So after all the reluctance and prevarication, and faced with inevitable sovereign defaults and the very real possibility of a global contagion (with a resultant double-dip global recession), the Europeans have finally acted. Taking a leaf out of the Obama administration's $700 bn bail out of Wall Street, the EU and IMF announced a $957 bn rescue package of Greece, Portugal and Spain, to "shock and awe" the financial markets so as to revive confidence in Euroland.
This new package follows the failure of the $140 bn EU-IMF bailout last week to enthuse the markets. In contrast, the latest, completely unexpected announcement, has brought cheer to the markets. Equity markets across the world surged in response to the rescue package.
The EU finance ministers agreed to provide $560 billion in new loans and $76 billion under an existing lending program, while the IMF agreed to give up to $321 billion separately. The package also includes the creation of a "special purpose vehicle" to disburse the 440 billion euros in new loans, should that support be required by member states in economic difficulties.
Further, the European Central Bank (again reflecting what the Fed did in the US) announced that it would intervene in the government and corporate bond markets to provide liquidity and prevent freezing of credit markets. The ECB, which has so far rebuffed calls to inject liquidity into the markets by buying back European bonds, announced that it would take whatever steps were necessary to smooth out the secondary markets for public and private debt.
And in a sign of the spreading anxiety about the crisis spilling over outside Europe, the Fed, along with the ECB and the central banks of Canada, Britain and Switzerland, announced the establishment of swap lines intended to make it easier for European companies, institutions and governments to borrow dollars when they need them. Under these swap lines, the Fed will be printing dollars and exchanging them for euros to provide more liquidity, and thereby help the ECB make dollar-denominated loans to European financial institutions.
The swaps are broadly similar to one that the Fed itself introduced in December 2007 following the sub-prime meltdown. Under that, the Fed provided dollars to central banks in exchange for an equivalent amount in foreign currency (the foreign central banks paid the Fed interest equivalent to what they made from lending the dollars; while the Fed did not pay any interest on the foreign currencies it took in exchange, having agreed to hold them instead of lending them out or investing them in the private markets), based on prevailing exchange rates, and the parties agreed to make the same exchange in reverse at a later date — anywhere from one day to three months later — using the same exchange rate as in the initial transaction.
Though the completely unexpected nature of the rescue announcement has "shocked and awed" the financial markets, whether it is adequate or not is another matter. While it may be a step in the right direction and around the requirement to restructure the debt liabilities of these countries (atleast for the time being), they will do little to avoid the inevitable fiscal austerity that these countries will have to undergo. I have blogged about this in an earlier post here.
Paul Krugman argues that while the bailout plan appears to confuse a solvency problem for a liquidity problem, the ECB's willingness to undertake expansionary policies is a welcome sign. The possibility of inflation in Eurozone due to an expansionary policy by ECB could reduce the extent of deflation required by the likes of Greece to regain their competitiveness.
Some have criticized the bailout for containing only new loans (to help Greece and Co raise money at normal rates so as to reschedule its debts) instead of any actual decrease in the debt burden. They claim that this will only delay the ineveitable default by helping these countries raise enough money to temporarily repay their debts coming due in the immediate future. Further, as Krugman pointed out, it overlooks the fact that some of the debtors may actually be insolvent and may not be able to repay them at any time.
While this arguement is surely correct, like the US bailout, the broad underlying premiss of such liquidity support bailouts is that by making available ample liquidity at lower than prevailing market rates, the beleaguered firms and countries may be able to buy enough time to repair their balance sheets and for normal economic activity to get restarted. In other words, hope that with time market confidence returns and everything will be back to normal.
I am inclined to the opinion that this line of arguement overlooks the fact that Greece (and others) would need more than just reschedule its debts to return to normalcy. I have already blogged about the more fundamental structural challenges facing these countries. The resuce package will sure help, indeed it is a small first step in the long road to recovery. In fact, as Simon Johnson and Peter Boone have shown, even with a rescheduling of debts, the numbers are so staggeringly dismal and even the medium-term economic prospects too bleak that nothing short of a default (with haircuts) will help Greece. And even with all this, fiscal austerity cannot be avoided.
