Five Stories You Might Have Missed

The biggest story of the week has to be the breakdown of the ceasefire between Israel and Hamas in the Gaza Strip.  Since last week, when we discussed the termination of the Egyptian-brokered ceasefire, the two sides have increased cross-border attacks.  Civilians on both sides of the border are preparing for an increase in violence, as Hamas threatens a dramatic increase in rocket attacks against Israeli communities bordering the Gaza Strip in response to the dramatic increase in Israeli air strikes over the weekend.  So far, Prime Minister Ehud Olmert has refused to launch an all-out ground attack, but many are speculating that Israel is preparing to follow the massive air strikes with some kind of ground assault.  The United States has given tacit approval to the Israeli strikes, calling on Hamas to cease its activities.  The Europeans are calling for a stop in the violence, and Libya has called an emergency session of the UN Security Council to address the crisis.  However, any solution to the crisis must also involve Egypt, which has so far failed to develop an initiative both sides can accept. 

In other news from the last week:

1.  On Friday, Pakistan began shifting large portions of its military forces from its northern border with Afghanistan to its eastern border with India.  Pakistani military officials are downplaying the move, which so far has involved an estimated 20,000 soldiers.  But the Pakistani government has raised concerns that India may launch a strike in response to the Mumbai terrorist attacks.  The United States and the European Union are urging restraint on both sides, noting that Pakistan’s move undermines the ability of coalition forces to wage the war against al Qaeda in Afghanistan.  India and Pakistan have long been at odds over the disputed territory of Kashmir.  Both are also nuclear powers.

2.  Somalia’s President, Abdullahi Yusuf, may be close to resigning.   Earlier this month, a political crisis emerged when Yusuf attempted to force the resignation of the country’s Prime Minister, Nur Hassan Hussein.  Hussein had been appointed as part of a power-sharing agreement supported by the West and by neighboring governments.  Since the attempt, Kenya has announced its intentions to move forward with sanctions against Somalia.  The resignation of Abdullahi Yusuf may increase instability in the embattled country, already home to a number of pirates and warlords.  Alternatively, it may result in greater stability if the Islamic insurgency with close ties to al Qaeda is able to establish control over the country. 

3.  The Russian government is bracing for an increase in unrest as the ruble fell to a four-year low against the euro and the dollar on Friday.  In early December, the Russian government put down protests in Vladivostok as it increased duties on imported cars in an attempt to protect domestic auto manufactures.  The opposition has criticized the government, and the liberal People’s Democratic Union leader Mikhail Kasyanov, has argued that the implicit social contract, under which the Russian people exchanged political freedoms for economic prosperity and consumer goods, had broken down.  The global economic crisis has hit Russia particularly hard, with industrial output falling and unemployment increasing at the same time the price of the country’s most important product, oil, has collapsed. 

4.  The December 23 death of Lansana Conté, left a power vacuum in Guinea  which was filled on Friday by a military junta.  Conté had ruled the West African nation for 24 years, after seizing power in a coup in 1984.  The military group which seized power on Friday is led by Moussa Camara, a captain who served in a logistics unit.  The junta has appealed to the international community for recognition and assistance.  But so far, the international community has been slow to recognize the new government, as the United States, the European Union, the African Union, and France have all condemned the coup.  Guinea is the world’s largest exporter of bauxite, a precoursor in the production of aluminum, and the coup has raised concerns about the stability of world alumunum markets.  It also has a key role to play in ensuring the stability of its neighbors, Sierra Leone and Liberia, which experienced a long civil war in the 1990s fueled by trade in illicit diamonds.

5.  The budget of the United Nations was passed on Tuesday.  The new budget increases spending by $700 million (from $4.17 billion to $4.87 billion), excluding the cost of peacekeeping operations.  Passing the budget of the United Nations has become an increasingly politicized affair, as developing countries push for an expansion of the international institution’s role while the developed countries attempt to limit it.  This year, compromise was reached when the developed countries agreed to fund an additional 92 positions in exchange for increasing UN missions in Afghanistan and Iraq.

Five Stories You Might Have Missesd

Efforts to rescue the failing auto industry continue, as President Bush last week announced a $17.4 billion package targeting the big three American auto manufacturers.  The Canadian government has stepped in with a C$4 billion package of its own, and pressure is growing on the British government to follow suit.

