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  1. 1. Print edition Politics in America printed lighting Whats gone Printed circuit wrong in Washington? private-sector space flight American politics Moon dreams seems unusually bogged down at climate change present. Blame Green.view: Copenhagen accounting Barack Obama more than the system Feb 18th 2010 polar ice shelves Breaking waves Leaders computer displays Hands off Nigerias new president Be focused, be bold the internet Tech.view: World Wide Wait Greece and the euro Leant on recruitment Science correspondents job Competition policy Prosecutor, judge and jury more recruitment The Richard Casement internship Rethinking economics Radical thoughts on 19th Street Business&Finance americas economy A modest proposal business in china Power cut a european monetary fund? Economics focus: Disciplinary measures the euro area’s crisis Let the Greeks ruin themselves sovereign-debt worries Domino theory competition policy in europe Unchained watchdog business and social responsibility Business.view column: Unlikely heroes a special report on financial risk The gods strike back Science&Technology printed body parts Making a bit of me Page 2 of 59
  2. 2. Politics in AmericaWhats gone wrong in Washington?Feb 18th 2010From The Economist print editionAmerican politics seems unusually bogged down at present. Blame BarackObama more than the systemDerek BaconTHIS week Evan Bayh, a senator from Indiana who nearly became Barack Obama’svice-president, said he was retiring from the Senate, blaming the inability ofCongress to get things done. Cynics think Mr Bayh was also worried about beingbeaten in November (though he was ahead in the polls). Yet the idea that America’sdemocracy is broken, unable to fix the country’s problems and condemned toimpotent partisan warfare, has gained a lot of support lately (see article).Certainly the system looks dysfunctional. Although a Democratic president is in theWhite House and Democrats control both House and Senate, Mr Obama has beenunable to enact health-care reform, a Democratic goal for many decades. His cap-and-trade bill to reduce carbon emissions has passed the House but languishes in theSenate. Now a bill to boost job-creation is stuck there as well. Nor is it just aquestion of a governing party failing to get its way. Washington seems incapable offixing America’s deeper problems. Democrats and Republicans may disagree aboutclimate change and health, but nobody thinks that America can ignore the federal
  3. 3. deficit, already 10% of GDP and with a generation of baby-boomers just about toretire. Yet an attempt to set up a bipartisan deficit-reduction commission has recentlycollapsed—again.This, argue the critics, is what happens when a mere 41 senators (in a 100-strongchamber) can filibuster a bill to death; when states like Wyoming (population:500,000) have the same clout in the Senate as California (37m), so that senatorsrepresenting less than 11% of the population can block bills; when, thanks togerrymandering, many congressional seats are immune from competitive elections;when hateful bloggers and talk-radio hosts shoot down any hint of compromise;when a tide of lobbying cash corrupts everything. And this dysfunctionality mattersfar beyond America’s shores. A few years ago only Chinese bureaucrats daredsuggest that Beijing’s autocratic system of government was superior. Nowadaysthere is no shortage of leaders from emerging countries, or even prominent Americanbusinesspeople, who privately sing the praises of a system that can make decisionsswiftly.It’s alright, AbeWe disagree. Washington has its faults, some of which could easily be fixed. Butmuch of the current fuss forgets the purpose of American government; and it letscurrent politicians (Mr Obama in particular) off the hook.To begin with, the critics exaggerate their case. It is simply not true to say thatnothing can get through Congress. Look at the current financial crisis. The huge TARPbill, which set up a fund to save America’s banks, passed, even though it came at theend of George Bush’s presidency. The stimulus bill, a $787 billion two-year package,made it through within a month of Mr Obama taking office. The Democrats have alsopassed a long list of lesser bills, from investments in green technology to making iteasier for women to sue for sex discrimination.A criticism with more weight is that American government is good at solving acuteproblems (like averting a Depression) but less good at confronting chronic ones (likethe burden of entitlements). Yet even this can be overstated. Mr Bush failed toreform pensions, but he did push through No Child Left Behind, the biggest change toschools for a generation. Bill Clinton reformed welfare. The system, in other words,can work, even if it does not always do so. (That is hardly unusual anywhere: for allits speed in authorising power stations, China has hardly made a success of healthcare lately.) On the biggest worry of all, the budget, it may well take a crisis to forceaction, but Americans have wrestled down huge deficits before.America’s political structure was designed to make legislation at the federal leveldifficult, not easy. Its founders believed that a country the size of America is bestgoverned locally, not nationally. True to this picture, several states have pushedforward with health-care reform. The Senate, much ridiculed for antique practiceslike the filibuster and the cloture vote, was expressly designed as a “cooling”chamber, where bills might indeed die unless they commanded broad support.Broad support from the voters is something that both the health bill and the cap-and-trade bill clearly lack. Democrats could have a health bill tomorrow if the House
  4. 4. passed the Senate version. Mr Obama could pass a lot of green regulation byexecutive order. It is not so much that America is ungovernable, as that Mr Obamahas done a lousy job of winning over Republicans and independents to the causes hefavours. If, instead of handing over health care to his party’s left wing, he had livedup to his promise to be a bipartisan president and courted conservatives by offering,say, reform of the tort system, he might have got health care through; by givingground on nuclear power, he may now stand a chance of getting a climate bill. OnceMr Clinton learned the advantages of co-operating with the Republicans, the countrywas governed better.Redistricting the redistrictersSo the basic system works; but that is no excuse for ignoring areas where it could bereformed. In the House the main outrage is gerrymandering. Tortuously shaped“safe” Republican and Democratic seats mean that the real battles are fought amongparty activists for their party’s nomination. This leads candidates to pander toextremes, and lessens the chances of bipartisan co-operation. An independentcommission, already in existence in some states, would take out much of the sting.In the Senate the filibuster is used too often, in part because it is too easy. Senatorswho want to talk out a bill ought to be obliged to do just that, not rely on a simpleprocedural vote: voters could then see exactly who was obstructing what.These defects and others should be corrected. But even if they are not, they do notadd up to a system that is as broken as people now claim. American democracy hasits peaks and troughs; attempts to reform it dramatically, such as California’sinitiative craze, have a mixed history, to put it mildly. Rather than regretting how theRepublicans in Congress have behaved, Mr Obama should look harder at his own useof his presidential power. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  5. 5. Nigerias new presidentBe focused, be boldFeb 18th 2010From The Economist print editionGoodluck Jonathan probably has only a short time in office. He could stillmake a differenceAFPACCORDING to his spokesman, the man who has just become the acting president ofAfrica’s most populous country, Goodluck Jonathan, has vowed to “secure Nigeria’spath to greatness and guarantee our place among the great nations of the world inthe shortest possible time.” That would be a tall order even for a freshly electedleader with a thumping majority and two terms in office. In fact, the spokesman’sdesperate hyperbole reveals the truth of the matter: Mr Jonathan is taking over theleadership of one of the world’s least governable countries in the least promisingcircumstances.Some doubt the constitutionality of his succession to Umaru Yar’Adua, whosupposedly still lies gravely ill in a Saudi hospital. And as the presidency rotatesbetween a northern Muslim and a southern Christian, to satisfy both sides of Nigeria’sethnic-religious divide, so Mr Jonathan, a southerner, probably has only a little morethan a year in office before being replaced in the next election. To many of Nigeria’sambitious politicians, he is more lame duck than Goodluck.Given these constraints, Mr Jonathan could be forgiven, perhaps, for just keeping hishead down and the seat warm for his successor. His lacklustre record as vice-