Even accepting the importance of reassuring the banking system of European commitment to maintaining financial market stability, the creditors to these nations surely deserve to be penalized for their irresponsible lending decisions. The massive exposure to Greek, Italian, and Spanish debts by German, French and British banks cannot be justified based on any fundamentals-based evaluations. It is clear that they lowered their guards and indulged in irresponsible lending to governments and private agencies in the peripheral economies.
The present structure of the rescue packages, which effectively seeks to provide the ailing economies with more money to enable them to reschedule/roll-over their existing debts, is more beneficial to the creditor banks than the debtor nations. Their debt burden will remain unchanged, while the banks get away without any loss.
A more equitable approaach would have been to tailor a debt restructuring program, on the lines of the Argetine default of 2001, wherein the creditors take a "haircut". Another approach would have been to atleast impose a moratorium on interest payments and roll-over the loans for longer-tenors at the same rates. In both cases, the bankers would be held accountable for their lending decisions.
By setting up a special purpose vehicle to raise loans (not clear whether the loans would be raised with the sovereign backing of European governments, including German and French governments or at prevailing market rates and then given at subsidized rates to Greece and Co) and the lend to the the affected nations, the creditors are effeectively incentivized to exit with their principals, and leave the SPV to fill in the credit gap. If this trend plays itself out for all the peripheral nations, then $ 1 trillion could disappear very fast.
Update 1 (13/5/2010)
Economix has questions and answers with Simon Johnson, Yves Smith, and Carmen Reinhart here, here and here.
Update 2 (14/5/2010)
A summary of Vox economists on the Euro crisis.
Wednesday, May 12, 2010
Tuesday, May 11, 2010
Kerala's highway widening controversy
While in Trivandrum for a few days, I came across the raging controversy about what should be the width of the National Highways (NH), and could not resist wading into the debate. These quick comments about the specific situation in Kerala is from a cursory understanding, though its general thrust is relevant for all road-widenings.
The crux of the issue is that while the National Highway Authority of India (NHAI) has proposed widening NH 17 and 47 to a width of 45 m, public opinion (crystallized in an all-party meeting) favors restricting it to 30 m.
In this context, I am reminded about an old post, in the context of Vijayawada road-widenings, that argues in favor of framing road widening debates in terms of lanes rather than road widths. I am inclined towards the view that the debate should have been formulated as a requirement of 3/6 (or 4/8) lane carriageway with a 4-5 m wide service road, instead of the 30-45 m width choice.
Taking cue from behavioural psychology, it is far easier to bargain for a reduction in road width by 5 or even 15 m, as opposed to negotiating for reduction in one lane or dispensing with the service road. One carriage lane or a service road has a much greater cognitive salience than 5 or 15 m. Anybody who has done road widenings on scale would appreciate this dimension of collective psychology.
In many respects, road-widening is a classic collective bargaining game where framing the context of the negotiations is critical. An appropriate formulation of the choices can considerably increase the odds of achieving a successful result. Therefore, and in view of the aforementioned political dynamics, a more realistic final goal should have been to push through atleast a six lane carriageway proposal, even if without any service lanes.
Given the fact that existing roads are 10-15 m wide, a 45 m road widening proposal would have meant an effective tripling of the existing width, a difficult proposition in a densely populated and urbanized context, as in Kerala. At best of times Kerala is a difficult place to push through such measures. The numerous examples of tortuously slow road-widenings in Trivandrum city is a reflection of this difficulty.
In a state where travelling 60 km on NH 47 from Trivandrum to Kollam takes more than 90 minutes, the impact of even a 30 m road widening on Kerala's economy can be dramatic. To the extent that road transportation is one of the critical infrastructural engines of economic growth, substantial economic activity in the state remains suppressed/disincentivized by the narrow highway roads.
