want the insurgents and they want the government still less – they want, most of all, to survive and to avoid being governed. It is telling that the villagers and the monks are the only people in the movie who practice a sort of democracy – the Algerian military, of course, couldn’t care less, and the insurgents obey their leader. But this doesn’t mean they are passive. Part of the horror is that the relationship between the villagers and the monks subtly changes, from peace to something approaching a hostage situation. After all, the villagers are in a position to denounce them to the insurgents (or the army) and then carefully see nothing.

Obviously, this situation is intolerable to both the insurgents and the military. Neither the insurgent nor the counterinsurgent will put up with people who insist on escaping from their joint demand that they take sides. In a sense, the monks are wiped out by an unconscious conspiracy between two factions desperately competing to deliver their rival visions of government to people who want no part of either. Monks don’t have serial numbers, and all the killers of the Algerian war want to impose them.

Oddly enough, the Algerian governor, with his Ottoman title of Wali, is quite a sympathetic character. A curious feature of his role is that every time he appears on screen, he speaks the unvarnished truth as a sort of bureaucratic Greek chorus. Also, he always appears in a black suit, a uniform that marks him as a survival of civilian power. In his office, though, when he talks about the people and gestures out of the window, you can’t see any people.

Meet the DICKHEADS, and pity them

Anyone with any sense should mock this as hard as possible. The “shorter” seems to be that British (and probably other) counter-terrorism officials have convinced themselves that some of the constant false-positive results from baggage scanning are really deliberate reconnaissance by terrorists. The evidence presented is pathetically thin – apparently someone had both a BlackBerry and its USB charger in their bag, and the charger cable was wound round a bottle of gripe water. Who travels with a mobile device without bringing the battery charger?

This is worrying for all the obvious reasons – it shows that they are rationalising the false positive problem by defining-down the very idea of a suspect package, to the point where there is no real distinction between a suspect package and a non-suspect package. But the problem is broader than that. Consider the last few Al-Qa’ida incidents. All of them have been, objectively, pathetic. The common denominator has been failure mixed with futility. Terrorists who regularly and publicly fail to kill people or destroy artefacts are simply not terrifying. But the official narrative has been that this represents a “new form of terrorism”. For example:

Abdaly’s bombs may represent a new type of jihadist attack in the west. In terms of sophistication, it is at the opposite end of the scale from 9/11. But al-Qaida has failed to land a serious blow on western soil since the 2005 London bombings. Experts say they may be trying a new tack: calling on supporters to attack westerners at will, with whatever tools are at hand.

If this is a new form of terrorism, it’s nothing but good news, as it strongly suggests that the highly competent and ruthless agents of international Al-Qa’ida are a thing of the past, replaced by a new kind of terrorist I propose to call the DICKHEADS, for Desperate, Incompetent, Converts, Kids, Harmless, Economically insignificant, Aimless, Disconnected, and Suicidal.

Desperate – Recent terrorist plots show every sign of desperation. The Stockholm bomber had a bomb that probably wouldn’t go off properly, which he attempted to place somewhere where he realistically needed much more explosive and shrapnel to achieve a real massacre. The printer-cartridge plot amounted to sending some stuff off in air freight and blindly hoping it would explode in a passenger plane at some point. The underpants bomber…what can I say?

Hijacking a flight of fully fuelled Boeing 767s and crashing them into the New York skyline and the headquarters of the US defence establishment is a convincing and terrifying plot. Blowing up the Golden Mosque of Samarra in order to start a religious war in Iraq, in the hope of forcing one side to ally with you, is a convincing and deadly plot. Assassinating Abdel Aziz al-Hakim in order to forestall a stable political settlement in Iraq – that’s terrorism. Pants? No. Pathetic and desperate.

Incompetent – You thought the plans were poor, but that’s as nothing to the execution. Time after time, the DICKHEADS fail to explode. Even though the printer cartridges were well concealed, they failed the primary test of a bomb. They didn’t go bang. The pants bomber crazily attempted to mix his explosives at the point of use, set himself on fire, and made such a spectacle of himself he would have been restrained before doing anything even if he’d got the mixture right. The Stockholm bomber did actually have a nail bomb that worked, and he’d have done better simply to come on foot and chuck it into a crowd, but this apparently didn’t occur to him.

Converts – It is notable that in many cases, even the sources of ideological legitimacy now seem to be iffy converts, sort-of Muslims. The same goes for some of the terrorists. These people are no Sayyid Qutb.