  6. 6. president and before that as governor of Bayelsa state suggests, alas, that this wouldbe his instinct. However, he also has a rare chance to be radically more ambitious.Since Mr Jonathan has little to lose politically, he could position himself as a boldreformer. If he wants to make a difference in the year he has in charge he shoulddevote himself to two policies.His first concern should be the Niger Delta. After six years of an insurgency inNigeria’s oil-producing region, last summer Mr Yar’Adua negotiated an amnesty and aceasefire with the rebel groups. Thousands of young men gave themselves up andhanded over their weapons in return for promises of stipends and training. Yet withthe months of uncertainty at the top of Nigerian politics, the momentum has beenlost in the Delta; money has not been paid, the training programmes have fallenbehind and there is little evidence of the roads and schools that were promised tolocal people. Mr Jonathan must dispel this dangerous sense of drift. He has theresources to honour the commitments made by Mr Yar’Adua in full, and he should doso as quickly as possible.Give democracy a chanceEven more importantly, Mr Jonathan should also reform Nigeria’s dreadful electoralsystem. The last election, in 2007, was a travesty; some judged it to be the mostrigged poll in the country’s history, others in the history of Africa. Either would bequite an achievement. Without fixing the political system, there is no hope of tacklingNigeria’s other woes, such as corruption, because the government will always lackthe legitimacy to take harsh decisions and act on them.An official commission last year suggested several changes to the electoral system,such as taking the power to appoint the head of the body that supervises electionsaway from the president and giving it instead to an independent committee. This,and other sensible proposals, were all rejected by Mr Yar’Adua. Mr Jonathan shouldreverse that decision. Above all, he should create Nigeria’s first truly independentelectoral commission. That will antagonise his fellow politicians, who do so well out ofthe present wretched system, but it will send a firm signal that Nigeria is on the righttrack and it will delight the country’s long-suffering voters. Who knows, the rewardfor Mr Jonathan might just be to cheat the Buggins turn of presidential succession inNigeria and win his own popular mandate in 2011. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  7. 7. Greece and the euroLeant onFeb 18th 2010From The Economist print editionThe euro zone’s rescue plan for Greece is flawedON FEBRUARY 15th Greeks celebrated Clean Monday, the start of Orthodox Lent, byflocking out of towns and cities to eat shellfish and fly kites. For a country in thethroes of an economic crisis, a national holiday to listen to the bouzouki smacks ofself-indulgence. But then Greeks and other members of the euro zone are perhapsallowing themselves to believe that, after an awful, bickering month, things arelooking up. Fortified by a couple of European Union summits, plus a more ambitiousGreek pledge to cut the deficit and a euro-zone counterpledge to stand behind thecountry, the market for Greek government debt looks stable.But for how long? The bond market’s assault has indeed abated, but only the mostcarried-away kite-flying oyster-eater could believe that this crisis is over for good. Atsome point in the next few months, during which Greece has to raise at least €20billion ($27 billion) in the bond markets, its finances are likely to be tested again.Greece’s plans to restructure its economy lack credibility, the euro zone’s promisedrescue is vague and the whole confection threatens to be needlessly expensive.European leaders bought time this week. They should use it to devise somethingbetter.The problem is that European leaders seem to like their handiwork. The euro zone’schieftains promised “determined and co-ordinated action” should the euro comeunder threat. There was no detail, but that was intentional. Details would be harderthan generalities for member states to agree on and they would give speculators atarget. Details would also draw the anger of voters at a time when Europeansolidarity is in short supply. Almost seven out of ten French voters say they now
  8. 8. regret the loss of the franc. Germans wonder why a 67-year-old worker from Aachenmust cough up so that an Athenian can retire early at 54 (see article). As its part ofthe deal, Greece has to get its deficit below 3% of GDP by the end of 2012, includinga four-percentage-point cut this year. If by mid-March Greece is falling behind, theeuro zone can ask for further cuts. To German ears that sounds like reassuringlyharsh punishment for Greece’s fiddled accounts and profligacy.Between extremes, uncomfortable reality liesWhat is more, the fix appears to have seen off the two extremes that dismayEurope’s leaders. One is the Eurosceptic fantasy that Greece’s travails herald thebreaking apart of the euro. That will not happen if Greece has support. The other is apush towards further European integration—which, after the poison spread by theLisbon treaty, finally ratified last year, is firmly off the menu (see Charlemagne).True, Greece will be watched closely, but if compliance counted as federalism, thenthe IMF, which has overseen countless such programmes, would long ago havebrought about world government.The trouble is that the euro-zone plan also has some grave weaknesses. The first isthat its vagueness may come to be seen as a symptom of how hard it would be tocarry out—that, say, domestic objections in France or Germany could thwart it. If so,investors in Greek bonds may come to doubt the credibility of the rescue promise.You can see why George Papandreou, the Greek prime minister, asked for moreprecision.The second weakness is that Greece may not be able to restructure fast enough. Thatis not only because of the scale of the task. In just a few months Mr Papandreou’sSocialist government is seeking to overturn decades of tax evasion and easygovernment money. The finance minister has already seen his own staff go onstrike—and his ministry’s job is to force the programme through. There is a limit towhat Greeks will tolerate, but nobody knows where it lies. That is why the euro zonehas said it will call on the experts at the IMF to help ensure that Greece stays oncourse. However Greece is a full member of the EU and the euro zone. For as long asthe main judgments are in Brussels, it will be hard to convince investors that theGreek programme is immune from backroom favours.Some economists favour setting up a European Monetary Fund (see article). Wewould rather give the IMF overall charge, even if in Brussels this is seen as ahumiliation and in Athens the fund is viewed as an arm of the American government.The IMF would lend credibility to Greece’s restructuring and lower the cost ofemergency borrowing: euro-zone countries would have to lend to Greece at punitiveinterest rates, to deter future spendthrifts, but the fund can lend its own cash at lowrates. A credible IMF programme would also mean bond-market investors wouldcharge the Greeks less too. And the less it has to pay, the more restructuring Greececan get done. The euro zone may be too proud to go to the IMF, but as any Lentenpenitent should know, pride comes before a fall.
  9. 9. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  10. 10. Competition policyProsecutor, judge and juryFeb 18th 2010From The Economist print editionEnforcement of competition law in Europe is unjust and must changeIllustration by David SimondsEUROPE’S trustbusters have plenty to boast about. Over several decades theEuropean Commission’s competition directorate has evolved into perhaps the mostimportant regulator of its kind in the world. It has been rigorous in the developmentof antitrust theory and an energetic enforcer of the law. While antitrust policy acrossthe Atlantic has veered between the activism of the Clinton administration and therelative laissez-faire of the Bush years, it has shown consistency. More than anyother body it has upheld the principles of the single market, often incurring the wrathof powerful member states. Yet despite its fine record, there are deep flaws in theway the directorate operates. The priority of the new competition commissioner,Joaquín Almunia, must be to address them.The problems are not new, but they have been given fresh salience by the falloutfrom the European Union’s case against Intel (see article). Last May the commissionfined the chipmaker a record €1.06 billion ($1.5 billion) under Article 82 (now 102) ofthe European treaty, which forbids dominant firms from abusing their power. Thespecific complaint against Intel, brought by its smaller rival, AMD, was that it hadbribed PC-makers to buy its own processors.
  11. 11. The sheer size of the fine had an element of grandstanding about it. But a muchbigger worry was that the commission’s trustbusters may have ignored evidence thatcould have weakened their case and made Intel’s conduct look less sinister. The EU’sombudsman found that in the course of the commission’s investigation, it had failedto keep a record of a meeting with a senior executive from Dell, one of Intel’s biggestcustomers. Critics, whose concerns have increased with the ferocity of the sanctionsimposed, say that by acting simultaneously as investigator, prosecutor, jury andsentencing judge, the commission is denying defendant firms the basic right to beheard by an impartial tribunal. They are right.The rules under which the competition directorate operates, which date back nearlyhalf a century, are grossly inadequate for the hugely enhanced role it plays today.There are three main objections. The first is the conflicted role of the case teams.These are appointed when the competition directorate decides to investigate acomplaint about abusive behaviour from a business rival, an accusation of collusionor a merger with potentially anti-competitive consequences. The case teamsinvestigate, propose a verdict and argue for a particular penalty. From the outset, theprocess is polluted by a prosecutorial bias. The second objection is that the accusedcompany is denied a fair hearing. Although it gets the chance to put forward its sideof the argument, it does so only to the case team, not to a neutral judge or hearingofficer. As things stand, the role of the hearing officer is purely procedural. The thirdobjection is that the final decision on culpability is taken on a vote by 27 politicallyappointed commissioners, only one of whom may have attended the defendant’shearing.A fair hearing, pleaseIn no other area of law would it be thought acceptable for the outcome of suchimportant cases to be determined by a bunch of politicians. In America the antitrustdivision of the Department of Justice has to make its arguments in open court, whileeven the quasi-judicial commissioners of the Federal Trade Commission appoint ajudge to preside over hearings and publish findings. The process is long-winded andexpensive but it is an intrinsically fairer way to establish the facts.Even if Mr Almunia procrastinates, change is coming. Europe’s Charter ofFundamental Rights will finally be ratified next year. It is highly probable thatantitrust appeals to the European Court of Human Rights (based on the unfairness ofa process that levies huge fines but falls far short of the standards expected of thecriminal law) will succeed. Realistically, amending the treaty to remove thecommission’s role as the enforcer of competition law is a non-starter. A more modestchange would, however, improve things greatly and bring European practice closer toAmerica’s without importing all its excesses. That is to give the hearing officer thepower to make a factual and legal determination based on a proper examination ofthe evidence; the 27 commissioners would then have to accept or reject this. Thesystem would still be far from perfect, but it would be a good deal more just.