A 30 m (or 100 ft) road will have 1.2 m (5 ft) central median, with 10.5 m (=3.5x3) (or 33 ft) of three-lane carriageway, about 2.5-3 m of drainage, and 0.6-1.1 m of shoulders on either side. This specification would be adequate to meet the basic requirements. All the more so, since unlike other states, Kerala does not serve as a transit pathway for the North-South or East-West passenger and freight traffic. Further, given its limited industrial base, a wider NH would be more useful in facilitating the growth of the state's services sector than promoting freight traffic. While a 60 m width would have been a luxury, and 45 m width ideal, the aforementioned practical considerations means that a 30 m width should be a good second-best solution.
Further, the success or otherwise of road widenings are critically dependent on the flexibility in the widths across stretches (without compromising on the essentials) and compensation payment strategies. This is all the more so since given the urbanized nature of the state (especially adjoining the NH), the NH widening across a major length (and from where resistance is likely to be most vocal) will be similar to widening of city roads. In such environments, decentralized negotiations (at official level, as is done in states like Andhra Pradesh) can yield quick and fairer results, though it carries the risk of politicization and corruption.
Though, in comparison to the regular land accquisition process, the NHAI's procedures are faster and its compensation amounts larger, such urban land accquistion will have to embrace more innovative approaches like transferable FAR bonds (TDRs), waival/concessions on building fees, impact fee concessions etc. Further, there should be a distinction made between those losing the major share of their property (as to leave the remaining extent virtually useless) and those who lose only a smaller share of their property; houses and commercial establishments; and owners and tenants.
There is an Econ 101 arguement in favor of the 30 m proposal. Even with the 45/60 m widening, the carriageway will be no more than 4 or 6 lanes, and the remaining land will be left barren as shoulders to be brought to use when required. In any case, the NHAI roads do not have any drains and the concept of ducting to lay utility lines is yet to catch up even in the metropolitan cities.
In the circumstances, we are looking at accquiring and leaving 15 m (or 50 ft) of road width for a length of 500 km (i am not sure of this figure) virtually unused for a considerable period of time (let us say 10 years). Leave aside the virtual certainty of its encroachment, especially in the densified and urbanized context of Kerala, the sheer economic waste incurred by leaving 7.5 million sqm (or around 16000 acres) of valuable real estate (in fact, the most valuable lands in the respective towns/villages) area unproductive is staggering.
Back of the envelope calculations assuming a very conservative rate of Rs 5 m per acre would yield an asset worth Rs 80 bn (or Rs 8000 Cr) proposed to be left idle. The net present value of this investment, over a period of 10 years and assuming a discount rate of 10%, would surely be many times more than the cost of accquiring the same land after ten years. This calculation ignores the net economic return components like tax revenues from any prospective economic activity (which would be imminent once the widening is completed) on these lands and the contribution of the local economic multiplier due to this activity.
Even assuming sky-rocketing land values with road widening, there is surely some broad limit beyond which land values cannot just shoot. Though these calculations are also valid for other states, the virtually rural and uninhabited nature of their (say Andhra Pradesh or Orissa) NH stretches means that the opportunity cost of leaving them idle is not very large.
If the 30 m width is finally agreed to, the government should immediately demand consent letters from all those affected, and the demolitions should be done at the earliest. The momentum generated by the width concession should be leveraged to complete the widening and construction in quick time.
In light of this, a more practical choice facing the government now is between a swiftly executed 30 m widening and a lingering 45 m widening entangled in endless litigation. Take your pick.
The crux of the issue is that while the National Highway Authority of India (NHAI) has proposed widening NH 17 and 47 to a width of 45 m, public opinion (crystallized in an all-party meeting) favors restricting it to 30 m.
In this context, I am reminded about an old post, in the context of Vijayawada road-widenings, that argues in favor of framing road widening debates in terms of lanes rather than road widths. I am inclined towards the view that the debate should have been formulated as a requirement of 3/6 (or 4/8) lane carriageway with a 4-5 m wide service road, instead of the 30-45 m width choice.
