[Continued from yesterday's Part 1.]

Now they know how many holes it takes to fill the Albert Hall

– The Beatles, A Day in the Life

If all you took from the February 11 Economic Times of India were the clips we highlighted yesterday, one could be forgiven for being depressed about India’s potential – so it’s time to look on the bright side of things.

Ahmedabad home-sales billboard: February, 2010

4. The Economic Times on loan pricing

Finance is the engine of housing improvement, and transparent information is the handmaiden of finance:

MUMBAI: Borrowers can now look forward to a more transparent pricing of their loans, with the Reserve Bank of India (RBI) proposing to introduce a new benchmark from April that will more accurately reflect movement in interest rates.

The Bank is also trying to remove barriers to banks going down-market:

At the same time, banks have been granted the freedom to price loans below Rs 2 lakh [$4,000 – Ed.], which effectively paves the way for their entry into microfinance at commercially-viable rates. 

That’s a start, and the Rs 200,000 floor is significant because a great many semi-formal houses can be purchased in roughly this price range, but it will take more than merely small-loan permission to get the banks to move down. 

SEWA Bank in Ahmedabad, February 2010

The central bank plans to introduce a so-called ‘base rate’, which will be computed on a cost plus basis by each bank and which will now be the floor price for all lending by it. The ‘base rate’ system seeks to replace the prime lending rate (PLR), the present benchmark used by banks. 

The RBI on Wednesday announced that the new base rate system would be made applicable from April 1. The guidelines are not yet finalised, but a draft circular issued on Wednesday evening has the broad contours of the new regime. 

“All categories of loans should henceforth be priced only with reference to the base rate. The base rate could also serve as the reference benchmark rate for floating rate loan products, apart from the other external market benchmark rates,” the RBI said in its circular. 

If a bank chooses to base its floating rates on external benchmarks, it should ensure that the external rate is equal to or above the base rate at the time of sanction or renewal of the loan. 

Although there’s a long way to go — as in lending for home improvement, not just on new-build with mortgageable title – it’s a step in the right direction.

Nancy with Indian girls at Chittaugarh, Rajasthan, February 2010

5. The Times of India on development of accurate slum data

NEW DELHI: Aiming to meet ambitious target of making India slum-free, the government has embarked on a plan of remote mapping to get a ‘‘reliable figure’’ of people living in slums by collecting foolproof data on both notified and non-notified slums across the country. 

As I’ve posted before, among the many definitions of a slum is when the physical reality and legal records are wildly at odds.  Thus, when they are brought into harmony, the place is no longer a slum, it’s not merely a low-income neighborhood.  Moreover, in reconciling the two, it is always the law that moves, not the physical reality.

While the current estimate of slum dwellers is based mostly on surveys of notified slums, most non-notified slums have been left out. 

Notification is a legal process both granting rights (to slum dwellers) and giving powers (to government).

Local office of SAATH, Ahmedabad: February, 2010

Serving about 2,000 households on government’s behalf

Maps of cities prepared through remote sensing would give a clearer and more authentic picture of slums in a city and would include non-notified slums.

It’s critical; knowing where the people are is a first step both to enumeration and citizenship, and also to providing financial and physical dimensions on the problem. 

Housing minister Kumari Selja

Housing minister Kumari Selja said: “Most of the time the plans are based on projections rather than hard data. We plan to map the entire country so that we know about slums in each town and city. This would also include non-notified slums which are usually not accounted for.” 

Once you have counted them, you cannot ignore them.

The ministry, which has set a target of making India slum-free in the coming five years with the launch of the Rajiv Awas Yojana (RAY), expects to get the exact figure by GIS mapping and including non-notified slums too.

The GIS mapping will have to be supplemented by on-the-ground enumeration, but when the two are combined, the findings will be well-nigh indisputable.

With involvement of Isro in this project, the land-mapping and slum surveys are being done through remote sensing with GIS-enabled software. 

I read this with encouragement and no small sense of recognition, since two weeks earlier, at the beginning of my trip, I participated in a two-day a World Bank sponsored workshop on Rajiv Awas Yojana (RAY).

The ministry has also asked states to develop a Slum Information System and the Centre has provided them funds for the purpose. “We want the mapping to be completed in two years,” Selja said. 

Riverfront slums, Ahmedabad, February, 2010

As we saw when reviewing The Ghost Map and The Blackest Streets, ever since we created modern urban sums – which I date from the Industrial Revolution – they have been corrected with a combination of tools, including liberal social reformers, enumeration and surveys, vote power, and eminent domain.  India is harnessing twenty-first century technology to accelerate its addressing of a nineteenth-century problem.

However, the ministry says it is facing delays in implementing its plans due to slow response from the states to its draft guidelines for which their opinion has been sought. The ministry has sanctioned more than 1.4 million houses for the poor. As many as 1,327 projects of affordable housing and basic amenities to the urban poor with an outlay of more than Rs 34,791 crore have been approved. 

That’s $7 billion in funding – a meaningful sum, even for massive and populous India.

As further explained in an accompanying DNA India story:

The ministry of housing and urban poverty alleviation (Hupa) will do satellite mapping of all slums in the country under the slum-free cities initiative of the government. Indian Space Research Organisation (Isro) will be collaborating in the project.

Any resemblance to the Star Fleet logo?

Mumbai will be among the four metros to be mapped first.

Hupa believes mapping will help governments find new slums taking shape and prevent their illegal spread.