Kids – It’s also notable that there don’t seem to be many Mohammed Attas or even Mohammed Sidique Khans these days. Instead, the DICKHEADS seem to include a lot of people of limited experience of the world, lacking in competence at anything much, without being obviously fit, energetic, or aggressive enough to start a good teenage riot. The nadir, so far, was the mentally ill not-really-a-Muslim who was persuaded to set fire to his trousers in a chain pub in Exeter. As Chris Morris says, Four Lions is very nearly a documentary.

Harmless – In the light of this, I’m quite convinced that the jihadi movement off its home turf is now essentially harmless. Its intentions are fantastic and its capability pathetic. The English Defence League for example, which has a well defined organisation, a support base willing to fight with cops, and members who know real honest-to-goodness criminals, is probably more worrying on a day to day basis. Terrorism is boring: let’s all go home and get on with life.

Economically insignificant – If they can’t get it together to blow up properly, we certainly shouldn’t let them affect our business decisions. The Stockholm bomber’s impact on GDP is certainly less by several orders of magnitude than one day’s heavy snowfall over London.

Aimless – If their operational plans are silly, and their technology and tactics pathetic, their target selection is hilariously awful. Outside the Middle East, they are still yet to even attempt a serious attack on infrastructure other than aircraft, or a single serious attempt to assassinate an individual politician. It can’t be that the security is so formidable – where are the arrests, then?

Disconnected – It does not seem that the proven technology or effective tactics that Al-Qa’ida’s allies in Iraq make use of has spread beyond the Middle East. The DICKHEADS develop in semi-isolation, living on an intellectual diet of rantings and jihad fanboy culture. They are just as effective as you’d expect from that.

Suicidal – In the light of all this, perhaps we should think of them more like those occasional Americans or Germans who go mad and shoot their classmates. There have been some cases where it has been difficult to distinguish the two. There has been some debate about what the social and psychiatric sources of this phenomenon are. I should like to see something similar.

But in general, the lesson here is that we should feel the emotion that the terrorists’ leaders would hate more than anything else: pity. These people are both pathetic, a word that derives from pity, and pitiful. This is worth reading.

Update: If you need help, start here.

Sunshine: at the IMF, of all places

So, here we are, after a 2010 of economic horrors. There is extensive debate as to whether the standard tools of economics are even valid – as Daniel Davies points out, even Paul Krugman now self-identifies as a heterodox economist – while on the other side, the discipline is coping with the financial crisis experience by clapping louder and imposing ideological censorship. But is anyone at least trying to do something original with the standard toolkit? The DSGE model may be one of John Quiggin’s zombies (buy now for Christmas and support Australian professors’ lifestyles – what’s not to love?), but zombies are notoriously resilient. (Head shots! as a well-known advocate of conservative austerity once said.)

The answer on this occasion is yes, at least as far as Michael Kumhof and Romain Ranciére, go. In a new paper, they present a DSGE model with the following parameters: the top 5% of the income distribution value wealth more than everyone else, for whatever reason, and specifically, they want AAA-rated assets. Further, these are intermediated through the financial sector. Then, they run a simulation of the macro-economy assuming that there is a negative shock to the bargaining power of labour resulting in a shift in the income distribution.

The simulation results were that the financial sector balloons in size, that total private debt in the economy expands hugely, and that credit acts as a substitute for rising average wages in the short run. Eventually, the model produced a massive financial crisis and a brutal recession, followed by a blow-out of the government budget.

Your keen and agile minds will not have missed that flat real wages, an increased share of national income going to the top 5%, enormous growth in the financial sector, and a credit-financed consumer boom are exactly what happened to the macroeconomy in the last 30 years. Also, it would appear that the economic situation has developed not necessarily to our advantage, to borrow the Emperor Hirohito’s remark on Japan’s surrender to the Allies.

So, what should we do about it? Kumhof and Ranciére have something to say about that as well. Specifically, they ran the model for several different scenarios representing different paths out of the crisis. They considered a scenario in which the government took the pain, accepting a large government deficit in order to minimise the impact of the crisis on the real economy. This had the advantage of reducing the fall in GDP, and therefore allowing growth to reduce households’ leverage. They also considered the option of just suffering, which actually increased leverage as incomes fell and the stock of debt remained.

