Pol•eco•phi

Greece’s hung election raises the spectre of a Hellenic exit from the euro monetary area. To contain the crisis, the European Central Bank under the leadership of Mario Draghi has used creative policies to prevent a sudden escalation of the credit crisis in the periphery of the Eurozone, notably in Spain and Italy.

Two questions come to mind:
How have ECB interventions helped contain an escalation of the Euro crisis?

Can the ECB’s interventions maintain the cohesion of the Eurozone in the next few years?

Super Mario in action:

By providing liquidity to European banks, the ECB is slowing down the consequences of the Euro credit crisis. Firstly, subsidized loans at 0.5% interest rate allow European banks to lock in a guaranteed profit and to stay afloat. An Italian Bank can borrow at 0.5% and invest in European sovereigns at 5+%, which allows these banks to secure a profit. Secondly, ECB liquidity allows under-capitalized European banks to meet depositors demand for their money. A typical Spanish bank would be under capitalized, because its assets in the form of worthless mortgages have depreciated significantly (due to the implosion of the Iberian housing bubble), while its liabilities in the form of demand deposits remain intact. In such an environment, the slightest run on banks or financial shock could spell the doom of many of these institutions. Liquidity from the ECB allows those banks to continue to function, and prevents a run on banks which would have chaotic consequences.

Secondly, to secure a return on cheap ECB loans, European banks invest their cheap cash in European sovereign bonds, which provide them with a higher yield. While this may sound surprising, European sovereign debt is a better investment than consumer debt (as unemployment remains stubbornly high, and personal budgets are overstretched in countries where solidarity maintains social cohesion where austere states can’t afford to spend), or corporate debt as companies have no room to expand in an environment where taxes are increasing and consumers have nothing to spend.

Mario Draghi’s move to provide liquidity to banks that then turned around to buy their nations’ debt is a masterful move. It allows the ECB to put a cap on sovereign interest rates without violating its charter, which forbids it to finance sovereign borrowing. By indirectly capping the level of interest rates on EU sovereign debt, the bank is in effect preventing these rates from reaching the threshold at which rising debt service burdens increase the probability of default, which further constrains credit and drives rates higher, until the increasing risk of default causes defaults in a self fulfilling prophecy dynamic.

This intervention came at a cost however. Portfolio management theory demonstrates the benefits of diversification. As such, European Banks have an incentive to invest in sovereign debts of countries to which they have relatively less exposure. Italian Banks will therefore buy other EU country debt; in effect, providing European banks with cheap liquidity, and thus allowing them to invest further in each other socializes the cost of a default by any euro member. In exchange for more time, politicians are assured that their countries will pick up a greater share of the tab, should they not find a satisfactory solution.

Can the ECB save the Titanic Euro?

Given its current constraint of inflation targeting as its sole objective, the ECB cannot save the Euro. As previously covered in this blog, the austerity measures are counterproductive because they reduce the economic base from which the resources necessary to pay the debt must be extracted. Further, given that European banks are undercapitalized, ECB liquidity does not allow them to help economic expansion because they hoard cash to buttress their balance sheet rather than lend to citizen who are losing their jobs or to companies that have no room to grow.

In such an environment, ECB monetary actions are inefficient. Since the ECB cannot invest in government bonds, it cannot allow governments that can no longer borrow at affordable rates to support their economies through fiscal expansion. Further, ECB liquidity for European banks do not help restore consumer confidence, as the latter are faced with uncertain job prospects, rising taxes, and must support unemployed relatives. Furthermore, ECB monetary interventions do not help European companies who do not have customers to sell to, and whose competitiveness is not helped by a stubbornly high Euro.

In light of these facts, it is reasonable to infer that the ECB’s monetary interventions can buy time for efforts to preserve the Euro block, but are insufficient to resolve the Euro crisis. I maintain my assessment that the Eurozone will break up in parts by 2013.

Mario Draghi like Mr. Thomas Andrews knows that the Titanic Euro will sink, it is only a matter of time, the goal now is to help the maximum number of people stay afloat.

The Duality of Racism:

Having negative feelings and attitudes towards people based on their race is unambiguously considered racist. In most social milieus declaring that “I hate [ any group of human being]” is considered wrong, and will draw social disapprobation. However, declaring sympathy to a group of people based on positive characteristics is considered acceptable. It is ok to believe that people of Chinese ancestry are good at math, or people of African descent have super normal abilities in artistic expression and athletic performance. We may describe this as positive racism. The problem with “positive racism” is that it is noxious nonetheless. The acceptance of positive prejudices reflects the duality of racist feelings.