That I doubt – but it may accelerate their remediation.  Evidently the article’s author shares my skeptical optimism (that revealing ‘besides’):

Besides, it will be effective in analysing slum communities, providing them sanitation and other amenities, and relocating them to suitable locations.

This I believe.

A similar satellite mapping done by Indian Institute of Remote Sensing on Dehradun’s slums showed that the number of slums in the city had increased from 75 in 1996 to 113 in 2000.

Less important than the number of slums – which, after all, can grow and meld into one another – is the overall scale, particularly including the number of people living in them.

Toward the future: Chittaugarh, February, 2010

Hupa is working with experts for a model legal regulatory framework for according property rights to slum dwellers.

I would love if it we at AHI were part of that activity.

A total of 5,161 towns are being surveyed to prepare a profile of household poverty and livelihoods of the slum dwellers. According to data available, Maharashtra has the highest number of slums in the country (32%), followed by West Bengal (15%) and Andhra Pradesh (15%).

Undoubtedly this directly correlates with the rate of urbanization.

The expanding blue city of Jodhpur: February, 2010

6. The Times of India on binding Public Sector Undertaings (PSU’s) into corporate social responsibility

Norms to bind PSUs with social duty in a month 

The department of public enterprises (DPE) will soon come up with norms on corporate social responsibility (CSR) for central public sector enterprises (CPSEs). 

This is how it begins; when government creates what the Economist calls quangos – quasi-non-governmental organizations, in effect state enterprises – it imbues them with unique powers, resources (such as large sums of money) and responsibilities.  Over time, as the PSU’s and CPSE’s become large and successful, government is within its rights to charge Rumpelstiltskin’s fee, and demand that the corporation take some of its profits – all of which derive ab initio from government largesse – and redeploy them into further expanding their social mission.

As per the proposal, cleared by the committee of secretaries (CoS), profit-making PSUs may have to set aside up to 2-5 % of their net profits for CSR activities.

Indian CSR is about to grow teeth.

 
The new norms will be formulated within a month and there will be no escaping from CSR, which will no longer be a photo opportunity for the chairman, said DPE secretary Bhaskar Chatterjee. “I would put a timeline of two to three weeks,” he added. 

Chatterjee looks implacable and inescapable

I love the phraseology, and the implicit political capital behind it.  Will there be follow-through, I hope?

There ought to be, as these are government entities, not purely private companies.

New construction residential: metropolitan Ahmedabad, February 2010

Even though most CPSEs earmark funds for CSR activities, most of them are on a voluntary basis.

Allowing them to arbitrage visibility against cost to maximize the headline-to-rupee ratio –

The CSR would no more be confined to organising blood donation camps or some charity event.

– which is less cost-effective than maximizing the impact-to-rupee ratio.

The proposal is now awaiting approval by heavy industries and public enterprises minister Vilasrao Deshmukh.

Deshmukh is the decider

The CPSEs with net profit of more than Rs 100 crore may be asked to contribute up to 2% of the amount, Mr Chatterjee said.

In other words, roughly $450,000 annually.  That’s enough for each CPSE to undertake initiatives of some reasonable municipal or local scale.

Of the 244 PSUs, 160 earned a net profit of Rs 91,083 crore in 2007-08, 2% of which amounts to Rs 1,821 crore. 

 
Based on their 2007-08 results, PSUs would have to spend at least Rs 1,500 crore.

Or $300,000,000 – enough to represent a major set of flows, structured in a manner similar to the so-far-stillborn housing trust fund intended to be funded with GSE profits.  [You remember alleged GSE profits, don't you? – Ed.]

The CPSEs would be obliged to take up specific projects to help people affected directly or indirectly by their businesses. This would be their primary obligation, out of the profits that they make. “You (CPSE) must recycle it to help the society,” the DPE secretary said.

For these enterprises, housing is a natural.  They have a vast pool of employees, for whom better quality employer-assisted housing is an employee loyalty and employee productivity issue.

 
Chatterjee said the guidelines would provide for measurement of the CSR. “This is happening not just in India but across the world,” he said. These obligations would be set in the memorandum of understanding, which sets targets for an individual CPSE.

Echoes of South Africa’s Financial Sector Charter.

Community organization, Ahmedabad-style: February, 2010

The performance evaluation would also have CSR as one of the parameters. 

The world’s largest democracy is serious about tackling its challenge of slums.  That’s heady stuff.

Bikaner, February 2010: I command the PSUs to dance to my tune

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I read the news today, oh boy

– The Beatles, A Day in the Life

One day’s newspaper clippings – in this case, The Times of India, Thursday, February 11 – represent an info-montage of the world’s largest democracy muscling its way into the twenty-first century, and along the way the world’s largest and most urgent national affordable housing and slum upgrading challenge.

Ahmedabad retail street, February, 2010

[Recently Nancy and spent three weeks in India, a week of it for AHI at the South Asia Housing Finance Forum (Delhi; two days), a World Bank sponsored workshop (Udaipur) on India's new slum upgrading initiative Rajiv Awas Yojana (RAY), and then (z) in Ahmedabad with our customer SEWA Housing Finance and our working partner the Ashoka Foundation. 

Listening with interest at the SAHF Forum, January 27

Along the way and afterwards, we went all over Rajasthan, the old Rajputana or the India of princely states.  I will have a post forthcoming on the range of Indian housing alternatives, complete with pictures – truly remarkable.]

Boy musician, Jaswand Tanda, Jodhpur, February, 2010

India will overwhelm you – at least, it overwhelmed us.  It’s too large, too rambunctious, too cacophonous, too pungent to be absorbed into any totality in any short interval.  I can see why people hate the place, and I can also see why people become enraptured by it. 

