An upshot from the last post. Markets can adjust by price, or by quantity. Economics usually assumes that they do both simultaneously, although the maths usually doesn’t work that way. There is no reason I can think of to prefer either mode of adjustment a priori, but practical applications will usually show that one or the other would be better.
In the radical view that markets are institutions that are defined by the societies that create them, it is a very important question whether a new one (or an old one undergoing change) will tend to adjust price-first or quantity-first.
The statement noted that mortgage demand was up 40% in the year to January, while surveys by the main mortgage lenders suggested prices were around 10% higher in February than a year earlier.
It said: “In a continuation of a longer-term trend, mortgages at loan-to-income ratios above four times accounted for a higher share of new mortgages in the third quarter of 2013 than at any time since the data series began in 2005. New mortgage lending at high loan-to-value ratios remained low by historical standards, though the number of mortgage products offering higher loan-to-value ratios had doubled over the previous six months.
“Given the increasing momentum, the FPC will remain vigilant to emerging vulnerabilities, will continue to monitor conditions closely and will take further proportionate and graduated action if warranted.”
Threadneedle Street intends to oblige banks and building societies to carry out stringent stress tests later this year to see whether they would find themselves in trouble in the event of a slump in house prices or a sharp rise in interest rates.
Yeah. Interestingly, most of the classic bubble pathologies are showing up – try this for size – but for the first time in my life, this seems to be accompanied by dread, not euphoria. Nobody is cheering.
These stress tests are interesting. First of all, the fact that the Bank needs to audit the banks to work out if it is actually possible to increase the policy rate without triggering a major bank failure is itself evidence that the situation I described in the original In Search of Requisite Variety post is coming to pass. The rest of the economy is more than lacklustre but the housing market is going ape again.
Secondly, the version of that story that appeared in the paper contained several paragraphs that don’t appear in the web version. For example:
Amid growing concern that the central London property market is already overheating, the Bank’s financial policy committee said that from June it wanted to have the powers to set the interest rate scenarios lenders would have to consider when granting home loans
Another quotes Brian Hilliard of Société Générale as saying:
Both of these metrics, loan-to-value and loan-to-income, appear in the list of potential future tools the committee could use. The FPC would probably move first on loan-to-income. The problem with controlling loan-to-value ratios is that it might be thought to run contrary to the idea of the government’s Help to Buy scheme
What’s going on here is that the Bank is seeking requisite variety. Specifically, they’re trying to create policy tools to address a housing bubble without imposing monetary contraction on the whole economy. Setting “the interest rate scenarios lenders must consider” and then auditing them should lead the lenders to turn down more applications for very large mortgages. Setting a limit in terms of loan-to-income would have a similar effect on mortgages applied for by borrowers who might struggle to repay them. Rather than changing the price of credit economy-wide, this would mean that some new applications would be credit-rationed.
This, of course, represents finance being re-regulated. In the de-regulation era, it was thought that the big issue was the overall price of credit, which a central bank could control. Its distribution among borrowers, sectors, and geography would find its own level. Brad DeLong’s Republic of the Central Bankers gets at this weird combination of enormous central-planning power vested in the Fed, and its restriction to hugely general and rough measures.
It was hoped that this represented a sensible compromise between the need for a stabilisation policy, and the avoidance of what was thought to be harmful bureaucracy. But another way of looking at the republic of the central bankers is that it is rather like Russia – it has a stash of nuclear weapons with which it can destroy the economy and that’s basically it. Precisely because its chief policy options are “Nobody notices” and “Blow everything up”, its day to day influence is often less than it imagines. It is also superbly, peerlessly unaccountable.
I am much in favour of re-creating a variety of policy responses. I am, though, worried that the regulatory power is being re-created in the unaccountable and often explicitly anti-democratic domain of the central bank. This is evidence, though, that the political system itself lacks requisite variety. Who do I vote for to re-regulate mortgage finance? As a result, the problem landed with the people who did have enough degrees of freedom to do something: the Bank.