Then they considered two more positive responses to the crisis. One was a debt restructuring, or to be brutal about it, widespread default and bankruptcy. This had the advantage that it does, indeed, reduce the leverage burden and does so cheaply. It also implies the end of the big banks, as they point out that a bank rescue doesn’t constitute a restructuring, just a transfer of debt from the private sector to the public sector. In a policy context, we could caricature this option as “stimulus plus cramdown”.

The other was to shift the labour share of income upwards. They found that this achieved a faster, bigger, and more lasting reduction in leverage and a reduced probability of crises. In their own words:

The main difference to Figure 14 however is observed following period 30, where under a loan restructuring leverage and default probability resume an upward trajectory for several additional decades, while under the bargaining power solution both immediately go onto a declining path. By year 50 leverage is around 20 percentage points lower under the bargaining power solution than under the loan restructuring solution. For long-run sustainability a permanent flow adjustment, giving workers the means to repay their obligations over time, is therefore much more successful than a stock adjustment, unless the latter is extremely large….But without the prospect of a recovery in the incomes of poor and middle income households over a reasonable time horizon, the inevitable result is that loans keep growing, and therefore so does leverage and the probability of a major crisis that, in the real world, typically also has severe implications for the real economy.

They also argue that the inequality-finance-lending transmission mechanism might also explain the global imbalances, with the emergence of a globalised rich elite driving the demand for AAA-rated assets, the growth of the financial sector, and the emergence of persistent large capital account surpluses and trade deficits. (We already know that imbalances in the balance of payments are intermediated through the financial sector.) However, they haven’t extended the model to include the international dimension yet, although it’s on their agenda for further research.

I’ve waited for this moment, 752 words on, to mention the key detail: this cell of dangerous subversive Bolsheviks is embedded in the International Monetary Fund, and their poisonous hate-writings were published as an IMF Working Paper. Perhaps DSK really has had an influence on the institution? In other optimistic news, both IFO and the German Chambers of Commerce expect significantly stronger internal demand next year and a smaller trade surplus, while Daimler Benz’s CEO is promising that this year’s profit share payments will be “attractive”.

It better be

To slip under the European bailout umbrella

Or in German: unter den Eurorettungsschirm schlüpfen. It’s the tenth-placed expression in the German Language Society’s list of the most important German words and expressions of 2010. Cyberkrieg also made the cut (fourth place). In first place: Wutbürger, or ‘enraged citizen’. All of which we’ve covered on Fistful recently. No one can say we don’t have our finger on the world spirit. I have to say I admire the work of the GfdS here: I feel much better knowing that all it takes for a terrible thing to seem almost humorous is to discover there’s a community of language users that’s fond of giving the terrible things their own special names.

Other people’s money

USA Financial Crisis Inquiry Commission, “primer” issued by the Republican party defectors from the project —

If the bank uses deposits to fund poorly performing projects, depositors can become concerned that eventually their bank is going to fail and they will not get their deposits back. If a bank lends too much of its deposits to finance long-term projects, depositors might begin to worry that they will not be able to withdraw their money according to their needs. Therefore, banks hold enough cash on hand, or “liquidity,” to be able to honor withdrawal requests and offer confidence to depositors that their money will be there when they want it. If depositors lose confidence in their bank, the only rational thing to do is to withdraw their money and move it to a safer place. With each depositor withdrawal, the bank becomes more leveraged, the mismatch between its assets and liabilities becomes more pronounced, and liquidity on hand is further diminished.

With the credentials that one assumes qualified them to be on the commission in the first place, you’d hope to do better than what you’d get from putting “bank run” into The Google.  But do you?

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Deference check

An argument that’s often put forward by people who support the institution of the British monarchy is that the monarch and his or her family are apolitical; that is, they can rise above party politics and lead through dint of example and charisma. An elected presidential figurehead, by contrast, would inevitably be drawn into party politics. Names would have to be put forward; manifestos drawn up. We are better off without any of that, monarchists argue. The monarch and her family are popular, well liked; a force for national unity.

The fact that the occupants of a royal limousine were recently mobbed – and, allegedly, to some degree physically assaulted – surely does severe damage to that argument. The relevant counterfactual is this: if last Thursday that car had contained a figurehead president, would he or she have been mobbed in the same way? I reckon many people will find themselves answering yes to that question. And if that’s what you believe, then I’d suggest you jettison any belief you might have had that a royal family is better at unifying the nation than an elected president would be. At least consider the possibility that a president wouldn’t do worse.