Taking cue from behavioural psychology, it is far easier to bargain for a reduction in road width by 5 or even 15 m, as opposed to negotiating for reduction in one lane or dispensing with the service road. One carriage lane or a service road has a much greater cognitive salience than 5 or 15 m. Anybody who has done road widenings on scale would appreciate this dimension of collective psychology.
In many respects, road-widening is a classic collective bargaining game where framing the context of the negotiations is critical. An appropriate formulation of the choices can considerably increase the odds of achieving a successful result. Therefore, and in view of the aforementioned political dynamics, a more realistic final goal should have been to push through atleast a six lane carriageway proposal, even if without any service lanes.
Given the fact that existing roads are 10-15 m wide, a 45 m road widening proposal would have meant an effective tripling of the existing width, a difficult proposition in a densely populated and urbanized context, as in Kerala. At best of times Kerala is a difficult place to push through such measures. The numerous examples of tortuously slow road-widenings in Trivandrum city is a reflection of this difficulty.
In a state where travelling 60 km on NH 47 from Trivandrum to Kollam takes more than 90 minutes, the impact of even a 30 m road widening on Kerala's economy can be dramatic. To the extent that road transportation is one of the critical infrastructural engines of economic growth, substantial economic activity in the state remains suppressed/disincentivized by the narrow highway roads.
A 30 m (or 100 ft) road will have 1.2 m (5 ft) central median, with 10.5 m (=3.5x3) (or 33 ft) of three-lane carriageway, about 2.5-3 m of drainage, and 0.6-1.1 m of shoulders on either side. This specification would be adequate to meet the basic requirements. All the more so, since unlike other states, Kerala does not serve as a transit pathway for the North-South or East-West passenger and freight traffic. Further, given its limited industrial base, a wider NH would be more useful in facilitating the growth of the state's services sector than promoting freight traffic. While a 60 m width would have been a luxury, and 45 m width ideal, the aforementioned practical considerations means that a 30 m width should be a good second-best solution.
Further, the success or otherwise of road widenings are critically dependent on the flexibility in the widths across stretches (without compromising on the essentials) and compensation payment strategies. This is all the more so since given the urbanized nature of the state (especially adjoining the NH), the NH widening across a major length (and from where resistance is likely to be most vocal) will be similar to widening of city roads. In such environments, decentralized negotiations (at official level, as is done in states like Andhra Pradesh) can yield quick and fairer results, though it carries the risk of politicization and corruption.
Though, in comparison to the regular land accquisition process, the NHAI's procedures are faster and its compensation amounts larger, such urban land accquistion will have to embrace more innovative approaches like transferable FAR bonds (TDRs), waival/concessions on building fees, impact fee concessions etc. Further, there should be a distinction made between those losing the major share of their property (as to leave the remaining extent virtually useless) and those who lose only a smaller share of their property; houses and commercial establishments; and owners and tenants.
There is an Econ 101 arguement in favor of the 30 m proposal. Even with the 45/60 m widening, the carriageway will be no more than 4 or 6 lanes, and the remaining land will be left barren as shoulders to be brought to use when required. In any case, the NHAI roads do not have any drains and the concept of ducting to lay utility lines is yet to catch up even in the metropolitan cities.
In the circumstances, we are looking at accquiring and leaving 15 m (or 50 ft) of road width for a length of 500 km (i am not sure of this figure) virtually unused for a considerable period of time (let us say 10 years). Leave aside the virtual certainty of its encroachment, especially in the densified and urbanized context of Kerala, the sheer economic waste incurred by leaving 7.5 million sqm (or around 16000 acres) of valuable real estate (in fact, the most valuable lands in the respective towns/villages) area unproductive is staggering.
Back of the envelope calculations assuming a very conservative rate of Rs 5 m per acre would yield an asset worth Rs 80 bn (or Rs 8000 Cr) proposed to be left idle. The net present value of this investment, over a period of 10 years and assuming a discount rate of 10%, would surely be many times more than the cost of accquiring the same land after ten years. This calculation ignores the net economic return components like tax revenues from any prospective economic activity (which would be imminent once the widening is completed) on these lands and the contribution of the local economic multiplier due to this activity.