“This focus initially made sense since one of the greatest challenges for macroeconomic policy in the late 1970s and 1980s was the fight against inflation,” he said. “However, with time, a healthy focus became a dangerous distraction.”
He described the move by Brown in 1997 to give the Bank independence to set interest rates focusing on an inflation target as a “deconstruction of the old model of central banking”.
“In my view, while there were enormous innovations of enduring value during this period, the reductionist vision of a central bank’s role that was adopted around the world was fatally flawed,” Carney said in his Mais Lecture at the Cass Business School in London.
Russia absorbing Crimea will be the first time since 1945 that a country other than Israel has taken over a part of a neighbouring state and formally annexed it, other than colonial outposts. Some people are maybe not appreciating what a break with international norms that is.
A few of those annexations of colonies were a lot more brutal affairs than Crimea: Ogaden, East Timor, Western Sahara. It’s still a very short list. Iraq and Kuwait was very briefly an exception and was supposed to once and for all end that sort of thing (and end history).
Crimea: Anschluss. Mostly wiling population, dissent shouted down or stamped out, stage-managed sham referendum. The main difference is that the troops of the larger, external power were already in Crimea, rather than just across the border in Bavaria.
Kharkiv, Donetsk: Sudetenland. Some real tension, mostly trumped up and stage-managed confrontations. Pleas for “protection” from some parts of a particular nationality to the outside power. Not fooling anyone. In contrast to then, Kiev would try to defend the frontier region militarily. (The great powers will not intervene, should it come to that.) Whether that defense would succeed is rather an important question. There’s not a major defensible barrier until the Dniepr. Speaking of which…
Dnepropetrovsk, Zaporizhia: Poland. The great powers would not be able to overlook the dismemberment of a major European state. They wouldn’t be able to stop it, either.
As that empire was pushed out of Eastern Europe, Aksyonov’s father, Valery, became the leader of a group called the Russian Community of Northern Moldova, which campaigned for the rights of ethnic Russians in a country ruled by the Moldovan majority. In 1990, the ethnic tensions in that country erupted into war, and the Russian army came to the rescue of paramilitary groups fighting the forces of the Moldovan government. Two years later, the conflict ended with the de facto secession of a breakaway state called Transnistria, a sliver of land that runs along the Dniestr River.
Today, Transnistria is still a frozen conflict zone on the map of Europe – and a state that Aksyonov reveres. Its independence is not recognized by any member of the United Nations, including Russia. It is the only part of Europe that still uses the insignia of the Soviet Union, and its economy imposes Soviet-style subsistence living on the masses while the politically-connected elite benefit from its unique black market. As an unrecognized state unbound by international law, its customs points are a clearinghouse for contraband, including tobacco, guns and counterfeit liquor. But Aksyonov sees it as a place to be emulated. “Transnistria is a bastion of Russian culture inside Moldova,” he says. “They wanted to preserve their identity. And I fully support them, because I know what kind of pressures they faced.”
Who knew frozen conflicts could be a family business? Of course, “family” and “business” are usually very ordinary words that can take on a very different significance.
He remembers Aksyonov in the 1990s as a member of a criminal syndicate called Salem, which was named for the brand of contraband cigarettes they imported and dealt in bulk. (Other accounts claim the group was named for the cafe where they hung out.) “Aksyonov was a capo for them, an enforcer,” says Los. “He had a group of ten guys that would go around collecting money.” Aksyonov’s nickname in the local underworld, says Los, was the Goblin. “Every gangster had a nickname. I was called Horns because of my surname.” (Translated from Russian, the word los means moose or elk.)
In Crimea, it looks like he’s starting with the banks. Of course. Was ist ein Einbruch in eine Bank gegen die Gründung einer Bank? I do think this fits with my idea that this is about post-Soviets vs. pre-Europeans.
In the wake of the mysterious disappearance of Ballardian Malaysian Airlines Flight 370 to the East or possibly the West of the Malaysian peninsula, here's an interesting account of all the ways civilian airliners keep in touch with ground control in the various territories they cross over. It reveals that quite a lot of the time they're not actually in touch at all. Those reassuring blips on the screen are sometimes just flight path projections, as they appear to have been in this case.