Downtown Jodhpur, rush hour, February, 2010

What follows are representative clips from one day’s Economic Times of India.  They are related an unrelated, consistent and contradictory, serious and silly.  All of them are India, and all of them are now.

Start with the challenges:

1. The Economic Times on the housing deficit in homes and rupees

NEW DELHI: The government on Wednesday said the country needs investment to the tune of Rs 3,61,000 crore [Roughly $7.0 billion – Ed.] to meet the shortage of nearly 25 million housing units. 

That’s called paying the piper!

“There was approximately housing shortage of 24.7 million dwelling units at the beginning of the 11th Five year plan…”

Government bodies love quantifying a housing ‘deficit,’ if only to give a macro scale to the problem.  Personally, I think the deficit has to be even larger than this, since it must include people living in inadequate housing, people living in too little housing, and people who are moving to India’s cities at an unprecedented rate.

“The investment requirements would be to the tune of Rs 3,61,000 crore for overcoming this massive housing shortage,” Minister of State for Urban Development Seagate Roy said at the CII real estate concave here. 

Ray thinks it’s 3.6 lakh crores of rupees

Of the total housing requirement, about 99% is constituted by the economically weaker section and the low income groups, he added. 

Housing demand being elastic, as these people become less poor, they will want more housing, so even if India magically conjured up 25,000,000 homes tomorrow, the nation would need an equal number the day after.

“The massive urbanisation in the past few decades has led to severe housing shortage for the urban poor… providing affordable housing is one of the most formidable challenges that our country faces today,” Roy said. 

As I said in my World Bank presentation, I’ve previously hypothesized that not only are slums economically rational, they may be an inevitable phase in urbanization, a phase that governments and cities escape by investing their way out.

Pushing a bicycle carrying petroleum, Jodhpur, February 2010

He said availability of land at cheap rates is the greatest challenge in providing affordable housing in the country. 

We know that the value of urban land is a residual, so as India urbanizes (today it is only 28% urban), those land prices will only rise – unless something is done to head them off.

Measures like increasing density by [a] hiking the floor-area ratio and [b] encouraging public-private partnership, should be considered in fulfilling the housing need of the country. 

It’s important to distinguish the potential utility and impacts of these two. 

A. Floor-to-area-ratio (FAR) and its close Indian cousin the floor space index (FSI) are the principal means by which India controls its formal development.  The effect, not necessarily a desirable one, is that developable urban land rises dramatically in price.  Tweaking the FSI and FAR can add value to selected land – in the right location, almost as much value as one wants – while at the same time inflating the value of all other land.  (And on the third hand, managing the preservation of open space for municipal infrastructure such as highways, urban rail lines, and even public green space.)

Good thing Lord Ganesha has four hands

B. Public-private partnership is merely a means by which the public sector can get technical functions – land development, construction, ownership – performed faster, cheaper and better.  Public-private partnership cannot conjure up subsidy or value from thin air, nor will the private sector embrace and internalize essentially governmental functions – like owning public-policy imperatives – unless it is very well paid to do so.

“The government has sought to create an enabling and supportive environment for expanding credit flow to the housing sector and increasing home ownership in the country,” Roy said.

Absolutely, creation of the enabling environment is one of government’s four essential roles.

Schoolgirls on a field trip: Jodhpur, February 2010

2. The Economic Times on land grabbing

Her Excellency’s husband a land grabber?

You’re just electing me, not my brother

NEW DELHI: In a major embarrassment to President Pratibha Patil, her husband Devisingh Ransingh Shekhawat has been asked to return over two acres he grabbed from a poor Dalit  [Untouchable – Ed.] farmer in Amravati of Maharashtra. 

She’s India’s first woman president

The president, the First  Gentleman, and the Queen

The farmer, Kishore Bansod, had last year found that most of his land had been transferred to Mr Shekhawat in the government records. The President’s spouse was accused of forging papers to grab 2.5 acres near the highway in Chandrapur two years ago. The farmer went to court in June, 2009. The Daryapur court gave its verdict in the case in December stating that the land belonged to Kishore Madhav Bansod and not Mr Shekhawat and that it be returned to the farmer. However, Mr Bansod got the copy of the judgement only earlier this week. 

Later that day, I read elsewhere that Mr. Shekhawat vigorously disputes the characterization of his land transaction.  All I know is what I read in the newspapers …

The President’s husband took the help of local revenue officers. An inquiry by local officials revealed that five others — all his relatives — colluded with him. 

Though the Rashtrapati Bhavan [The Indian White House – Ed.] has refrained from commenting saying that the President’s husband is a private citizen and enjoys no special privileges, the allegations against him are bound to haunt the President. 

Government buildings, Rajpath, Delhi, Republic Day, 2010

Following the farmer’s complaint last year, SDM Ashok Amankar had issued notices to Shekhawat and seven others, including his nephew Bhanwarsingh Lalsingh Shekhawat and brothers Kishorsingh, Omsingh and Raghusingh. The then revenue inspector was also served a notice. 

The farmer had said that officials who went for land measurements had told him that his land was in the name of the Shekhawat family. The three-acre farm was purchased by his father Mahadevrao in 1985-86 from a Bapurao Chaudhary, he had said.

Indian land use records are an infinitely recursive tangle of documents.  At the India RAY conference, Bimal Patel of HCP Design in Ahmedabad gave a superlative presentation illustrating the land-use and legal history of Jadibanagar in Ahmedabad, a public infrastructure project of our customer SEWA Bank.  It would have been hilarious had it not been so real.  Because land history is inevitably lost in the mists of time, land-use disputes are common. 