Even assuming sky-rocketing land values with road widening, there is surely some broad limit beyond which land values cannot just shoot. Though these calculations are also valid for other states, the virtually rural and uninhabited nature of their (say Andhra Pradesh or Orissa) NH stretches means that the opportunity cost of leaving them idle is not very large.
If the 30 m width is finally agreed to, the government should immediately demand consent letters from all those affected, and the demolitions should be done at the earliest. The momentum generated by the width concession should be leveraged to complete the widening and construction in quick time.
In light of this, a more practical choice facing the government now is between a swiftly executed 30 m widening and a lingering 45 m widening entangled in endless litigation. Take your pick.
Monday, May 10, 2010
Euroland and optimal currency areas
Paul Krugman's column about the need for a strong fiscal authority that can make fiscal transfers to assist Euro members successfully confront macroeconomic challenges has raised an interesting debate about what constitutes an optimal currency area (OCA).
Greg Mankiw posted that an OCA required not just a strong fiscal authority, but also a different set of labor institutions, one that facilitates faster adjustment of wages. More specifically, he calls for labor mobility across borders and wage flexibility.
David Beckworth makes several highly relevant points and advocates that "members of a currency union should either share similar business cycles or have in place some combination of economic shock absorbers including flexible wages and prices, factor mobility, fiscal transfers, and diversified economies". In a reflection of EMU's problems, a common monetary policy for the entire currency union is fine so long as all members are at similar points business cycles, but would be destabilizing (either too stimulative or too tight) if members have dissimilar business cycles. In the later case, fiscal transfers are neccessary to mitigate the resultant macroeconomic problems. He represents the OCA area requirements in this simple graphic
And he maps those member economies falling inside and outside the OCA boundary. A number of the peripheral economies of EMU falls well inside the OCA boundary.
In other words, business cycles have differing impacts across the euro area, which lacks the necessary fiscal institutions to cushion the blow in places hit relatively hard. David Beckworth writes that Greece lies inside the OCA boundary, "there is not enough of either business cycle similarity or shock absorbers in Greece to justify the cost of its membership in the Eurozone". He also suggests that the US economy itself, with its North-South labor mobility restrictions till after the War, did not become acquire characteristics of an OCA until the 1930s.
Indeed, taking the example of Michigan and Texas, he even argues that all of the US is still not an OCA. He writes that it is facile to claim that both, with inadequate amount of economic shock absorbers, benefited from the same monetary policy,
I find this arguement about Euroland not being an OCA and the consequent pointer towards an exit (by Greece) from Euro area a case of post-facto rationalization with a bit of circular logic. Instead of questioning the Euro Project itself on the grounds that Euroland does not have the pre-requisites of an OCA, opinion makers should be trying to suggest measures (like what David Beckworth suggests) that can make Euroland a successful OCA.
Whatever the end result of the ongoing crisis, I cannot but argue that the benefits of a single currency, by way of lowering of business transaction costs and tariff barriers, and the consequent increase in trade, are too large to be overlooked. If there was a failure, it was clearly that of the architect policy makers, who failed to understand the true implications of a monetary union and have in place institutional mechanisms that can address economic failures arising out of the political deficiencies of the European integration project. And as a silver lining, maybe the current crisis is a godsend for integrationists to push through some of the institutional reforms required to increase the political integration dimension to the EMU.
In fact, a logical extension of the arguement applied to Indian context, would lead to the conclusion that since at any time many Indian states would be out of sync with the national business cycle (which determines the monetary policy), India does not correspond to an OCA. For examples, the wide variations in unskilled labor wage rates between states like Kerala and Bihar or even Andhra Pradesh, and the considerable systemic and cultural restrictions against their free mobility, goes against the requirements of an OCA. Does that mean India is not ready to be an OCA and therefore states should have their own currencies? By the same yardstick, are there are any really optimal OCA's? I am inclined to the view that construction of an OCA is in large measure about effective fiscal federalism.