Here’s five other stories important from the previous week:

 1.  Despite the announcement of a record production cut by OPEC last week, oil prices continued to slide, falling below $34 per barrel—a four year low—on Friday.  Many analysts have raised concerns about the stability of oil prices, though oil producers and oil consumers remain at odds over precisely what the price should be.  In an interesting side note, falling oil prices have also undermined the ability of Venezuela to pursue its policy of supporting like-minded governments in Latin America.  Chavez’s government has pledged $30 billion in direct payments, oil financings, and other initiatives developed through the Bolivarian Alternative for the Americas, whose members include Venezuela, Cuba, Bolivia, Dominica, and Honduras.

2.  Prime Minister Yves Leterme’s government in Belgium resigned on Friday after the country’s supreme court found signs that the government had attempted to exercise undue influence over the country’s courts.  The resignation of Leterme’s government is the most recent indication of political instability in the country, sharply divided along linguistic lines and perpetually in danger of dissolution.  The government has been in office since March, after taking more than nine months to cobble together his five-party coalition.  As head of state, King Albert II must now decide whether to accept the resignation and schedule new elections, or try to form a new coalition out of the country’s sharply divided parliament.

3.  Palestinians living in the Gaza Strip and Israelis living near it are bracing for a renewal of violence this weekend as the Egyptian-negotiated ceasefire between the Israeli government and the Hamas-led government in Gaza ended on Friday.  The fragile ceasefire has been in place for six months, but both sides have regularly violated the agreement.  In response to rocket attacks against Israeli settlements, the Israeli military has closed all entry-points into Gaza, effectively cutting the region off from the outside world and creating severe shortages of key materials, including food and fuel.  The Hamas government asserts that it will not stop the rocket attacks until the blockage is lifted.

4.  On Thursday, a United Nations court found Colonel Theoneste Bagosora guilty of genocide, crimes against humanity, and war crimes in Rwanda and sentenced him to life in prison.  Bagosora assumed leadership of the military, and became the de facto leader of Rwanda after President Huvenal Habyarimana’s plane was shot down in April, 1994.  The downing of the plane marked the beginning of the mass killings, which resulted in the murder of more than 800,000 Tutsis in Rwanda.  The conviction makes Bagosora the highest-ranking member of the Hutu-dominated Rwandan government to be convicted. 

5.  The United States is preparing to expand its mission in Afghanistan, projecting an increased force commitment of between 20,000 and 30,000 soldiers by next summer.  The extra troops are necessary to fight a growing Taliban insurgency centered in the east and south of Afghanistan.

The Return of Keynesianism?

On Monday, the Federal Reserve’s Board of Governors took the dramatic move of lowering the federal funds rate—the interest rate the Fed charges banks on short term loans—by 50 basis points.  A half point cut would normally be noteworthy by itself.  But this cut was particularly newsworthy because it lowered the federal funds rate to 0.25 percent—one quarter of one percent—its lowest rate ever.

The Fed hopes that the move will provide the market a clear signal of the Fed’s willingness to take sweeping action to address the current financial crisis.  And indeed, U.S. markets briefly reacted positively to the announcement, with equities increasingly slightly before falling by day’s end.

However, the move also raises some concerns.  First, with the U.S. funds rate so much lower than the rate of other major central banks (especially in European Union), the move may put downward pressure on the dollar.  This could help the U.S.’s balance of trade, but it may also make investors more hesitant to hold dollar-denominated assets, particularly U.S. Treasury Bills, due to their historically low yields.  Some groups within the Chinese government, the single-largest holder of U.S. t-bills, have already raised such concerns and have been pushing the Chinese government to diversify its holdings.  Were this to happen, the U.S. government could find it increasingly difficult to finance its operations, not to mention its $10 trillion debt.

More generally, however, the current low federal funds rate raises some important questions regarding the relative influence of (Neo)Keynesian and Monetarist policy in the United States.  Since the early 1980s, monetarism has been the prime approach to managing the nation’s economy, and the most important tool in the monetarist policy kit is arguably the federal funds rate.  By increasing the rate, the Fed can slow down the economy and bring inflation under control.  Conversely, by lowering the rate, the Fed can inject liquidity into the system, stimulating the economy and encouraging expansion.  Until recently, this system worked relatively well, keeping recessions (such as the one that occurred in 1990-1991) relatively short and shallow.