  12. 12. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  13. 13. Rethinking economicsRadical thoughts on 19th StreetFeb 18th 2010From The Economist print editionA higher inflation target for central banks would be a bad ideaEVEN in economics, the guardians of orthodoxy are not given to capricious changesof mind. So when economists at the IMF question received wisdom and the fund’sestablished views twice in a week, it is no small matter. Two new papers have doneexactly that. The first reversal, on inflation targets, makes less sense than thesecond, on capital controls.The initial firecracker came on February 12th, with an analysis of the lessons of thefinancial crisis for macroeconomic policy, led by Olivier Blanchard, the IMF’s chiefeconomist. The report called for several bold innovations. The most radical of these isthat central banks should raise their inflation targets—perhaps to 4% from thestandard 2% or so.The logic is seductive. Because inflation and interest rates were low when the crisishit, central banks had little room to cut rates to cushion the economic blow. Oncetheir policy rates were down to almost zero, the world’s big central banks had to turnto untested tools, such as quantitative easing. Politicians had to boost enfeebledmonetary policy by loosening their budgets generously. Had inflation and interestrates been higher, policymakers would have had more room to cut rates. That gain,Mr Blanchard argues, might outweigh the small distortions from modestly higherinflation, especially if countries reformed their tax systems to make them inflation-neutral.Were central banks starting from scratch, such a cost-benefit analysis would indeedbe the right way to set an inflation target. Even then, Mr Blanchard might be wrong.He may be understating the costs of higher inflation. Many studies suggest that
  14. 14. inflation of 4% would do little, if any, harm to economic growth, but others reckonthat the threshold at which distortions kick in is lower. And since higher inflationtends to mean more volatile prices, the risks increase as the target rate rises.Nor is it obvious that starting with interest rates so low was either a cripplingconstraint on central banks’ actions or the main reason for the weakness of monetarypolicy. Central banks showed plenty of ingenuity with quantitative easing. Othertools, such as negative interest rates, could also be developed if need be. And withthe financial system in crisis and debt-ridden consumers unwilling to borrow,monetary loosening might have been a feeble source of stimulus even if inflation hadstarted higher.A question of credibilityYet the biggest problem with Mr Blanchard’s idea is that central banks are notstarting from scratch. They have spent two decades convincing the public that theyare committed to price stability and, rightly or wrongly, have equated this withinflation of around 2%. The stabilisation of expectations has been remarkablysuccessful—and it allowed policymakers to cut rates as fiercely as they did. But itcannot be taken for granted, especially when some rich countries’ budget deficits areso vast. It would disappear fast if central bankers suddenly said that inflation of 4%was just fine after all. How could they convince investors that the change wasintended to make policy more flexible, rather than to inflate away the state’s debts?With their credibility undermined, the next crisis would be much harder to fight. Asan intellectual exercise, Mr Blanchard’s idea is intriguing. As a policy proposal, it isreckless.That is not true of the IMF’s second piece of revisionism. A note to be published onFebruary 19th acknowledges that controls on capital inflows can be a useful tool forcountries facing a surge of foreign funds (see article). For an organisation that haslong focused on the distortions such controls create, the shift is significant. It is alsotimely. With rich-world interest rates at rock bottom, emerging economies are likelyto face continuing surges of foreign capital. Until now, the IMF has sniffed indisapproval when countries have introduced controls. It would be more useful if ithelped countries decide when such controls might work and designed them to do themost good and least harm. The new paper makes it easier for the fund’s economiststo get on with this. It may be less exciting intellectually than rewriting central banks’rule-books. But it is probably more useful and certainly less dangerous. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  15. 15. Gome and Huang GuangyuPower cutFeb 18th 2010 | HONG KONGFrom The Economist print editionChina’s biggest electronics retailer, like its founder, is in troubleNO ONE epitomises China’s boisterous embrace of modern consumerism better thanHuang Guangyu, who transformed a tiny street stall in Beijing into a sprawlingnetwork of 1,350 stores. In the process, he became the country’s richest man, worthmore than $6.3 billion. His spectacular rise ended abruptly with his arrest in 2008.The authorities belatedly announced the charges against him, of insider trading andbribery, on February 12th.Gome, the electronic-goods chain that Mr Huang founded, has also had a difficulttime of late. Since Mr Huang’s arrest hundreds of its stores have been closed andBain Capital, an American private-equity firm, has been brought in to shore up itscapital.Gome has had to change strategies several times. Mr Huang first found success byacting as an intermediary between the factories making electronic goods that werespringing up in southern China throughout the 1980s and consumers in Beijing, whoat the time had few places to shop other than dreary state-owned stores. As otherretailers followed suit, Gome’s initial advantage dissipated. But Mr Huang was quickto add scale. He proved to be an adept operator in China’s murky property markets,adding low-cost leases in numerous cities.Mr Huang took his knack for property deals one crucial step further. Gome was reallymore of a landlord than a retailer. Manufacturers in effect rented floorspace withineach store, and provided their own staff and products. That made it hard to compareone television, say, with another. But Chinese consumers, overwhelmed by the floodof new gadgets in their lives, were happy to be glad-handed by eager salesmen.Western retailers who tried to insulate Chinese shoppers from manufacturers andtheir fierce sales pitches were faulted for misunderstanding the local market.Nowadays, however, Chinese consumers are increasingly shopping in hypermarketsthat group products by type rather than by manufacturer. Gome, too, is trying toevolve. But like its founder, it is no longer a connected insider. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  16. 16. Economics focusDisciplinary measuresFeb 18th 2010From The Economist print editionIn a guest article, Daniel Gros of the Centre for European Policy Studies(pictured left) and Thomas Mayer of Deutsche Bank argue the case for aEuropean Monetary FundCEPS/Deutsche BankTHE difficulties facing Greece and other European borrowers expose two big failuresof discipline at the heart of the euro zone. The first is a failure to encourage membergovernments to maintain control of their finances. The second, and more overlooked,is a failure to allow for an orderly sovereign default. To address these issues, wepropose a new euro-area institution, which we dub the European Monetary Fund(EMF). Although the EMF could not be set up overnight, it is not too late to do so.Past experience (with Argentina, for instance) suggests that the road to eventualsovereign insolvency is a long one.The EMF could be run along similar governance lines to the IMF, by having aprofessional staff remote from direct political influence and a board withrepresentatives from euro-area countries. Just as the existing fund does, the EMFwould conduct regular and broad economic surveillance of member countries. But itsmain role would be to design, monitor and fund assistance programmes for euro-areacountries in difficulties, just as the IMF does on a global scale.Guilt payments
  17. 17. For its initial funding the EMF should be given authority to borrow in the markets withthe full and joint backing of all its member countries. Going forward, however, asimple funding mechanism would also limit the moral hazard that potentially resultsfrom the creation of the fund. Only those countries in breach of set limits ongovernments’ debt stocks and annual deficits would have to contribute, giving theman incentive to keep their finances in order. (Basing contributions on marketindicators of default risk does not seem appropriate since the existence of the EMFwould itself depress credit-default-swap spreads and yield differentials among themembers.)Countries could, for instance, be charged an annual contribution of 1% of their“excess debt”, the difference between their actual level of public debt and the limit of60% of GDP agreed on as one of the Maastricht criteria for euro entry. A similarcharge could be levied on governments’ excess deficits, the amount exceeding theMaastricht limit of 3% of GDP. Under these parameters the EMF would haveaccumulated about €120 billion ($163 billion) over the past decade, enough to coverthe likely costs of rescuing Greece. These levies are not so big that they make itimpossible for offenders to get to grips with their finances. Under this scheme theGreek contribution to an EMF would have been 0.65% of GDP in 2009.Any member country could call on the funds of the EMF up to the amount it hasdeposited in the past (including interest), provided its fiscal-adjustment programmehas been approved by the Eurogroup of euro-area finance ministers. Any call on EMFfunds above this amount would be possible only if the country agreed to a tailor-made adjustment programme supervised jointly by the European Commission andthe Eurogroup, and on condition that the EMF ranked ahead of all other creditors.The EMF’s other job would be to deal with the aftermath of a sudden withdrawal ofmarket funding from a euro-zone government. The strongest negotiating asset of abig debtor is always that default cannot be contemplated because it would bringdown the financial system. Few now doubt that euro-area countries would step in andpick up the bill were Greece’s deficit-reduction programme to fail. To eliminate themoral hazard this presumption creates, among profligate governments and recklessinvestors alike, it is crucial to create mechanisms that minimise the disruptionscaused by a default.One simple answer is to draw on the successful experience of the Brady bonds thatwere used to deal with the impaired debt of Latin American countries in the 1980s. Adefault creates ripple effects throughout the financial system because all debtinstruments of a defaulting country become, at least temporarily, worthless andilliquid. If a euro-area country loses access to market financing, the EMF could step inand offer all holders of debt issued by the defaulting country an exchange againstnew bonds issued by the EMF. The fund would require creditors to take a uniform“haircut”, or loss, on their existing debt in order to protect taxpayers. The EMF could,for example, tie its guarantees to the 60%-of-GDP Maastricht limit on debt, so thatcreditors of a country with a debt stock of 120% of GDP would face a 50% haircut.The losses to financial institutions would be limited and certain, reducing the risk ofcontagion. The EMF would only exchange debt instruments that had been registeredwith it beforehand. That would provide a strong incentive for transparency, because