It's shocking – and fascinating in a morbid way – that you can just lose an airliner full of people, as though it was a collective Amelia Earhart. But maybe its not so surprising. It's not just that ground coverage is incomplete. There are more flights than ever before, flying from and between places where perhaps the staff are not too well trained, funded or attentive, over vast expanses of ocean, desert, tundra, jungle and ice. Perhaps the surprising thing is that it doesn't happen more often. I speak as someone who has flown over the arctic with this on my mind. Anyway:
This incident (frankly, we’re not even 100 percent sure it is a crash) is different. So far, no debris field has been found, the Pentagon reports that it detected no midair explosions in the area, and Malaysian authorities have issued contradictory statements about what primary-radar tracks they may or may not have observed. Based on the vast search area, it appears that authorities believe that the plane may have been deliberately flown far from its original heading. If that’s the case, then whoever redirected the plane might well have timed its abduction to coincide with the period when it would have slipped out of sight of the air traffic control system anyway.
The search for flight 370 is also hampered by the fact that the relevant sea lanes are literally full of crap. The almost certain bet is catastrophe in the air compounded by incompetence on the ground, but the resonances of the case are so strange that you wouldn't be surprised to discover that, 20 years on, some mad visionary pilot had taken his passengers to - say – sojourn among the Wa for urgent but incomprehensible reasons. After all, if the pilot was just intent on suicide/murder, why wait until he was out of contact?
This piece of Galrahn’s has a great title: US Soft Power in Ukraine is Missing Hard Power’s Escalation Control. It then wanders off into generic stuff about how Obama is lacking resolve and a succession of supposed military options, all of which would lead to war with Russia.
But if we were to stick with the title, we might learn something. “Soft power” – influence, the EU as a magnet, that stuff – is very hard to “calibrate” precisely because it deals in influence over people rather than physical force. People may not be impressed for years, but then change their minds and hugely over-deliver. The participation that makes it important also makes it very difficult to use as an instrument of policy. Classical theories of innovation diffusion tell us that “reinvention”, the degree to which users make innovations their own, is a critical factor in whether this or that idea reaches enough early adopters to hit the inflection point into mass adoption. As a result, not only does it work far better than anyone expects when it works, it also goes to new and unpredictable places nobody expects.
Fair enough. It is obviously true that US and European soft power played a role in Euromaidan. They called it Euromaidan, after all. But I have been writing so far in the voice of someone who imagines they controlled the situation, explaining why they failed to control it. Saying that soft power lacks escalation control is another way of saying that you underestimated the agency of Ukrainians. This theme runs through the whole story.
Vladimir Putin, famously, doesn’t believe it’s a nation and openly treats it as a colonial entity. The US imagines that some National Endowment for Democracy money and advice will solve everything in the way they would like it to be solved. The EU sees it as a fairly cynical bargaining process between Yanukovych and Yulia Tymoshenko and wouldn’t have minded Yanukovych sticking around even after all the shooting. Yanukovych, for his part, clearly didn’t think of Ukraine as a nation; he thought he owned it.
Operationally, this was meant to work like so. The conflict could be presented as a divide between (ex-Polish) western Ukrainians and (ex-Soviet) eastern ones. Experts differ. This would permit people to see it as not a proper nation, a conflict that had to be managed, or alternatively a Soviet survival that needed protecting from the IMF. At street level, this would show up as a pro-Yanuk movement big enough to be a potential political majority. But Yanuk was let down by the failure of the supposed “pro-Russian East” to show up. He was counting on it and he may have reassured Vladislav Surkov, Putin’s very influential PR expert, that it was coming when Surkov came to see him.