Positive racists act on their feelings in ways that are detrimental to the victims of racism and society. As such, a talented Japanese Jazz musician may not get a fair hearing to demonstrate his talent. Should he get his groove across to a talent scout, a musical impresario may deem him unmarketable because people cannot associate a Japanese saxophonist to Jazz. Likewise, a motivated African American student with a solid aptitude for Mathematics may never receive the positive reinforcement she needs from her teachers, to embark on a career in engineering. Make your own examples.

On the 7th of May 1954, the siege of Dien Bien Phu ends. It is a tremendous victory for the  vietnamese forces over the french colonial army. This victory ends French colonial rule of Vietnam, and, regrettably, paves the way for American involvement in Vietnam. 

Arguably, Vietnam’s distance from France, a long war with the pre-eminent western super power, and its location in a region vibrant with various successful political models of governance (Japan, China, Korea, Thailand, Malaysia), shielded it from French political interference and French institutional modes of governance.

Vietnam’s ability to model its development economic models best suited to its historical and political context allowed it to prosper beyond most other former French colonies that are still mired in poverty and underdevelopment.

Who is racist?

A minority of people would self-identify as racist. A silent majority use race as a heuristic that leads to racist behaviour. A general perception that say green people are 10% more likely to engage in racist behaviour, leads us to be prejudiced against a majority of green people. In our mental risk assessment, our instinct is to distrust all green people. Implicit association tests are widely used to establish racial (and other) prejudice(s). Subjects are given a positive and negative anchor, and are tasked to assigning statements to their anchors. By analyzing the length of their responses and comparing these to a pre-test survey of their beliefs, researchers can infer prejudice. Essentially people take longer to respond to cognitively dissonant questions. For example, prejudiced people will take more time to assign the phrase “Green people are like any other persons” to the Positive (or True) category, than the phrase “Purple people are like any other persons” if they harbour racist feelings against green people. You can test it on Harvard’s Implicit Association Website [5]. The results of tests that aim to measure prejudice demonstrate that most people are prejudiced.

[5] Implicit association Tests. See https://implicit.harvard.edu/implicit/demo/selectatest.html

Why is racism morally reprehensible?

In short, judging individuals based on characteristics that are beyond their control is unjust. None of us would agree to arbitrary judgement based on characteristics of our person that are beyond our control, if we were seated behind a veil of ignorance (See John Rawls) [4]. From a social perspective, choosing individuals based on race instead of aptitude constrains the production possibility of beneficial and desirable goods that result from social interdependence.

[4] Justice as Fairness # John Rawls

On The Dual Faces of Racism: What is Racism?

Racism is the belief that individuals possess abilities, handicaps, or special characteristics that are linked to their race. Racism sentiments are noxious to a well functioning society because people relate to others based on their racist sentiments. Racist people may deny economic, social, or political opportunities to others based on their race and not their character or aptitude.

For example, countless studies have shown that minorities are discriminated against in the labour market based on their race and not their qualifications. [1] This article is a good example of wage gaps by ethnic origin (as a proxy for race), in the labour markets of France, Germany, and England.

Beyond Economic discrimination, social discrimination is also pervasive. People from other races, are considered less desirable partners. An interesting data crunch from Ok Cupid demonstrates how race affects dating markets. In a world without racial discrimination then race should be irrelevant in the dating market, just like our astrological signs are. At its worse, social discrimination takes violent forms. Most western democracies have experienced violent racial riots in response to emblematic incidents of racial hatred perpetrated by a representative of the government. Of note, the 2005 “civil unrest” in France, the race riots in LA in 1992, the race riots in Brixton UK in 1981, amongst others.

Social discrimination inevitably leads to political discrimination. President Barack Obama’s historic victory is particularly exceptional, as he had to overcome voters concerns about his opponents’ politically motivated charges that America was not prepared to vote for a man of African ancestry. [3]

[1]  http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0297.2009.02338.x/pdf

[2] http://blog.okcupid.com/index.php/your-race-affects-whether-people-write-you-back/

[3] http://thecaucus.blogs.nytimes.com/2008/04/22/bill-clinton-irritated-by-race-card-questions/