But with the federal funds rate now near zero percent (and potentially negative in real terms), the most important tool in the monetarist economic policy kit is no longer available.  If this move does not work—and there is good reason to think that it may not—the Fed will be forced to come up with new ways to stimulate the economy.

The current situation may therefore call for a return to Keynesian policies of this post-Great Depression era.  By focusing on the maintenance and expansion of aggregate demand, Keynesian policies may provide an additional tool for the U.S. government to address the current crisis.  Although Keynesianism may have fallen out of favor in the 1980s, in truth Keynesian policies never fully disappeared from the scene.  Since the 1980s, the U.S. government has been much less willing to use Keynesian tools than it historically had been.  But now that monetarism’s most important tool has been exhausted, perhaps we are all, to paraphrase Richard Nixon, Keynesians again.

If you’re interested in learning more, Paul Krugman has written extensively on the topic.  There’s a great ongoing discussion of his book, Return of Depression Economics, at Taking Points Memo.  And Krugman’s blog always makes for an interesting read!

Five Stories You Might Have Missed

Most of the headlines this week has centered on the auto rescue package.  The most recent news is that the Treasury Department is working to put together a rescue package for Detroit automakers after Senate Republicans blocked the Congressional effort last week.  The Canadian government is offering $3.4 billion in aid to struggling car makers on the condition that the U.S. government extend assistance as well.  Foreign car manufacturers are that the U.S. government should extend aid to American manufacturers in order to prevent knock-on effects on their own businesses.

Here’s five other important stories you might have missed this week:

1.  The government of Ecuador announced it would not meet the $30.6 million payment on the country’s foreign debt, despite holding $5.65 billion in cash reserves.  Rafael Correa, Ecuador’s leftist president, said, “I gave the order not to pay the interest and to go into default.  We know very well who we are up against—real monsters.”    The international debt-forgiveness campaign Jubilee celebrated the decision, arguing that requiring countries to repay illegitimate debt forces them to cut social spending.  As a result of the default, the cost of barrowing money by the Ecuadorian government and businesses will likely increase.

2.  The situation in Zimbabwe continues to deteriorate.  Once celebrated as a potential model for the rest of Africa to emulate, Zimbabwe’s social, political, and economic collapse continues.  The country currently faces an annual inflation rate of 231 million percent, and a cholera outbreak which has resulted in the deaths of more than 800 people this month now threatens to spread into other states in the region, forcing South Africa to declare a state of emergency and close the border.

3.  European leaders committed themselves to a 20 percent reduction in greenhouse gas emission by 2020.  The announcement, intended to reduce the danger of global climate change, falls short of the 25-40 percent reductions required of developed countries according to scientific assessments.  However, the EU has already announced its intention to pursue bigger reductions if the United States and other developed countries come on board.

4.  Ireland confirmed it would move forward with a second referendum on the Lisbon Treaty after securing concessions from the European Union.  The Lisbon Treaty, which was defeated by Irish voters in June, moves European integration forward.  Ireland is the only country which required a popular referendum on the Treaty.  The text of the Treaty has been amended to assure that Ireland’s military neutrality would be guaranteed, and its abortion laws and national tax system would not be affected.

5.  The South Korean government announced its intention to expand cooperation with China and Japan in coordinating economic policy to address the spreading global financial crisis.   The three countries account for 75 percent of the region’s economy and two-thirds of its trade.  The deal would expand a currency swap agreement intended to stabilize the three countries’ currencies, and could lead to further coordination of economic policy.

Foreign Policy’s 10 Missed Stories from 2008

Foreign Policy magazine published its Ten Stories You Missed in 2008.  The list makes for interesting reading.  The ten stories are:

1. The Surge in Afghanistan starts early.
2. Colombian coca production increases.
3. The next Darfur heats up.
4. The United States helps India build a missile shield.
5. Russia makes play for Africa.
6. Greenhouse gas comes from solar panels.
7. Shanghai steel fails basic safety test.
8. Aid to Georgia finances luxury hotel in Tbilisi.
9. For first time, U.S. citizen convicted of torture abroad.
10. American company sells ‘sonic blasters’ to China.

They also have a list of the ten worst predictions for 2008.  Hindsight may be 20/20, but these predictions make for interesting reading!

Five Stories You Might Have Missed

It’s been a bad week for economic news.  Both the United States and Canada posted record job losses, home foreclosures continue to rise, and Congress is at an impasse on how to (or if to) bail out the U.S. auto industry.   Here’s five stories you might have missed amid all the bad economic news coming out this week.