Informal neighborhood with municipal infrastructure (streets) added, Ahmedabad, February, 2010

Mr Shekawat is a member of the Congress and has also served as the Mayor of Amravati. This is not the first time that the President’s family has come under a cloud over financial dealings. 

In 1973, [President Patil] had set up a co-operative bank named Pratibha Mahila Shahkari Bank to empower women but its license of the bank was revoked in 2003 by the RBI over alleged financial irregularities. According to reports, one of the reasons listed by RBI for cancellation of the license was the faulty loan policy of the bank and waivers on loan interests given, among others, to Ms Patil’s relatives.

Everyone I talked with bemoans corruption in India.

A new currency created to try to shame people into refusing bribes

3. The Economic Times on the black-market economy

11 Feb 2010, 0542 hrs IST, Mythili Bhusnurmath , ET Bureau

Can you see her tongue in her cheek?  Mythili

The Great Recession might have laid mightier economies than ours struggling but the Indian economy has emerged relatively unscathed. Yes, you’ve heard that before. But chances are that as the global economy lurches from one crisis to another while the Indian economy gathers speed, you will hear that repeated in many quarters, especially in official fora. 

To hear it from government sources, there are many reasons for the Indian economy’s resilience: the Goldilocks fiscal stimulus, monetary easing, our large domestic market, demographic dividend, calibrated opening up of the economy, and so and so forth. But before we pat ourselves on the back, could there be another, no-so-happy reason why the Indian economy has been less affected by the Great Recession? 

If research by Deutsche Bank economists is to be believed, yes, our black economy! 

Doors for sale, Ahmedabad, February, 2010

A vast portion of India’s economy and employment is informal – meaning in cash transactions.

Paper money has no memory

Now, black money has long been regarded the bane of our development process. It results in huge wastage of resources , lowers the rate of growth, leads to criminalisation in society and breakdown of institutions, undermines the capacity of Indian businesses to face the challenge of globalisation, jeopardises our security, leads to poor governance, in short, to every conceivable ill we can think of. 

But there just might be something to be said for it. According to researchers at Deutsche Bank, empirical analysis shows countries with a very high or very low share of activity in the shadow economy appear to be much less affected by growth fluctuations in the world economy than countries that have an average-sized shadow economy. 

Because they have a much larger economy, and its financing is countercyclical.  Thus the formally conducted economy – the one we can observe – may be only the tip of the iceberg of economic activity.

What’s under the surface is more important

Alas! Countries where ‘the population cannot really decide whether it wants to offer its labour ‘honestly’ in the official economy or rigorously off-record are hit particularly hard’ . So, countries such as Germany, Ireland and some Scandinavian ones whose shadow economies are around 15% of GDP, saw their GDP plunge by around 5% in 2009, and in the case of Ireland and Finland, by over 6.5%. 

The report does not include India, but there’s no disputing which end of the scale we occupy when it comes to the share of the black economy. At close to 40% of GDP, i.e., $400 billion, according to Arun Kumar, professor of economics at the Capital’s Jawaharlal Nehru University, who has done a great deal of work on black money, black money vitiates every aspect of our life. 

Kumar tracks the black economy

I’ve posted extensively that lack of electronic – hence, formal and reported – financial activity is a huge barrier to bringing the poor into the formal city – and hence to enabling them to claim their economic citizenship. 

Self-employed food vendor, Ahmedabad, February, 2010

So, is the report a vindication of the rampant corruption and growing scourge of black money? Not at all! The downside of black money far exceeds any possible upside. To the rhetoric question of where would we have been without the black economy shoring up growth, the answer could well be, like the Scandinavians, perhaps! With a growth rate far lower than our present 7-8%, but guess what! I have a feeling that given a choice, most ordinary Indians might happily swap their present lot for that of the Scandinavians, 9% growth be damned! 

If urbanization is a process, and housing formalization is a process, then too the visible manifestation of money is a further process. 

From Nancy’s and my India trip: Friendly tuk-tuk driver and passenger, Ahmedabad

[Continued tomorrow in Part 2.]

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[Continued from yesterday's Part 1.]

Yesterday, examining the New York Times‘ reporting of Ben Bernanke’s reconfirmation as Federal Reserve Chairman, we saw that the Times focused on what happened – a 70-30 final vote – rather than the mountainously glaring things that didn’t happen:

“But the Senate did nothing at the hearings.”

“That was the curious incident.”

Nowhere does the Times article mention any single:

* Controversial Bernanke statement, gaffe, or concession about his or the Fed’s record.

* Pledge or promise he committed himself to.

* Statement of limitations on the Fed’s powers and authorities that might be imposed as a condition of his reconfirmation.

* Announcement of legislation being introduced to curtail the Fed’s independence.

And you were there!

As the Wall Street Journal put it some days later:

Despite last month’s bruising confirmation battle, Federal Reserve Chairman Ben Bernanke and the central bank’s independence came out relatively unscathed, according to economists in the latest Wall Street Journal forecasting survey.

“Bernanke will do what he thinks is correct for the long run success of the U.S. economy,” said Paul Kasriel of The Northern Trust.

Kasriel bills himself an econtrarian

That’s the real story – faced with a unique opportunity to hamstring the Fed chairman, at a time when President Obama had minimal political capital and no fallback plan, the Senate did nothing.

Without a doubt, the Senate could have tried such a tactic. 