  18. 18. the counterparties of derivatives designed to conceal the true state of public financeswould not have the option of converting their claims.Having acquired bondholders’ claims against the defaulting country, the EMF wouldallow the country to receive additional funds only for specific purposes that the EMFapproved. The new institution would provide a framework for sovereign bankruptcycomparable to the Chapter 11 procedure for bankrupt companies in America. Withoutsuch a process for orderly bankruptcy, the euro area will remain hostage to anycountry that is unwilling to adjust and threatens a systemic crisis if help is notforthcoming.In-house solutionSetting up a European Monetary Fund is superior to the option of either calling in theIMF or muddling through on the basis of ad hoc interventions. The IMF has nomechanism for allowing orderly default, and ad hoc decisions typically have to betaken hurriedly, often over a weekend when the pressure in markets has becomeunbearable. It should not come to that with an EMF.Closer surveillance (supported by pre-funding requirements based on the laxity ofpublic finances) should lead to sounder fiscal policies. Perhaps more importantly,there would be less reason for turbulence in financial markets as the procedure for anorderly sovereign bankruptcy would be known in advance. Of course, a defaultingcountry may regard such intrusions as an unacceptable violation of its sovereignty. Aeuro-zone country that refused to abide by the decisions of the EMF could choose toleave the EU, and with it the euro, under Article 50 of the Lisbon Treaty. But theprice of doing so would be very great. That is another reason to think that the EMFwould address today’s moral-hazard problem, whereby bond markets and Greece areboth assuming that they can count on a bail-out in the end.The full paper on which this article is based can be read hereSee further discussion of this article at Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  19. 19. Germany and the euroLet the Greeks ruin themselvesFeb 18th 2010 | BERLINFrom The Economist print editionGermany has Europe’s deepest pockets, but it does not want to pay to savetroubled euro-zone economiesIllustration by Peter SchrankLESS than a year before the euro became the currency of 11 European countries inJanuary 1999, a declaration signed by 155 German-speaking economists called for an“orderly”—ie, long—delay. The prospective euro members, they said, had not yetreduced their debt and deficits to suit a workable monetary union; some were using“creative accounting” to get there, and a casual attitude towards deficits wouldundermine confidence in the euro’s stability.Now the prediction is coming true, says Wim Kösters, of the Ruhr University inBochum and one of the original signatories. Greece, which joined the euro two yearsafter its inception, has concealed the dodgy state of its finances. Now it is underattack from speculators. A default could spread panic to other deficit-plaguedeconomies, including those of Spain and Portugal, with scary consequences for
  20. 20. Europe’s already shaky banking system. But if Greece’s partners bail it out, defyingthe euro’s founding treaty, the currency will suffer. Either way, the euro is in trouble.This dilemma is felt especially keenly in Germany. It was a wrench to surrender theDeutschmark, symbol of post-war recovery and economic success. On the eve ofmonetary union 55% of Germans were against it, making their nation the euro zone’smost reluctant founders. When a “rescue” is mentioned, all eyes fix on Germany,Europe’s biggest economy and most creditworthy borrower. Germans fear that arescue of Greece would, in effect, extend their welfare state to the Mediterranean.Greece’s travails put Angela Merkel, the chancellor, in an uncomfortable position.German taxpayers are in no mood to save what they see as profligate Greeks, havingalready pledged €500 billion ($682 billion) to shore up their own banks and billionsmore for companies. The liberal Free Democratic Party (FDP), the junior partner inher coalition government, is against a rescue, as are many politicians from her ownChristian Democratic Union (CDU). The Young Entrepreneurs’ Association declaredthat it would be “fatal” for Germany to foot the bill for Greece’s “budget chaos”.A domestic row over welfare makes charity for foreigners a still more awkwardsubject. This month the constitutional court ruled that the government had erred insetting benefits for the main welfare programme, called Hartz IV. It has until the endof the year to come up with a new formula, which may cost more money. GuidoWesterwelle, the FDP leader, lamented the “late Roman decadence” of a society thattreats welfare beneficiaries more generously than workers. His outburst, in turn,annoyed Ms Merkel. “I can’t explain to someone on Hartz IV that we can’t give him asingle cent more but that a Greek gets to retire at 63”, said Michael Fuchs, a CDUleader in the Bundestag.On February 11th Mrs Merkel joined other European leaders in offering Greece vaguesupport, while demanding concrete plans to slash its budget deficit. Since thesummit, the demands have become more concrete and talk of aid even more vague.On February 15th finance ministers from the 16 euro-zone countries told Greece totake additional steps to cut its budget deficit by four percentage points of GDP to8.7% this year. A harsh austerity plan, they hope, will be enough to deterspeculators—and to reassure their voters at home that Greece is not getting offlightly. The model is Ireland, whose brutal spending cuts restored market confidencewithout aid from its European neighbours.A bail-out, Mrs Merkel fears, would break the bargain Germany struck in acceptingthe euro: that the single currency’s members would never jeopardise its stability norask Germans to pay for anyone else’s mismanagement. That said, the currency unionwas hardly an act of martyrdom by Germany. In the past decade its firms havemodernised and their workers have accepted miserly pay rises, boosting theircompetitiveness. In a euro-less Europe, its trading partners could have erased someof that advantage by devaluing their currencies. Instead, many of Europe’s weakereconomies failed to reform and Germany accumulated gratifyingly large current-account surpluses. Nor has the crisis been entirely bad news. The euro has weakenedby about 10% against the dollar since the beginning of 2010. Under thecircumstances, that was not a harbinger of inflation but a welcome tonic for Europeanexports—especially German ones.
  21. 21. The path out of the crisis is unclear. Greek bonds remain under pressure (see chart).Arguments rage over which chain reaction would be more damaging: serial bail-outsor serial defaults. A legal opinion by Bundestag experts argues that help for Greecemight be allowed by European treaties if the crisis can be blamed on outside forces,like speculators or the global recession. Some economists (mainly non-German ones)say Germany can contribute to a longer-term solution by stimulating domesticconsumption, which would help the Mediterranean miscreants grow out of theirproblems. There is talk of more co-ordinated “economic government” within theeuro-zone (see Charlemagne).Mr Kösters is sceptical. “No one knows what economic government is,” he says.Europe’s single market and currency set countries in competition with each other onthe basis of their economies and institutions. Germany largely rose to the challenge.Now, says Mr Kösters, it is up to Greece and the others to do the same. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  22. 22. Sovereign-debt theoriesDomino theoryFeb 18th 2010 | WASHINGTON, DCFrom The Economist print editionAssessing the risk that Greece’s woes herald something far worseSatoshi KambayashiHOW far is it from Athens to America and which countries lie on the way? That maysound like an esoteric geography question, but it is being asked by investors asGreece’s debt crisis creates global jitters about the safety of sovereign debt. So farPortugal, Ireland and Spain, the other high-deficit countries on the periphery of theeuro zone, are thought to be next in line. In most big rich economies, yields havebeen stable and well below their long-term average (see chart).But nerves are fraying elsewhere. The cost of insuring against sovereign default hasrisen in 47 of the 50 countries for which these instruments exist. Dubai’s sovereigncredit-default-swap spreads soared to their highest level in a year this week, amidconcern about the terms of a debt restructuring by a state-owned conglomerate.There is increasingly shrill commentary arguing that Greece is the start of a far
  23. 23. bigger problem. “A Greek crisis is coming to America”, blared the headline on arecent Financial Times article by Niall Ferguson, a financial historian.The stakes are high. A sudden loss of confidence in all sovereign debt, and especiallyin American Treasuries, the world’s benchmark “risk-free” asset, would havecalamitous consequences in a still-fragile recovery. Equally, an exaggerated fear ofsovereign risk could prompt governments into premature fiscal austerity, whichmight itself push the world economy back into recession.Neither the shrill nor the sanguine arguments can be dismissed out of hand. Fiscalpessimists point both to past experience and to the arithmetic of public debt forevidence that sovereign-debt crises could spread far beyond Greece. The lesson ofhistory, as documented in a magisterial study of financial crises by Carmen Reinhartand Ken Rogoff, is that public debt tends to soar after financial crises, rising by anaverage of 86% in real terms. Sovereign defaults have often followed.The arithmetic argument for pessimism is equally compelling. Virtually no richcountry has a “sustainable” debt position, in the narrow sense that none is running atight enough budget or is growing quickly enough to stop its debt burden from rising.The worst offenders on this count are the euro area’s peripheral economies, as wellas Britain and America.Greece stands out for the size of its debt stock, the scale of its budget deficit and thegrimness of its growth prospects given high domestic costs and an inability todevalue. Worries about where growth will come from are the main reason why fearshave, so far, focused on the other weak members of the euro zone (although Spainattracted decent demand for a 15-year bond sale on February 17th).America and Britain, having their own currencies, are in a different position. But theyare not immune to concerns about growth and debt dynamics. On February 18thBritain reported a deficit for January, a month of surplus since records began in1993. Pessimists also fret about the sheer scale of America’s public borrowing and,
  24. 24. especially, China’s role in funding it. News that foreign demand for Treasuries fellsharply in December and that Beijing was a big seller has fanned their concerns.Nonsense, says the sanguine camp, whose members include Paul Krugman, aprominent New York Times columnist. In their view, those who fear a sudden rise insovereign risk, particularly for America, misunderstand the reasons for the build-upof sovereign debt and underestimate the role of Treasuries as a safe haven.Sovereign-bond yields are low because private demand for capital is weak. And it islikely to stay that way as Anglo-Saxon households rebuild their savings and firmshold back from investing.On this view, America and Britain are better compared to Japan than to Greece.Japan’s public debt—almost 200% of GDP on a gross basis—has risen steadily in thetwo decades since its asset bubble burst. It is far higher than in any Anglo-Saxoneconomies. Despite several downgrades, Japan has not had a debt crisis.It is true that Japan, as a big creditor nation, can tap into ample savings at home,whereas America relies more on foreign investors. But the breadth of the financialcrisis across the rich world, and hence the surfeit of savings relative to investment,means this distinction can be overdone. What is more, investors still flee to, notfrom, American assets when they worry about risk. The dollar has risen by 4.8%against the euro since the start of the year. Existing investors in American debt, suchas China, have no incentive to drive down its value with a fire sale of their holdings.If Greece’s plight shows that investor sentiment can change quickly and Japan’shistory shows that it need not, where do other sovereigns stand? So far low yieldshave vindicated the sanguine view for all but those on the very edge of the eurozone. But there are three reasons to believe that could change.The first lies in the strength of emerging markets. A gradual reorientation of theireconomies towards domestic spending will slowly reduce the global supply of savings,even if rich-country growth remains weak. Other things being equal, that ought topush up the cost of capital. At the same time rapid growth means most emergingeconomies’ sovereign-debt ratios, already much lower than those in the rich world,will fall. True, rich countries can point to a far superior payment record. Over thepast 50 years sovereign defaults have been confined to the emerging world. But thedefinition of what is a “safe” borrower could shift, benefiting Brazil, say, and hurtingAmerica and Britain.Second, the debt problems in big rich economies go well beyond the temporaryeffects of the crisis. It is thanks to an ageing population and soaring health andpension costs that America’s debt ratio will still be rising in a decade. Investors havelong shrugged off this structural deterioration. Insouciance seems less likely whenthe starting point is much higher debt.Third, the rise in interest rates that should naturally accompany an economicrecovery and increased investment demand might itself spawn a higher risk premiumon sovereign debt, especially in America. The average maturity on federal debt is lessthan five years, so higher yields translate relatively quickly into bigger interestpayments, worsening the fiscal position. Richard Berner of Morgan Stanley expectsten-year bond yields to reach 5.5% by December, up from 3.7% now.