1. Massive riots rocked the Greek capital of Athens on Sunday, as young Greeks took to the streets to protest the killing of teenager by police.  The center-right Greek government has been under pressure amid the spread of the financial crisis to Greece.  It currently holds a narrow two-seat majority in the country’s parliament, but the protests—the largest in Greece since World War II—may force some concessions on the part of the government.

2.  Amid news that the global economic crisis is taking a severe toll in Asia, both China and India are seeking to limit the spread of the crisis by instituting Keynesian-style economic stimulus packages.  India has announced a $4 billion package while China is seeking to boost domestic consumption.  Both plans have been criticized for being too small in the face of the current crisis.

3.  The Israeli closure of the Gaza Strip continues.  According to Palestinian officials, the impact of the closure is so severe that the Gaza’s financial institutions have run out of money.  The lack of cash has affected nearly all aspects of daily life in Gaza, as families lack the cash to purchase basic supplies and relief agencies have been forced to suspend their work.  Israel maintains the closure is necessary to prevent the Hamas government in Gaza from attacking Israeli settlements near Gaza. 

4.  Elections are being held in Ghana, one of Africa’s most longstanding and stable democracies.  Sunday’s presidential election is projected to be very close, potentially triggering a run-off election later this month.  Many are looking to Ghana to illustrate the potential of peaceful political transitions to countries like Kenya, Zimbabwe, and Nigeria, which experienced violence surrounding recent elections.

5.  Regional economists are raising concerns that Latin American governments may be crowded out of international credit markets due to barrowing by the United States and other developed countries.  The Latin American Shadow Financial Regulatory Committee, comprised of former finance ministers and central bank governors from the region, are warning that the loss of access to credit could have severe consequences in the region, potentially forcing countries to undertake painful fiscal adjustments or detrimental import restrictions and capital controls.

The Politics of Instability in Canada

Canadian politics have become much more exciting in the last few days.  Just seven weeks after an election which saw Stephen Harper’s ruling Conservative Party declare victory and form a minority government, a counter-coalition of opposition parties is threatening a confidence vote which could see the Conservative government fall.  The counter-coalition is comprised of two, the Liberal Party and the New Democratic Party, and is supported by a third, the Bloc Québécois. 

In the last national election, held in early November, the Conservatives won 37.6% of the poplar vote, which translated into 143 seats (46% of the total seats) in Parliament.  The Liberals won 26.2% of the vote (77 seats), the New Democratic Party won 18.2% of the vote (37 seats), and the Bloc Québécois 10% of the vote (49 seats).  After the election results, Stephen Harper decided to try and rule through a minority government.  His party’s attempt to force through fairly dramatic economic reforms provoked a sharp response from the opposition, leading to the current standoff.

Michaëlle Jean, the Canadian Governor General, who acts as head of state, is returning from a conference in Europe to consider ways out of the current crisis. Three options appear to be on the table.  First, she may permit new elections to be scheduled, though it is unclear that new elections would resolve the crisis.  Second, she may approve the new coalition and allow it to form a new government.  Or third, she may permit Harper to suspend parliament without calling for new elections.

Whatever the outcome of the current standoff, the crisis illustrates the challenges of parliamentary governance.  Parliamentary systems are often criticized for being less stable than presidential systems.  This is certainly illustrated by the contemporary crisis in Canada.  But on the up side, they can also force greater compromise and are often more inclusive of a greater variety of opinions.  The current crisis in Canada is, in part, a function of the larger number of political parties represented in the national legislature.  The four major parties in the Canadian Parliament each represent a specific ideological or political constituency, and it appears unlikely that either the major parties or their constituencies are going to disappear to make governance easier.

The crisis also raises some interesting questions about the nature of democracy.  In the context of the crisis, the Conservatives have accused the Liberals of being undemocratic in their attempt to circumvent the popular expression of the people in the last national election.  By tradition, the party that wins a plurality of the seats in parliament gets the right to form the new government.  But the Liberals counter that the current government is not representative of the interests of the Canadian electorate, the majority of which voted for parties other than the Conservatives.  Both positions have an element of truth.  Ultimately, however, the debate over the future of the Canadian Parliament will likely be resolved through power sharing deals negotiated in the back halls of Parliament rather than another national election.