In 1688, when Parliament invited William of Orange to become king, it imposed limitations on his authority as a condition of the tender: the King In Parliament.  That phraseology – and the particulars that undergirded it – limited William’s prerogatives and within a hundred years had led to the leaching of virtually all political power out of the sovereign and into the chamber. 

We’ll let you be king, subject to some … preconditions

Not there (the Journal again):

Just one economist of the 50 who answered the question thought that the Fed’s independence from political interference was significantly undermined by the confirmation fight in the Senate. Bernanke was eventually backed by a bipartisan vote of 70-30, the lowest ever number of ayes for a Fed chairman. Twenty-nine economists said independence was slightly undermined by the fight.

Actually, nothing’s changed … yet.  There is the potential to erode the Fed’s independence.

While an arm-twisting campaign by the administration limited the opposition, the outcry against the Fed –

“Father forgive them, for they have no bloody clue.”

Give me a break.  How many people do you know who could say what the Federal Reserve is, let alone make even a partially coherent case why the Fed should be curtailed?  That’s just short-term political scapegoating at work.

– will most likely continue rippling through economic policy generally, and Mr. Bernanke’s leadership of the Fed in particular.

The effects could be felt first in the debate over how to reform financial regulations. The Obama administration has proposed consolidating risk regulation under the Fed, while some in Congress want to strip away its oversight authority.

Note well the distinction – the Administration wants to give the Fed more authority, not less.  Because of

Jefferson’s curse, regulation of financial institutions is thoroughly balkanized, which leads, as I explained in Cutting Turf, leading to interstices – gaps in the observation platform as one might put it – through which flowed most of the highly volatile financial instruments whose unwinding has created out current undoing.

Oversight must be consolidated, and it must be standardized.  These are fundamental post-catastrophe financial reforms yet to come.

There is thus a risk that consolidation will center somewhere other than the Fed.  The only other logical candidate is Treasury – FDIC covers only depository institutions, for whom additional oversight is appropriate, and the OCC’s remit is limited. 

“The institutional prestige of the Fed, even apart from this vote, had taken a hit, and it started back around the disaster of September 2008,” said Stephen H. Axilrod, who worked at the Fed for 34 years [1952 to 1986, that is, 24 years ago – Ed.] and wrote a history of its monetary policies. “I don’t think it has recovered. This is a low point in the Fed’s recent history, that’s for sure.”

Probably true, but so what?  Prestige grows back naturally.  Power lost doesn’t.

The vote also made clear Congress’s insistence on transparency from a historically secretive institution that has made extraordinary interventions in the market since 2008.

“The Fed is going to have to work hard, for a long period, to regain the public confidence of the sort it enjoyed during the halcyon days when everything was going so swimmingly,” said Barry Eichengreen, professor of economics and political science at the University of California, Berkeley.

When the food is bad, blame the waiter.

You serve lousy monetary policy in this joint, sir

The last time any nominee for chairman faced such opposition was 1983, when the Senate confirmed Paul A. Volcker to a second term on an 84-to-16 vote.

That was a more civilized era, when Senators showed more deference to Presidential nominees.

Mr. Volcker, too, had served under presidents of opposing parties and had navigated the Fed through a difficult recession.

But while Mr. Volcker sharply raised interest rates to tame runaway inflation — actions that were initially unpopular –

That’s a polite phrase.  I remember people wanting to crucify Volcker.

Did I look like I cared?

– but were later praised, Mr. Bernanke faces a different challenge.

And he’s already said that he will raise interest rates.  Indeed, six months ago, he wrote an editorial so promising:

Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period [written July, 2009, just before Mr. Bernanke's renomination – Ed.].

We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.

A model of clarity: Chairman Bernanke will push interest rates up and up as fast as he can without stalling the fragile economic recovery.

The Fed has held short-term interest rates near zero since December 2008, a policy reaffirmed on Wednesday. And while analysts expect rates to start rising later this year, the scale and timing of that rise will be a challenge.

Just you wait, Ben Bernanke, just you wait

There’ll be time enough for you to raise the rate

So, too, will be the unwinding of the Fed’s emergency lending programs and its purchase of $1.25 trillion in mortgage-backed securities.

When one pulls $1.25 trillion – for viewers playing at home, that’s $1,250,000,000,000 – out of the money supply, it’s going to be a shock.

Many politicians will not want the Fed to put the brakes on recovery by raising rates.

Many politicians will have lost their opportunity to do anything about the Fed raising rates.

Missed by that much

Indeed, the Senate majority leader, Harry Reid of Nevada, offered only a lukewarm endorsement last week after telling Mr. Bernanke that the Fed must do more to ease lending to households and small businesses. While the Fed says Mr. Bernanke gave Mr. Reid no specific commitments, the central bank will continue to face close scrutiny.

Scrutinize away

To recapitulate:

1. He got reconfirmed while promising nothing.

2. He lost none of the Fed’s autonomy.

What then was all the fuss and bother?  As Isaac Asimov put it in his Foundation story, The Encyclopedists:

When, after two days’ steady work, he succeeded in eliminating meaningless statements, vague gibberish, useless qualifications – in short, all the goo and dribble – he found  he had nothing left.  Everything canceled out.  Lord Dorwin, in five days of discussion, didn’t say one damned thing, and said it so you never noticed. 

I swear to answer your questions, not to tell you the questions to ask

As so often happens, the newspaper got the story wrong.  The Times headlined it:

Senate, Weakly, Backs New Term for Bernanke

When the real story was:

Senate, True To Form, Talks and Does Not Act

All is unfolding as I have foreseen

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It’ll go down in the box score as a line drive, baseball announcers chortle when a seeing-eye dribbler finds the hole between shortstop and third – as if claiming a base that way is somehow unmanly. 