There are some other things to think about as well. The second-in-line to the British throne is getting married next spring. The government wasted no time in deciding that this event should be celebrated with full spectacle: the location is Westminster Abbey; an extra national holiday is planned for the day. It seems very unlikely that a nation would do any of this for a president, let alone his or her grandson: the thinking has to be that the royal wedding will be bread and circuses popular; a unifying event. But will it be? There’s some polling on this. Only one in four thinks that the government should spend any extra money on the royal wedding. Plenty of people think that the monarchy should modernise. The most interesting figure in the Independent’s recent piece on the popularity of the monarchy is that around about two thirds of the D and E socioeconomic groups now say that the monarchy should modernise. I don’t see much bread and circuses potential there, given that ‘modernising’ is code for shrinking the spectacle. And one illusion about the royal family – that it can command at least a minimum of deference wherever it goes – has been shattered. Those who want to maintain the illusion will probably make an effort to show that the paint can throwers were asocial hoodlums, and altogether unrepresentative. I’m not sure it’ll work.

On trying not to prove your critics right

Julian Assange says that the authoritarian regimes of the world define themselves through their attempts at concealment and conspiracy.

Some governments – we don’t know exactly which, but the group seems to include the governments of Australia, the UK, Sweden and Switzerland – are apparently set on confirming his theory. There’s some recent evidence from Switzerland here.

I have to say that if a government thinks that what the Wikileaks people have done is criminal (and by extension, that what Der Spiegel, The Guardian and the New York Times have done is criminal) then they should issue an arrest warrant and, if relevant, start extradition proceedings. They shouldn’t act like anonymous, shabby harassers. It doesn’t help the cause of state secrecy to muddle the Wikileaks releases up with what Julian Assange may or may not have done on his nights off, or with his filling out a bank account application incorrectly. It does nothing for anyone’s confidence in government if PayPal gets leant on so that donations to Wikileaks don’t make it to Wikileaks, or if Wikileaks’s various web servers are serially taken out as and when they come into use. All of that stuff erodes the legitimacy of government.

Perhaps governments are shit scared by Wikileaks. If so, then I’d direct them to this piece by Martin Kettle. I’d also suggest that they be as nice as possible to their employees; I’m thinking of the ones doing jobs like Specialist Bradley Manning did. This would be just a prudential measure: I don’t suggest that what Manning did was the right thing for anyone to do.

Ireland crisis loan conditions become clearer

Ireland’s department of finance has released the draft loan program agreement with the European Union and IMF.  It is still preliminary and subject to various approvals, but the government was under pressure to show the basics of what had been agreed prior to the budget vote on 7 December.  A quick perusal of the document reveals the following:

The EFSF apparently asked the government to post collateral for the EFSF loan.  This rumour had circulated during the negotiations but a reference in the letter confirms it.  But the government found “legal and economic constraints” to do it … those acquired-helpnessness Irish lawyers strike again.   Anyway, the apparent disagreement over collateral provides indications both of the risk EFSF may see in the package, and so the interest rate that has drawn so much attention.

In the better-late-than-never department, the opening letter includes the statement “The Irish owned banks were much larger than the size of the economy.”  The government may be groping towards an understanding of the difference between “Irish banking system” and “Irish banks.”

The government is leaving open the option of more wage or number cuts in the public sector (p13) … it will consider “an appropriate adjustment, including to the overall public sector wage bill, to compensate for potential shortfalls in projected savings arising from administrative efficiencies and public service numbers reductions.”  Note that under the Croke Park Agreement, those savings are supposedly pledged to reversing previous wage cuts, in reverse order of wage level.  But now it appears that those savings are part of the fiscal targets and wages/numbers may be on the table to meeting them.  Note: that’s a 2011 decision, left to a future government as the current one feathers its personal nests.

Bank resolution legislation is coming (various described as end December or February); under it, the Central Bank can appoint a special manager, transfer assets and liabilities of distressed institutions, and establish bridge banks.  It is unclear whether this is the same as or separate from legislation that will impose burden sharing on subordinated bondholders in banks.

Finally, it looks like the deficit targes are being set in currency terms and not in percentage of GDP, which may indicate some thinking that the ratios have been misleading or added statistical doubt to the numbers.  And, in the final sign of how there’s a new sheriff in town, there will be a lot of new monitoring and reporting to overseas agencies under the agreement.