  25. 25. None of these possibilities suggests that America or Britain is at risk of a debt crisis,in the sense that bond yields soar as investors suddenly flee. But they do suggestthat a bigger rise in yields than expected and a subsequent worsening of their debtposition is possible. That demands a credible medium-term plan to cut deficits.Otherwise Greece’s problems could be the start of something much bigger. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  26. 26. Antitrust in the European UnionUnchained watchdogFeb 18th 2010From The Economist print editionBusinesses think Europe’s trustbusters should be kept on a tighter leashIllustration by David SimondsIT WAS probably with some relief that Joaquín Almunia took up his post as theEuropean Union’s competition commissioner earlier this month. One of his main tasksin his previous job, as commissioner for monetary affairs, was to police the publicfinances of the countries that use the euro. But he lacked any means to sanction thefiscally lax, such as Greece. That left a mess that his successor is now struggling toclean up.In his new job Mr Almunia may have the opposite problem: too much power. He hasthe authority to block mergers, to force companies to sell assets and to fine heavilyfirms judged to have thwarted fair competition. There is only limited redress forbusinesses that feel they have been punished unfairly. All this has prompted agrowing fuss about how his agency treats companies it accuses of taking part in
  27. 27. cartels or of trying to maintain monopolies by freezing out smaller rivals. Thecommission, competition lawyers complain, acts as prosecutor, judge and jury.Cases often start with a complaint, which is taken up by a “case team”. After a longinvestigation the commission issues a “statement of objections”—an indictment, ineffect. Companies are then entitled to a hearing at which they can dispute thecharges. If the commission feels its case still stands up, it finds against the firm anddetermines a penalty.The previous commissioner, Neelie Kroes, boasted about the fines she raised frommiscreants, including Microsoft and Intel. Penalties have often been big enough todent profits, even at mammoth corporations. Companies argue, reasonably, thatthere should be legal safeguards to match the punishments they face. They wouldprefer a court-like process in which they could question witnesses and introduceevidence. The issue has already stirred the Brussels bureaucracy. Before MrAlmunia’s feet were under the desk, the commission had circulated draft proposals onways to tighten up its procedures when investigating cartels and anti-competitivepractices.The soul-searching is part of the fallout from the EU’s case against Intel. Thecommission fined the chipmaker a record €1.06 billion ($1.5 billion) last May forusing loyalty discounts to stop its main rival, AMD, from challenging its dominance. Itsoon emerged that the trustbusters had failed to keep a record of a meeting with anexecutive from Dell, a big computer-maker. For some, this oversight only confirmedsuspicions that commission staff overlook potentially exculpatory evidence.Moreover, trustbusters are as much settlers of disputes between rival firms asguardians of vibrant competition, and that dual role may encourage meretriciouscases. Companies are well aware that a plausible complaint to the commission can bea way of tying rivals up in costly litigation. The EU’s trustbusters routinely proclaimthat they aim to protect competition not competitors. Yet big technology firmsacknowledge that antitrust lawsuits have become just another weapon in the battlefor markets.Establishing the facts in such cases is far from straightforward. Loyalty discounts, forexample, can benefit consumers in that they pave the way for lower prices, but canalso make it hard for competitors to survive, which can lead to higher prices in thelong run. Judgments may turn on motive, and there are fears that prosecutorsconvinced of their case may miss evidence at odds with it.Companies complain that by the time hearings take place case teams are wedded totheir version of events, even if they hear a convincing defence. It rankles that thecommissioner, who in effect decides cases, does not always attend hearings. There isno cross-examination of witnesses. No independent arbiter judges the merits ofopposing arguments. “It’s just a bunch of lawyers showing PowerPoint slides,” saysone firm’s legal counsel. Companies have the right to appeal against thecommission’s rulings but that can take two or three years. The courts do not retrycases or hear new evidence. They merely assess whether a verdict was plausible, anddefer to the commission’s reasoning on anything “complex”.Cartel cases may be more clear-cut but the calls for better safeguards are just asloud. The EU’s trustbusters rely on amnesties to crack price-fixing rings: the first
  28. 28. member of a ring to rat on its fellow price-fixers escapes prosecution. This tactic wasimported from America, where cartel cases are tried in court. The fear is that theEuropean system is open to abuse. Firms could seek to implicate innocent rivals, whowould not then be able to defend themselves in court.Another complaint is that the commission’s big fines are of little use as a deterrent.Decisions to fix prices are often taken by rogue employees without the knowledge ofboards or senior managers. Big fines, meanwhile, may harm some companies andthus hurt competition. It would be far better to target executives with criminalsanctions, says Karl Hofstetter, group general counsel to Schindler, an elevator-maker that shared in a 1 billion cartel fine.How might Mr Almunia set about tackling these concerns? Shifting authority overantitrust from the commission to the courts would require a change in the treatyunderpinning the EU, a tortuous process. The EU could try to mimic the Federal TradeCommission (FTC), one of America’s two main competition agencies, which employsindependent judges, separate from case teams, to hear “monopolisation” cases. Yetthe populist FTC is hardly a model of restraint: “It could scarcely be moreinterventionist,” complains a lawyer in Washington, DC.The ideal would be to address Europe’s procedural shortcomings, while avoiding theexcesses of the American system, says Ian Forrester, a competition lawyer based inBrussels. He favours giving greater powers to the legal officers who preside over thecommission’s hearings. Their role now is to make sure the hearing goes smoothly.But Mr Forrester thinks they should also make an independent judgment on thefactual and legal merits of the case, for the commission to accept or reject withoutalteration. It would also help, he adds, if the hearing itself were open to the publicand the hearing officer’s report published. Bureaucracies do not give up powerreadily, and Mr Almunia will probably be reluctant to tie his own hands. But if he doesso, he may leave his successor less of a mess to deal with. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  29. 29. Business.viewUnlikely heroesFeb 16th 2010From Economist.comCan hedge funds save the world? One pundit thinks so“HEDGE funds are fundamentally evil and there is no way to view them in any otherlight. You’re a great guy, but let’s not be ridiculous!” This was the response that JedEmerson received from several erstwhile supporters when he circulated a draft paperclaiming that, in at least some circumstances, the activities of hedge funds could begood for society and even for the planet.Many people might struggle with the idea of hedge funds being a force for good,regarding them as obsessively focused on short-term financial gain regardless of theenvironmental or social consequences. And Mr Emerson makes an unlikely defenderof them, since he is as green in tooth and claw as a capitalist can be. Having firstworked organising projects for the homeless, then as one of the first “venturephilanthropists”, he made his name with a series of academic papers on what he callsblended value—the notion that the performance of a business should be judged notjust by its profitability, but also by its impact on society and the environment.After a stint in the philanthropic arm of Al Gore’s environmentalist money-management firm, Generation Investment Management, in the summer of 2008 hestarted working for a fund of hedge funds. This triggered a period of soul-searchingthat ultimately produced his controversial new paper, “Beyond Good Versus Evil:Hedge Fund Investing, Capital Markets and the Sustainability Challenge.” In the financial crisis, supposedly risky “socially tinged” investments did reasonably wellSoon after Mr Emerson entered the hedge-fund world, it collapsed spectacularly inthe financial crisis. But he noticed that supposedly risky “socially tinged”investments, such as those in microfinance bonds, performed reasonably well,turning in positive returns as many hedge funds lost a large chunk of their value.