Doesn’t look unmanly to me

Yet newly reconfirmed Chairman Ben Bernanke knows, as I wonder how many in the Senate know, that during his confirmation hearings only two things mattered:

Not counting winning, of course!

1. His reconfirmation.

2. Preserving the Federal Reserve’s independence.

Everything else was window dressing, show trial, commedia dell’arte, words and fury signifying nothing.

Knowing this, Chairman Bernanke cared not a whit how many votes of conscience/ protest he didn’t get, not how many scrolls of Congressional record transcript it took not to get them.

As I predicted [It wasn't hard – Ed.], he got reconfirmed, and he kept the Fed independent.  Two for two in history’s box score.

Is he … praising me?

How did he do it?  By smiling, shutting up, and offering neither excuses, nor alternatives, nor grand and potentially troublesome promises.  In short, by being the Pillsbury dough boy – for now.

“If I hold my finger like this, it keeps me from saying anything inflammatory.”

Of course, that wasn’t how the New York Times saw it, reporting it this way:

WASHINGTON — The Senate gave Ben S. Bernanke a second four-year term as the head of the Federal Reserve on Thursday after critics excoriated the central bank’s conduct in the years leading up to the financial crisis.

Excoriation costs nothing.  My friend Alex has often teased me that I should set up a consultancy, Whipping Boy Associates, to be hired only when managers know a scheme will fail, and desperately want someone smilingly to take the blame for it.

The 70-to-30 vote was the weakest endorsement ever extended to a chairman in the Fed’s 96-year history.

Ask Harry Truman and Jack Kennedy how crippling it proves to win by one of the narrowest margins in history. 

Do I look crippled?

“The torch has been passed to a new generation of Americans”

Thus, in another stirring victory for the sensible party over the silly party:

That’s a big swing against the silly party …

The confirmation was a victory for President Obama, who had called Mr. Bernanke an architect of the recovery –

Presuming that we’re in recovery, which I doubt.  Let’s call Mr. Bernanke a successful mad experimenter, an architect of banking on value and preventing the Second Great Depression:

– but also signaled the extent to which the Fed, once little known to the public, has become the object of outrage over high unemployment and bank bailouts.

Easier to be mad at the Fed, whom few understand, than one’s elected officials, who will fulminate if criticized.

Someone criticized me?

In several hours of debate, senators said that the Fed had [1] abetted, [2] then ignored, the housing and credit bubbles and allowed banks [3] to keep dangerously low capital reserves and [4] to make reckless lending decisions that ruined consumers.

Of the four charges, [1]’s been an ongoing subject of discussion since Chairman Greenspan, and [2] is quite probably correct:

To an extent, the rhetoric against Mr. Bernanke reflected a spilling-over of frustration at two of his collaborators: the former Treasury secretary, Henry M. Paulson Jr., and the current one, Timothy F. Geithner.

Neither of whom are available for public flogging; Paulson because he’s not the Treasury Secretary, and Geithner because he is.

You can’t touch this

Charge [3] is self-evident in hindsight – yet who is Congress to complain, with its oversight of Fannie Mae and Freddie Mac?, and [4] isn’t within the Fed’s purview, but instead that of consumer protection regulation. 

“Let me try this in simpler language …”

Looming over it all was the role of Mr. Bernanke’s predecessor, Alan Greenspan, whose once-sterling reputation has been diminished as his decisions to keep interest rates low after the 2001 recession have been brought into question.

Well, we could flog him, I suppose.

Not anymore, you can’t

“I knew that he would continue the legacy of Alan Greenspan, and I was right,” said Senator Jim Bunning, Republican of Kentucky, who was the lone vote against Mr. Bernanke in 2005.

Give Senator Bunning credit – he voted his conscience when that was a hard thing to do.

Mr. Bernanke rejoined the Fed, as chairman, in 2006, and Mr. Obama renominated him last year.

Mr. Bunning cited a half-dozen statements from 2007 to 2009 in which Mr. Bernanke expressed optimism about the housing market, bank capital ratios, the capitalization of Fannie Mae and Freddie Mac and the unemployment rate. Saying that Mr. Bernanke had been repeatedly wrong, he declared, “We shouldn’t be paying the Fed chairman to learn on the job.”

It’s called responding to unprecedented events, Senator

A Fed chairman is not a soothsayer, he’s a surfer of chaos.  Less important than Mr. Bernanke’s predictions or contemporaneous perspectives are his judgments and actions, and as I’ve made clear in previous posts, I like his batting average.

Senator Sheldon Whitehouse, Democrat of Rhode Island, echoed that, saying Mr. Bernanke had shown “a troubling pattern of false confidence.”

Senator Jeff Merkley, Democrat of Oregon, went further, saying the Fed had “helped set the fire that destroyed our economy.”

Massive budget deficits having nothing to do with it at all ….

Mr. Bernanke is a Republican economist and an authority on the Depression.

He’s also darned knowledgeable and unflappable.

“Must control … finger of death.”

Another Alabaman, Richard C. Shelby, the top Republican on the banking committee, which approved the nomination last month by a 16-to-7 vote, laid out a bill of particulars, saying Mr. Bernanke’s handling of the financial crisis did not make up for his failings before that time.

“Considerable economic devastation occurred as a result of Chairman Bernanke’s loose monetary policy and weak regulatory oversight,” Mr. Shelby said. “If we don’t hold Chairman Bernanke accountable, what precedent are we setting for future regulators?”