The problem was, though, that the “pro-Russian east” had already been a disappointment in 2004, and it was even weaker this time. Research on the ground suggests that the idea of a geographical split is misleading – the political divide is generational, and eastern Ukrainian identity does not signal support for Russia and still less for Yanuk. There is even some evidence that the linguistic picture has changed since 2004, with more people, especially young people, opting to speak Ukrainian and to adopt such an identity. This could be described as the transition from a post-Soviet to a pre-European identity. We might make a little leap of faith and argue that the EU missed this too, and the evidence is that Tymoshenko’s polls are horrible.
If the pro-Russian east didn’t show up, who did? There was a big surprise about Ukraine, and there was a big non-surprise. The surprise was the appeal of the European Union as an ideal – who expected that? – and the non-surprise was the emotional force of nationalism. This brings me to Tuesday’s standoff at Belbek airfield, Sevastopol, where Ukrainian Colonel Yuri Mamchuk led an unarmed march of the 204th Aviation Brigade’s ground crew to assert their right to access the runway and maintain the 40 or so MiG-29 aircraft there. You can watch the confrontation, with subtitles, below:
But I prefer this photo, which reminds me of Ilya Repin, perhaps a painting entitled Colonel Mamchuk Defies the Rascally Cossacks:
Face off between Ukraine base commander Col. Yuli Manchur and Russian officer at occupied Belbek airbase pic.twitter.com/6N10wuezef
The imagery here is very important – the red banner is the colours of the Soviet unit whose traditions the 204th inherited, which had no fewer than six Heroes of the Soviet Union. The Ukrainians have both appropriated the Second World War heritage, and also posed the question as to who looks like the Germans here. It’s also crucial to note that the people Mamchuk led up to the Russian sentries will have been the cooks and clerks and avionics technicians you need to make an air force work, not some sort of commando elite. This is, I think, what nationhood looks like.
And as a piece of strategic nonviolence, it came close to scuppering the whole Russian plan or non-plan in the Crimea. If the Ukrainians got to use the airfield, they could resupply and indeed relieve their garrisons there. If they could fly their planes, they would evidently discredit any Russian claim to control the air. Starving them out would no longer be an option. Having both Russian and Ukrainian forces present would be very much like the Crimea pre-revolution, and therefore something close to the status quo. The degree to which Russian and Ukrainian forces coexisted there until this month is shown by the fact the 204th is a counter-air wing with the dogfighter variant of the MiG-29, and the Russian air wing up the road is a strike force with the Su-24 bomber. The Ukrainians essentially provided the Black Sea Fleet’s air defence. (SO AWKWARD.)
The upshot was a compromise – the Ukrainians didn’t get to reoccupy the airfield, but they did get to station people there. But this is progress towards the status quo. And today, this Daily Mirror piece mentions that the Ukrainian navy’s helicopters are active in Crimea and that the Mirror journalist saw one resupply the garrison he visited. If this is true, the Ukrainians can hold out a long time.
On Tuesday, both Putin’s odd self-contradictory statement and Kerry’s words in Kyiv were united in tone; they both seemed huffy, calling for OSCE monitors to check on the kids-on-lawn situation. Two old men who found they controlled the situation much less than they thought. It is worth pointing out that historically, Crimeans have usually demanded autonomy or even independence, not integration in Russia.
Sources I used beyond the ones linked in the text:
As the expression has been put back in the news, here’s the text of what became known as the Chicken Kiev* speech of President George HW Bush (the elder) in 1991. The title speaks to the changed times: Remarks to the Supreme Soviet of the Republic of the Ukraine in Kiev, Soviet Union. The speech takes as a guiding frame that the USSR will continue in some form and is sceptical about the ongoing process of USSR disintegration, especially economic disintegration. The paragraph that caused Bush 41 trouble back home (a reaction that no doubt had some influence on Bush 43) was this one:
Yet freedom is not the same as independence. Americans will not support those who seek independence in order to replace a far-off tyranny with a local despotism. They will not aid those who promote a suicidal nationalism based upon ethnic hatred.
For US domestic politics, too deferential to the Soviet status quo. But he did manage to avoid accusations that he was stirring things up and a few months later, Ukraine had voted for independence. Anyway, read the whole thing.