  30. 30. “The financial world as defined by traditional measures of risk and return was rolledon its head,” he says. This prompted Mr Emerson to start probing hedge funds’investment practices, and he was surprised to discover how similar they often wereto those of a socially and environmentally driven movement known as sustainablefinance. “Not the same, mind you, but quite similar nonetheless,” he says. Accordingto the paper, such sustainable investing accounts for around $2.7 trillion of the $25trillion invested in America’s capital markets. The total invested in hedge funds ofevery variety in early 2009 was about $1.3 trillion.Mr Emerson’s paper focuses only on that part of the hedge fund-world which employsfundamental long/short strategies, which means researching the long-term prospectsof a company and either holding its shares or shorting them accordingly. He does notexplore, for example, macro strategies (which bet on, say, movements in exchangerates), let alone “black box” trading strategies that plough through masses of data,seeking patterns that can be exploited.Trading according to rigorous fundamental research can often mirror sustainableinvesting, which seeks to profit by taking into account social and environmentalfactors, he says. Fundamental hedge funds are far more likely than other investors totry to identify a firm’s off-balance-sheet exposures, of which a growing proportionmay be “environmental or social liabilities present in a market or company but notexplicitly accounted for in traditional numeric valuation or mainstream investoranalysis”. These types of hedge fund also tend to make relatively little use ofleverage, so they are less easily convicted than some of their hedge-fund peers ofrecklessly gambling with other people’s money. Nor do they try to profit by “creatingmarket distortions within the very markets they are investing in”.Even short-selling could be socially usefulThe most interesting section of Mr Emerson’s paper is entitled “Shorting as a SocialAct?”. It has become fashionable even among mainstream capitalists to condemn thehedge funds that, for example, shorted the shares of banks in the run up to themeltdown in the markets in 2008. There are two sides to this coin, he points out,since shorting can also act as a “canary in a coal mine” to warn the wider market ofimpending problems and the potential for decreased future performance. Shortingcan also help stop market bubbles forming. Used judiciously, to reward attentiveinvestors and alert the broader market to ill-understood risks that a company faces,shorting may indeed be seen as a positive social act, he says.You can take the man out of the movement, but you can’t take the movement out ofthe man: Mr Emerson now sees the potential for a powerful coalition of hedgies (whoshort, but only rarely engage in shareholder activism) and investors with a yen forsustainability, such as pension funds (which may press for better management or
  31. 31. corporate governance at the firms they invest in, but rarely go in for shorting), in anew movement he calls “short shareholder activism”.Sceptics may detect a whiff of wishful thinking in all this. But stranger things havehappened. Indeed, it is not just hedge funds that are starting to win plaudits fromsocially minded investors. In private equity, the other main form of “alternativeinvestment”, the venerable firm of Kohlberg, Kravis & Roberts has formed acelebrated partnership, which it expanded last week, with Environmental Defense, agreen non-profit organisation, to develop sustainability strategies for the firms itowns. If the private-equity firm once memorably described as the “Barbarians at theGate” can turn into a tree-hugger, why not hedge funds? Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  32. 32. The gods strike backFeb 11th 2010From The Economist print editionFinancial risk got ahead of the world’s ability to manage it. MatthewValencia (interviewed here) asks if it can be tamed againIllustration by Tim Marrs“THE revolutionary idea that defines the boundary between modern times and thepast is the mastery of risk: the notion that the future is more than a whim of thegods and that men and women are not passive before nature.” So wrote PeterBernstein in his seminal history of risk, “Against the Gods”, published in 1996. And soit seemed, to all but a few Cassandras, for much of the decade that followed. Financeenjoyed a golden period, with low interest rates, low volatility and high returns. Riskseemed to have been reduced to a permanently lower level.This purported new paradigm hinged, in large part, on three closely linkeddevelopments: the huge growth of derivatives; the decomposition and distribution ofcredit risk through securitisation; and the formidable combination of mathematicsand computing power in risk management that had its roots in academic work of themid-20th century. It blossomed in the 1990s at firms such as Bankers Trust andJPMorgan, which developed “value-at-risk” (VAR), a way for banks to calculate howmuch they could expect to lose when things got really rough.
  33. 33. Suddenly it seemed possible for any financial risk to be measured to five decimalplaces, and for expected returns to be adjusted accordingly. Banks hired hordes ofPhD-wielding “quants” to fine-tune ever more complex risk models. The belief tookhold that, even as profits were being boosted by larger balance sheets and greaterleverage (borrowing), risk was being capped by a technological shift.There was something self-serving about this. The more that risk could be calibrated,the greater the opportunity to turn debt into securities that could be sold or held intrading books, with lower capital charges than regular loans. Regulators acceptedthis, arguing that the “great moderation” had subdued macroeconomic dangers andthat securitisation had chopped up individual firms’ risks into manageable lumps. Thisfaith in the new, technology-driven order was reflected in the Basel 2 bank-capitalrules, which relied heavily on the banks’ internal models.There were bumps along the way, such as the near-collapse of Long-Term CapitalManagement (LTCM), a hedge fund, and the dotcom bust, but each time marketsrecovered relatively quickly. Banks grew cocky. But that sense of security wasdestroyed by the meltdown of 2007-09, which as much as anything was a crisis ofmodern metrics-based risk management. The idea that markets can be left to policethemselves turned out to be the world’s most expensive mistake, requiring $15trillion in capital injections and other forms of support. “It has cost a lot to learn howlittle we really knew,” says a senior central banker. Another lesson was thatmanaging risk is as much about judgment as about numbers. Trying ever harder tocapture risk in mathematical formulae can be counterproductive if such a degree ofaccuracy is intrinsically unattainable.For now, the hubris of spurious precision has given way to humility. It turns out thatin financial markets “black swans”, or extreme events, occur much more often thanthe usual probability models suggest. Worse, finance is becoming more fragile: thesedays blow-ups are twice as frequent as they were before the first world war,according to Barry Eichengreen of the University of California at Berkeley and MichaelBordo of Rutgers University. Benoit Mandelbrot, the father of fractal theory and apioneer in the study of market swings, argues that finance is prone to a “wild”randomness not usually seen in nature. In markets, “rare big changes can be moresignificant than the sum of many small changes,” he says. If financial marketsfollowed the normal bell-shaped distribution curve, in which meltdowns are very rare,the stockmarket crash of 1987, the interest-rate turmoil of 1992 and the 2008 crashwould each be expected only once in the lifetime of the universe.This is changing the way many financial firms think about risk, says Greg Case, chiefexecutive of Aon, an insurance broker. Before the crisis they were looking at thingslike pandemics, cyber-security and terrorism as possible causes of black swans. Nowthey are turning to risks from within the system, and how they can become amplifiedin combination.Cheap as chips, and just as bad for youIt would, though, be simplistic to blame the crisis solely, or even mainly, on sloppyrisk managers or wild-eyed quants. Cheap money led to the wholesale underpricing
  34. 34. of risk; America ran negative real interest rates in 2002-05, even though consumer-price inflation was quiescent. Plenty of economists disagree with the recent assertionby Ben Bernanke, chairman of the Federal Reserve, that the crisis had more to dowith lax regulation of mortgage products than loose monetary policy.Equally damaging were policies to promote home ownership in America using FannieMae and Freddie Mac, the country’s two mortgage giants. They led the duo to bingeon securities backed by shoddily underwritten loans.In the absence of strict limits, higher leverage followed naturally from low interestrates. The debt of America’s financial firms ballooned relative to the overall economy(see chart 1). At the peak of the madness, the median large bank had borrowings of37 times its equity, meaning it could be wiped out by a loss of just 2-3% of itsassets. Borrowed money allowed investors to fake “alpha”, or above-market returns,says Benn Steil of the Council on Foreign Relations.The agony was compounded by the proliferation of short-term debt to support illiquidlong-term assets, much of it issued beneath the regulatory radar in highly leveraged“shadow” banks, such as structured investment vehicles. When markets froze,sponsoring entities, usually banks, felt morally obliged to absorb their losses.“Reputation risk was shown to have a very real financial price,” says Doug Roeder ofthe Office of the Comptroller of the Currency, an American regulator.Everywhere you looked, moreover, incentives were misaligned. Firms deemed “toobig to fail” nestled under implicit guarantees. Sensitivity to risk was dulled by the“Greenspan put”, a belief that America’s Federal Reserve would ride to the rescuewith lower rates and liquidity support if needed. Scrutiny of borrowers was delegatedto rating agencies, who were paid by the debt-issuers. Some products were socomplex, and the chains from borrower to end-investor so long, that thorough duediligence was impossible. A proper understanding of a typical collateralised debtobligation (CDO), a structured bundle of debt securities, would have required reading30,000 pages of documentation.
  35. 35. Fees for securitisers were paid largely upfront, increasing the temptation to originate,flog and forget. The problems with bankers’ pay went much wider, meaning that itwas much better to be an employee than a shareholder (or, eventually, a taxpayerpicking up the bail-out tab). The role of top executives’ pay has been overblown. Topbrass at Lehman Brothers and American International Group (AIG) suffered massivelosses when share prices tumbled. A recent study found that banks where chiefexecutives had more of their wealth tied up in the firm performed worse, not better,than those with apparently less strong incentives. One explanation is that they tookrisks they thought were in shareholders’ best interests, but were proved wrong.Motives lower down the chain were more suspect. It was too easy for traders to cashin on short-term gains and skirt responsibility for any time-bombs they had setticking.Asymmetries wreaked havoc in the vast over-the-counter derivatives market, too,where even large dealing firms lacked the information to determine theconsequences of others failing. Losses on contracts linked to Lehman turned out tobe modest, but nobody knew that when it collapsed in September 2008, causingpanic. Likewise, it was hard to gauge the exposures to “tail” risks built up by sellersof swaps on CDOs such as AIG and bond insurers. These were essentially put options,with limited upside and a low but real probability of catastrophic losses.Another factor in the build-up of excessive risk was what Andy Haldane, head offinancial stability at the Bank of England, has described as “disaster myopia”. Likedrivers who slow down after seeing a crash but soon speed up again, investorsexercise greater caution after a disaster, but these days it takes less than a decadeto make them reckless again. Not having seen a debt-market crash since 1998,investors piled into ever riskier securities in 2003-07 to maintain yield at a time oflow interest rates. Risk-management models reinforced this myopia by relying tooheavily on recent data samples with a narrow distribution of outcomes, especially insubprime mortgages.A further hazard was summed up by the assertion in 2007 by Chuck Prince, thenCitigroup’s boss, that “as long as the music is playing, you’ve got to get up anddance.” Performance is usually judged relative to rivals or to an industry benchmark,encouraging banks to mimic each other’s risk-taking, even if in the long run itbenefits no one. In mortgages, bad lenders drove out good ones, keeping up withaggressive competitors for fear of losing market share. A few held back, but it wasnot easy: when JPMorgan sacrificed five percentage points of return on equity in theshort run, it was lambasted by shareholders who wanted it to “catch up” with zippier-looking rivals.An overarching worry is that the complexity of today’s global financial network makesoccasional catastrophic failure inevitable. For example, the market for creditderivatives galloped far ahead of its supporting infrastructure. Only now are seriousmoves being made to push these contracts through central clearing-houses whichensure that trades are properly collateralised and guarantee their completion if oneparty defaults.