Except that it’s hard to lay all or even a major part of these at Chairman Bernanke’s feet.

Mr. Bernanke, 56, was a member of the Fed’s board for part of that period, from 2002 to 2005, when President George W. Bush named him to lead his Council of Economic Advisers.

Yes, I have some knowledge of Chairman Greenspan

Some even [5] blamed Mr. Bernanke for the falling dollar and [6] questioned his commitment to free enterprise.

Regarding [5], would you rather have a falling dollar (through low interest rates) in exchange for banks making profits and limiting the fallout from a still-overhanging homeownership market?  As for [6], isn’t it entirely contradictory to the previous points?  How can doing too little make one an enemy of free enterprise?

Just smile, Ben.

“Just keep smiling, just keep smiling.”

In contrast, Mr. Bernanke’s supporters were muted.

There being no political upside to voicing support, and no particular likelihood that such public presentiments would change the minds of Mr. Bernanke’s No votes.

They reiterated that the Fed had made mistakes but said that Mr. Bernanke had helped save the economy from a far worse recession.

Yes, he did. 

“He basically allowed the Fed to become the lender of the nation,” said Senator Judd Gregg, Republican of New Hampshire. “Nobody had ever done that. The way he did it was extraordinary in its creativity, and the results were that the country’s financial system did not collapse.”

Nominated as President Obama’s Commerce Secretary before withdrawing his nomination over disagreements about the wisdom of what became known as ARRA

After a week in which top White House officials and Mr. Bernanke met with Democratic leaders in the Senate to secure support, the Senate first voted 77 to 23 to end debate, with more than the 60 votes needed to overcome the threat of a filibuster.

Cloture was the real vote; that having been held, roughly seven Senators then hedged their back-home political bets by casting symbolic No votes:

On a second vote, to confirm, the 30 dissents came from 18 Republicans, 11 Democrats and one independent, Bernard Sanders of Vermont.

Mr. Sanders is lefter than left; for this purpose, count him a Democrat.

Senators from opposite ends of the spectrum formed unlikely alliances. After Mr. Sanders, who calls himself a socialist, finished denouncing Mr. Bernanke, Jeff Sessions, a conservative Republican from Alabama, rose to do the same.

With enemies like these, who needs friends?

I never really expected to get Bernie’s vote, anyway

On Thursday evening, Mr. Obama congratulated Mr. Bernanke in a statement. “As the nation continues to face the consequences of the worst recession in a generation, Ben Bernanke has provided wisdom and steady leadership in the midst of the financial and economic crisis,” he said.

Remarkable in this story is the entire pack of hounds who did not bark in the night.

[Continued tomorrow in Part 2.]

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[Continued from yesterday's Part 1.]

Yesterday we learned that the capital markets, by raising the cost of Greek bonds to sky-high levels, have sounded the klaxon and warned that the fiscal ship has been holed below the waterline.

We’ve taken some damage

As reported on December 15 in the Wall Street Journal, the damage has been done and is being done by Greece, but the casualties may include France and Germany, because sovereign default risk of one state brings into question whether and how the Eurozone’s members are in fact committed to defending their currency’s purchasing power by controlling their monetary policy:

Greek Finance Minister George Papaconstantinou visited Berlin and Paris Tuesday to try to reassure governments and markets; he next visits London and Frankfurt. Mr. Papaconstantinou told reporters in Paris he wasn’t discussing a bailout.

Not discussing it, no; just implicitly asking for one.  His very presence does that.

You mentioned bailout, I didn’t.

In an earlier interview, the finance minister said he understands the risk if the newly elected Socialist government can’t show by early 2010 that a decisive overhaul of public finances is under way. He expects to have to borrow just over €50 billion ($73.22 billion) from bond markets next year.

From whom?  Who lends to the spendthrift?

“There is a scenario in which the market dries up” for Greek bonds, he said.  “I wouldn’t say it’s completely out of the question, but it’s not likely by any stretch of the imagination.” If it happens, Greece would have to go to fellow European Union member countries or the International Monetary Fund for loans, which would come with stringent conditions. “I don’t want to be the finance minister who took Greece to the IMF,” Mr. Papaconstantinou said.

Especially as any IMF visit would get short shrift.  The IMF would tell Greece to get lost, because the IMF exists for developed nations (like Greece) to help emerging nations, not as a cross-collateralized mutual bailout fund. 

As always, should you or any of your IMF ambassadors be caught or bankrupted …

Greece will also get a chilly reception in Berlin.

EU officials, publicly and privately, stress that Greece is unlikely to need a bailout provided it follows its words with actions.

Ay, there’s the rub – is there any reason to believe Greece will do so?

You should believe that I will lose weight after I eat

The treaty on monetary union banned bailouts of euro members, but senior European officials say there are ways around it.

Rules you don’t enforce are worse than useless.  If the EU does bail out Greece, it will have zero fiscal credibility, and who is to say that Iceland, Ireland, or Portugal will not feel like chumps for their not asking for a bailout? 

One option would be a loan from a financially strong country such as Germany.

Oh, they’d love that.

Sure, let’s lend money to Greece, okay chief?

EU authorities including the ECB would prefer the euro zone handle any assistance internally. But German Chancellor Angela Merkel would favor the IMF as the source of funds, says a senior aide.

Of course she would; it wouldn’t be her money.

(Similar divisions were evident when the EU and IMF bailed out Hungary last year.)

Hungary is an emerging economy; Greece is not.  Big difference.