  36. 36. Network overloadThe push to allocate capital ever more efficiently over the past 20 years created whatTill Guldimann, the father of VAR and vice-chairman of SunGard, a technology firm,calls “capitalism on steroids”. Banks got to depend on the modelling of prices inesoteric markets to gauge risks and became adept at gaming the rules. As a result,capital was not being spread around as efficiently as everyone believed.Big banks had also grown increasingly interdependent through the boom inderivatives, computer-driven equities trading and so on. Another bond was cross-ownership: at the start of the crisis, financial firms held big dollops of each other’scommon and hybrid equity. Such tight coupling of components increases the dangerof “non-linear” outcomes, where a small change has a big impact. “Financial marketsare not only vulnerable to black swans but have become the perfect breeding groundfor them,” says Mr Guldimann. In such a network a firm’s troubles can have anexaggerated effect on the perceived riskiness of its trading partners. When Lehman’scredit-default spreads rose to distressed levels, AIG’s jumped by twice what wouldhave been expected on its own, according to the International Monetary Fund.Mr Haldane has suggested that these knife-edge dynamics were caused not only bycomplexity but also—paradoxically—by homogeneity. Banks, insurers, hedge fundsand others bought smorgasbords of debt securities to try to reduce risk throughdiversification, but the ingredients were similar: leveraged loans, Americanmortgages and the like. From the individual firm’s perspective this looked sensible.But for the system as a whole it put everyone’s eggs in the same few baskets, asreflected in their returns (see chart 2).Efforts are now under way to deal with these risks. The Financial Stability Board, aninternational group of regulators, is trying to co-ordinate global reforms in areas suchas capital, liquidity and mechanisms for rescuing or dismantling troubled banks. Itsbiggest challenge will be to make the system more resilient to the failure of giants.
  37. 37. There are deep divisions over how to set about this, with some favouring toughercapital requirements, others break-ups, still others—including America—acombination of remedies.In January President Barack Obama shocked big banks by proposing a tax on theirliabilities and a plan to cap their size, ban “proprietary” trading and limit theirinvolvement in hedge funds and private equity. The proposals still need congressionalapproval. They were seen as energising the debate about how to tackle dangerouslylarge firms, though the reaction in Europe was mixed.Regulators are also inching towards a more “systemic” approach to risk. The oldsupervisory framework assumed that if the 100 largest banks were individually safe,then the system was too. But the crisis showed that even well-managed firms, actingprudently in a downturn, can undermine the strength of all.The banks themselves will have to find a middle ground in risk management,somewhere between gut feeling and number fetishism. Much of the progress made inquantitative finance was real enough, but a firm that does not understand the flawsin its models is destined for trouble. This special report will argue that rules will haveto be both tightened and better enforced to avoid future crises—but that all thereforms in the world will never guarantee total safety. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  38. 38. Printing body partsMaking a bit of meFeb 18th 2010From The Economist print editionA machine that prints organs is coming to marketIllustration by David SimondsTHE great hope of transplant surgeons is that they will, one day, be able to orderreplacement body parts on demand. At the moment, a patient may wait months,sometimes years, for an organ from a suitable donor. During that time his conditionmay worsen. He may even die. The ability to make organs as they are needed wouldnot only relieve suffering but also save lives. And that possibility may be closer withthe arrival of the first commercial 3D bio-printer for manufacturing human tissue andorgans.The new machine, which costs around $200,000, has been developed by Organovo, acompany in San Diego that specialises in regenerative medicine, and Invetech, anengineering and automation firm in Melbourne, Australia. One of Organovo’sfounders, Gabor Forgacs of the University of Missouri, developed the prototype onwhich the new 3D bio-printer is based. The first production models will soon be
  39. 39. delivered to research groups which, like Dr Forgacs’s, are studying ways to producetissue and organs for repair and replacement. At present much of this work is doneby hand or by adapting existing instruments and devices.To start with, only simple tissues, such as skin, muscle and short stretches of bloodvessels, will be made, says Keith Murphy, Organovo’s chief executive, and these willbe for research purposes. Mr Murphy says, however, that the company expects thatwithin five years, once clinical trials are complete, the printers will produce bloodvessels for use as grafts in bypass surgery. With more research it should be possibleto produce bigger, more complex body parts. Because the machines have the abilityto make branched tubes, the technology could, for example, be used to create thenetworks of blood vessels needed to sustain larger printed organs, like kidneys, liversand hearts.Printing historyOrganovo’s 3D bio-printer works in a similar way to some rapid-prototyping machinesused in industry to make parts and mechanically functioning models. These work likeinkjet printers, but with a third dimension. Such printers deposit droplets of polymerwhich fuse together to form a structure. With each pass of the printing heads, thebase on which the object is being made moves down a notch. In this way, little bylittle, the object takes shape. Voids in the structure and complex shapes aresupported by printing a “scaffold” of water-soluble material. Once the object iscomplete, the scaffold is washed away.Researchers have found that something similar can be done with biological materials.When small clusters of cells are placed next to each other they flow together, fuseand organise themselves. Various techniques are being explored to condition the cellsto mature into functioning body parts—for example, “exercising” incipient musclesusing small machines.Though printing organs is new, growing them from scratch on scaffolds has alreadybeen done successfully. In 2006 Anthony Atala and his colleagues at the Wake ForestInstitute for Regenerative Medicine in North Carolina made new bladders for sevenpatients. These are still working.Dr Atala’s process starts by taking a tiny sample of tissue from the patient’s ownbladder (so that the organ that is grown from it will not be rejected by his immunesystem). From this he extracts precursor cells that can go on to form the muscle onthe outside of the bladder and the specialised cells within it. When more of thesecells have been cultured in the laboratory, they are painted onto a biodegradablebladder-shaped scaffold which is warmed to body temperature. The cells then matureand multiply. Six to eight weeks later, the bladder is ready to be put into the patient.The advantage of using a bioprinter is that it eliminates the need for a scaffold, so DrAtala, too, is experimenting with inkjet technology. The Organovo machine uses stemcells extracted from adult bone marrow and fat as the precursors. These cells can becoaxed into differentiating into many other types of cells by the application ofappropriate growth factors. The cells are formed into droplets 100-500 microns in
  40. 40. diameter and containing 10,000-30,000 cells each. The droplets retain their shapewell and pass easily through the inkjet printing process.A second printing head is used to deposit scaffolding—a sugar-based hydrogel. Thisdoes not interfere with the cells or stick to them. Once the printing is complete, thestructure is left for a day or two, to allow the droplets to fuse together. For tubularstructures, such as blood vessels, the hydrogel is printed in the centre and aroundthe outside of the ring of each cross-section before the cells are added. When thepart has matured, the hydrogel is peeled away from the outside and pulled from thecentre like a piece of string.The bio-printers are also capable of using other types of cells and support materials.They could be employed, Mr Murphy suggests, to place liver cells on a pre-built,liver-shaped scaffold or to form layers of lining and connective tissue that would growinto a tooth. The printer fits inside a standard laboratory biosafety cabinet, for sterileoperation. Invetech has developed a laser-based calibration system to ensure thatboth print heads deposit their materials accurately, and a computer-graphics systemallows cross-sections of body parts to be designed.Some researchers think machines like this may one day be capable of printing tissuesand organs directly into the body. Indeed, Dr Atala is working on one that would scanthe contours of the part of a body where a skin graft was needed and then print skinonto it. As for bigger body parts, Dr Forgacs thinks they may take many differentforms, at least initially. A man-made biological substitute for a kidney, for instance,need not look like a real one or contain all its features in order to clean wasteproducts from the bloodstream. Those waiting for transplants are unlikely to worrytoo much about what replacement body parts look like, so long as they work andmake them better. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  41. 41. LightingPrinted circuitFeb 18th 2010From The Economist print editionA way to turn out lighting by the metre AlamyYou’re history!THE printing of body parts (see article) will probably remain a bespoke industry forever. Printed lighting, though, might be mass produced. That, at least, is the promiseof a technology being developed in Sweden by Ludvig Edman of Umea University andNathaniel Robinson of Linkoping. Dr Edman and Dr Robinson have taken a promisingtechnique called the organic light-emitting diode, or OLED, and tweaked it in aningenious way. The result is a sheet similar to wallpaper that can illuminate itself atthe flick of a switch.An OLED is a layer of semiconducting polymer sandwiched between two conductivelayers that act as electrodes. When a current is passed between these electrodes, thepolymer gives off light. The light is created by electrons released from one electrodelayer falling into positively charged “holes” that have been generated by thepolymer’s interaction with the other layer. These holes are gaps in the polymer’selectronic structure where an electron ought to be, but isn’t.