An IMF-led package might be politically more humiliating for Greece, but better for the credibility of the euro-zone’s no-bailout clause, and thus for fiscal discipline in the zone over time, analysts say.

Yes, but it’s nonsense to think that the IMF, which was never designed for developed economies, would take the lead in bailing out the entire Eurozone, which would be the consequence of its assisting one Euro member.

Mr. Papandreou called IMF Managing Director Dominique Strauss-Kahn last week, Greek officials say — but only to discuss the overall situation, not to ask for aid.

By tradition, the IMF head is always a European, as the World Bank heads is always an American.  That won’t have made Mr. Papandreou’s reception any warmer.

Strauss-Kahn: what’s the Greek for “not bloody likely”?

In much of southern Europe, declining competitiveness is linked to structural flaws including heavy and inefficient bureaucracy. Recent growth in Spain and Greece depended heavily on construction and consumer bubbles. Italy and Greece have particularly dysfunctional public administrations and chronic tax evasion.

Does any of this sound like California to you?

“It’s hard to see how Italy, Spain and Portugal are going to generate enough growth” to rein in their debts, says Simon Tilford, chief economist at the Center for European Reform, a London think tank.

Ireland’s economy is more flexible, and Ireland’s younger population makes growth easier to achieve, but Ireland is suffering from the weakness of the British pound and U.K. economy, a major Irish market.

Ireland, in short, is facing a temporary crunch.  Greece has structural financial problems; it’s been living way above its means for decades.

So far the Greek government has shied away from deep cuts in state spending and wages that Ireland announced to tame its deficit.

In other words, absent a bailout Ireland wins, Greece loses.

Hey boys, just run huge deficits and don’t worry about it, okay?

EU governments, financial markets and credit-rating agencies are piling pressure on Greece to flesh out its promises with a concrete plan by January.

Sure they are.  They realize the EU’s future is at stake.

But the prospect of Greek austerity has already sparked protests by pensioners, students and public-sector unions in the past two weeks, and officials fear a wave of social unrest.

Productivity?  Who cares about that?

Politicians and financial markets “want to make us wear an Irish costume,” says shipyard worker and labor leader Theodoros Koutras. Mr. Koutras’s Communist-backed union confederation, the All Workers’ Militant Front, aims to mobilize hundreds of thousands of workers in a nationwide strike on Dec. 17 Thursday.

Translated into English: Print more money!  Print more money!

Greece had no problem selling bonds in November –

That was before Dubai World.

– despite riling markets by stating that this year’s budget deficit would be nearly 13% of GDP –

I’d cackle at those deficits, except the US’s budget deficits have sharply increased.

A hideous graph

What’s really appalling is this:

– twice the previous government’s estimate only weeks earlier.

That kind of complete inability to project financial results close at hand is what doomed the pre-TARP US banks.

Prime Minister Papandreou, attending an EU summit in Brussels on Friday, said massive inefficiency and “widespread corruption” are keeping investment away and hobbling the economy.

Who says we Greek are corrupt, anyway?

Add to that government ineptness?

The government admits it doesn’t know exactly how many people work for it. That’s partly due to a history of haphazard hiring by politicians who have traditionally rewarded supporters with public-service jobs.

A hiring spree in the month before the election brought in thousands of salaried “trainees” who have no posts and in many cases no office to go to, according to the finance ministry.

If you were Germany, would you want to bail out such a system?

Public servants often leave work at 2 pm, and “many are doing a second job in the afternoon, very often without declaring their second income for tax,” says Evangelos Antonaros, a conservative legislator who was the previous government’s spokesman.

I’ve previously posted about the ecosystemic importance of bankruptcy.  Among its other virtues, it stops fiscal gluttony.  And Greece’s fiscal gluttony needs stopping, for Greece’s own long-term fiscal health.  Just listen to this tale:

The gray economy extends to the education system, where many Greek students pay on the side to fill in holes left by lackluster teaching. Katerina Karamatsiou, a young Athenian, recalls her high-school physics teacher telling the class: “What’s the point in teaching you? You all go for private tuition after school anyway.” He offered such after-hours, tax-free tuition himself, she says.

An exception?  Nope.

Mr. Papaconstantinou says such experiences are common in public services. “When you have to pay doctors in public hospitals with an envelope of money, then there is no public system,” he says. As a result, he says, many Greeks ask themselves: “So why pay taxes?”

When it comes to cheating on taxes, Greece is Number Three!

Allow me to quote myself again on the evils of rules you don’t enforce:

Widespread non-compliance undermines the rule of law.  What, in administrative terms, was the problem with Prohibition?  Not that it deprived people of a recreational substance, but that non-compliance was so pervasive it recruited just about everybody into a shadow system of speakeasies and bathtub gin.

Drinking in the Blind Pig during Prohibition

It’s no coincidence that organized crime came to prominence in America during Prohibition – so many people benefited from booze smuggling that the criminals had friends in high places. 

Looking the other way leads everyone into a social doublethink:

I’m not looking away

The power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them….  To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies — all this is indispensably necessary.

Greece is rotten with fiscal doublethink:

Despite the government’s campaign to persuade Greeks that the old ways can’t go on, many believe the media and financial speculators are exaggerating the country’s problems. Greece, says shopkeeper Athanasia Katsigianni, “is like a creme caramel: Always trembling, but it stays standing.”

Do you want a nation that’s a creme caramel?  No backbone and no nutrition?

No backbone, no nutrition

Those are the ingredients of sinking the currency, and the economy with it.

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