  42. 42. Semiconductors are strange materials. Both holes and electrons can move aroundwithin them. (The holes move in a manner analogous to the gap in a sliding-tilepuzzle.) They are also finicky. Only some sorts of conductors will work as sources ofelectrons. Only some sorts will work as sources of holes. And no known materialworks well for both.The electron source needs to be a metal, and the usual choice is aluminium. Ofcourse, metals are opaque, so the other electrode must be transparent. Fortunately,there are two materials that are both transparent and good hole-generators. One isindium tin oxide. The other is known as poly(3,4-ethylenedioxythiophene).OLEDs are, however, awkward to make. First, a precisely crafted layer of aluminiumhas to be created. Then the other two layers are sprayed onto it using an inkjetprinter. If the metal electrode could be replaced then it might be possible to makethe whole thing using just a printer. That would simplify matters enormously. Andthat is what Dr Edman and Dr Robinson believe they have achieved.To do so, they have gone back to their high-school physics lessons. As everyschoolboy knows, carbon in the form of graphite is the exception to the rule thatmetallic elements conduct electricity and non-metallic ones do not. Graphite, which isblack in bulk, consists of layers of carbon atoms arranged in a hexagonal grid. Whenthe substance is only a few of these layers thick, though, it is known as grapheneand is transparent.Graphene sheets are not easy to handle. But Dr Edman and Dr Robinson foundanother team of researchers, led by Manish Chhowalla of Rutgers University, thatwas working on making graphene electrodes. Unfortunately, they found thatgraphene by itself will not do the job. But they overcame its reluctance by blendingthe semiconducting polymer with potassium trifluoromethylsulfonate. This compoundconsists of positively charged potassium ions and negatively chargedtrifluoromethylsulfonates. When the current is switched on, the two sorts of ion movein opposite directions to the junctions between the polymer and the electrodes. Thetrifluoromethylsulfonate ions assist the process of hole formation inpoly(3,4-ethylenedioxythiophene) at one junction. That is useful. What is crucial,though, is that the potassium ions liberate electrons from graphene at the otherjunction.The result, as the team describe in ACS Nano, is a sheet that emits light in bothdirections and which it should be possible to make using industrial inkjet printers tospray layer upon layer. It is a truly enlightening idea. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  43. 43. Private-sector space flightMoon dreamsFeb 18th 2010From The Economist print editionThe Americans may still go to the moon before the ChineseAPCan you direct me to reception, please?WHEN America’s space agency, NASA, announced its spending plans in February,some people worried that its cancellation of the Constellation moon programme hadended any hopes of Americans returning to the Earth’s rocky satellite. The nextfootprints on the lunar regolith were therefore thought likely to be Chinese. Now,though, the private sector is arguing that the new spending plan actually makes itmore likely America will return to the moon.The new plan encourages firms to compete to provide transport to low Earth orbit(LEO). The budget proposes $6 billion over five years to spur the development ofcommercial crew and cargo services to the international space station. This moneywill be spent on “man-rating” existing rockets, such as Boeing’s Atlas V, and ondeveloping new spacecraft that could be launched on many different rockets. Thepoint of all this activity is to create healthy private-sector competition for transport tothe space station—and in doing so to drive down the cost of getting into space.
  44. 44. Eric Anderson, the boss of a space-travel company called Space Adventures, isoptimistic about the changes. They will, he says, build “railroads into space”. SpaceAdventures has already sent seven people to the space station, using Russianrockets. It would certainly benefit from a new generation of cheap launchers.Another potential beneficiary—and advocate of private-sector transport—is RobertBigelow, a wealthy entrepreneur who founded a hotel chain called Budget Suites ofAmerica. Mr Bigelow has so far spent $180m of his own money on spacedevelopment—probably more than any other individual in history. He has beendeveloping so-called expandable space habitats, a technology he bought from NASAa number of years ago.These habitats, which are folded up for launch and then inflated in space, weredesigned as interplanetary vehicles for a trip to Mars, but they are also likely to beuseful general-purpose accommodation. The company already has two scaled-downversions in orbit.Mr Bigelow is preparing to build a space station that will offer cheap access to spaceto other governments—something he believes will generate a lot of interest. Thecurrent plan is to launch the first full-scale habitat (called Sundancer) in 2014.Further modules will be added to this over the course of a year, and the result will bea space station with more usable volume than the existing international one. MrBigelow’s price is just under $23m per astronaut. That is about half what Russiacharges for a trip to the international station, a price that is likely to go up after thespace shuttle retires later this year. He says he will be able to offer this price by bulk-buying launches on newly man-rated rockets. Since most of the cost of space travelis the launch, the price might come down even more if the private sector can lowerthe costs of getting into orbit.The ultimate aim of all his investment, Mr Bigelow says, is to get to the moon. LEO ismerely his proving ground. He says that if the technology does work in orbit, thehabitats will be ideal for building bases on the moon. To go there, however, he willhave to prove that the expandable habitat does indeed work, and also generatesubstantial returns on his investment in LEO, to provide the necessary cash.If all goes well, the next target will be L1, the point 85% of the way to the moonwhere the gravitational pulls of moon and Earth balance. “It’s a terrific dumping offpoint,” he says. “We could transport a completed lunar base [to L1] and put it downon the lunar surface intact.”There are others with lunar ambitions, too. Some 20 teams are competing for theGoogle Lunar X Prize, a purse of $30m that will be given to the first private missionwhich lands a robot on the moon, travels across the surface and sends pictures backto Earth. Space Adventures, meanwhile, is in discussions with almost a dozenpotential clients about a circumlunar mission, costing $100m a head.The original Apollo project was mainly a race to prove the superiority of Americancapitalism over Soviet communism. Capitalism won—but at the cost of creating, inNASA, one of the largest bureaucracies in American history. If the United States is toreturn to the moon, it needs to do so in a way that is demonstrably superior to thefirst trip—for example, being led by business rather than government. Engaging in
  45. 45. another government-driven spending battle, this time with the Chinese, will donothing more than show that America has missed the point. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  46. 46. Polar ice shelvesBreaking wavesFeb 18th 2010From The Economist print editionThe coup de grace that shatters ice shelves is administered by ocean wavesIN 2008 part of the Wilkins ice shelf on the edge of the Antarctic peninsular suddenlydisintegrated. It was seen by some as a portend. If other, larger shelves—huge icesheets that have slipped off the land but are not floating freely on the sea—were tobreak up in a similar way, their non-floating ice (which is not subject to Archimedes’sprinciple that it displaces its own weight of water) would be converted into floatingice (which is), and the sea level would rise.The Wilkins shelf may or may not have been the victim, ultimately, of climatechange. Regardless of what weakened it, though, it was not rising temperatures thatcaused the sudden break up. Peter Bromirski of the Scripps Institution ofOceanography in San Diego thinks he knows what did: a little-studied phenomenoncalled infragravity waves.Ocean waves come in several varieties. Normal swells, known technically as gravitywaves, are created by wind pushing the surface of the sea up and gravity thenpulling it down, causing it to bounce. Gravity waves have a frequency of about onceevery 30 seconds. When such swells hit the coast, however, part of their energy istransformed into vibrations that have periods ranging from 50 to 350 seconds. Theseare infragravity waves, so called because they are sub-harmonics of the originalgravity waves.Most infragravity waves hug the coast. A few, though, break free—and such open-ocean waves are powerful and can travel great distances. Some generated off thecoast of South America, for example, make it all the way to Antarctica.Long-term monitoring of the vibrations induced by ocean waves in Antarctic iceshelves is a recent phenomenon. In the past the seismometers required to do sohave not been robust enough to survive such brutal conditions. Dr Bromirski,however, knew of a study that had deployed seismometers successfully on the Rossice shelf, and he was able to reanalyse the data from it.The original analysis had detected storm-driven swell shaking the ice. Dr Bromirski’swork showed a second signal. Waves with longer periods were also shaking the Rossshelf—indeed, they were inducing a much larger response than the storm waveswere. Dr Bromirski and his colleagues report in Geophysical Research Letters that themovements caused by infragravity waves were three times larger than those inducedby the swell. Moreover, although floating sea ice damped the swell, reducing its
  47. 47. impact on the shelf considerably, such floating ice had no significant effect oninfragravity waves—even during the winter, when it was at its thickest.The researchers suggest infragravity waves cause vibrations in shelves. These opennew cracks and widen existing ones. The cracks then flood, and this speeds up thedisintegration of the shelf by weakening its interior.Applying this model to the Wilkins ice shelf, Dr Bromirski concludes the likelyexplanation for its sudden disappearance is that it was shivered to pieces byinfragravity waves generated by a series of storms on the coast of Patagonia. A case,then, of being both shaken and stirred. Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.
  48. 48. Green.viewCopenhagen accountingFeb 16th 2010From Economist.comWhat countries are currently offering on climateSINCE the fractious negotiations that produced a last-minute “accord” at theCopenhagen climate-change meeting last year, those in and out of government whoconcern themselves with climate policy have been in a state of some befuddlement.They wonder what it all means, how to build on it and whom to blame for itsperceived deficiencies and the troublesome circumstances of its birth. Despite thisthe accord has already achieved a couple of the aims its framers intended. Neither is,of itself, earth-shattering, far less Earth-saving. But they are worth noting, not leastfor what they reveal about where climate diplomacy should be focusing.The accord provided a way for countries to make public, if non-binding, commitmentson climate change. By the early February deadline that was set for this, some 90 ofthem had done so. In the weeks since, various stalwarts of the climate-wonkerycircuit have been working out what those commitments might mean. That process ismade complex by the fact that countries can express their intentions in differentways, and that many have provided two or more levels of commitment: a low onethat they say they will pursue regardless, and one or more higher ones that they willtry for if enough other countries are also going high.AFPThe unsurprising bottom line of the various analyses is that even if you add up all thehigh commitments, you do not get a package that keeps average warming below