See also this analysis of the Euromess by Krugman, with the illustrative case of Spain, about the importance of fiscal and labor market integration before a currency union. Ryan Avent points to the fact that, unlike the American states, cultural differences may be a large enough deterrent from achieving the desired level of labor mobility among Euroland members. See Amol Agarwal's summary of the debate here.
Greg Mankiw posted that an OCA required not just a strong fiscal authority, but also a different set of labor institutions, one that facilitates faster adjustment of wages. More specifically, he calls for labor mobility across borders and wage flexibility.
David Beckworth makes several highly relevant points and advocates that "members of a currency union should either share similar business cycles or have in place some combination of economic shock absorbers including flexible wages and prices, factor mobility, fiscal transfers, and diversified economies". In a reflection of EMU's problems, a common monetary policy for the entire currency union is fine so long as all members are at similar points business cycles, but would be destabilizing (either too stimulative or too tight) if members have dissimilar business cycles. In the later case, fiscal transfers are neccessary to mitigate the resultant macroeconomic problems. He represents the OCA area requirements in this simple graphic
And he maps those member economies falling inside and outside the OCA boundary. A number of the peripheral economies of EMU falls well inside the OCA boundary.
In other words, business cycles have differing impacts across the euro area, which lacks the necessary fiscal institutions to cushion the blow in places hit relatively hard. David Beckworth writes that Greece lies inside the OCA boundary, "there is not enough of either business cycle similarity or shock absorbers in Greece to justify the cost of its membership in the Eurozone". He also suggests that the US economy itself, with its North-South labor mobility restrictions till after the War, did not become acquire characteristics of an OCA until the 1930s.
Indeed, taking the example of Michigan and Texas, he even argues that all of the US is still not an OCA. He writes that it is facile to claim that both, with inadequate amount of economic shock absorbers, benefited from the same monetary policy,
"Given the vast differences between these two states in their business cycles, diversification of industry, union influence, and wage stickiness it easy to wonder whether these states should belong to the same currency union. Yes, they have access to fiscal transfers, labor mobility is great, culturally they are similar, and politically there is will for the dollar union. Still, given the disparate impact of US monetary policy on different regions of the country one does wonder whether all the United States is truly an OCA."
I find this arguement about Euroland not being an OCA and the consequent pointer towards an exit (by Greece) from Euro area a case of post-facto rationalization with a bit of circular logic. Instead of questioning the Euro Project itself on the grounds that Euroland does not have the pre-requisites of an OCA, opinion makers should be trying to suggest measures (like what David Beckworth suggests) that can make Euroland a successful OCA.
Whatever the end result of the ongoing crisis, I cannot but argue that the benefits of a single currency, by way of lowering of business transaction costs and tariff barriers, and the consequent increase in trade, are too large to be overlooked. If there was a failure, it was clearly that of the architect policy makers, who failed to understand the true implications of a monetary union and have in place institutional mechanisms that can address economic failures arising out of the political deficiencies of the European integration project. And as a silver lining, maybe the current crisis is a godsend for integrationists to push through some of the institutional reforms required to increase the political integration dimension to the EMU.
In fact, a logical extension of the arguement applied to Indian context, would lead to the conclusion that since at any time many Indian states would be out of sync with the national business cycle (which determines the monetary policy), India does not correspond to an OCA. For examples, the wide variations in unskilled labor wage rates between states like Kerala and Bihar or even Andhra Pradesh, and the considerable systemic and cultural restrictions against their free mobility, goes against the requirements of an OCA. Does that mean India is not ready to be an OCA and therefore states should have their own currencies? By the same yardstick, are there are any really optimal OCA's? I am inclined to the view that construction of an OCA is in large measure about effective fiscal federalism.
See also this analysis of the Euromess by Krugman, with the illustrative case of Spain, about the importance of fiscal and labor market integration before a currency union. Ryan Avent points to the fact that, unlike the American states, cultural differences may be a large enough deterrent from achieving the desired level of labor mobility among Euroland members. See Amol Agarwal's summary of the debate here.
Saturday, May 8, 2010
Default looks inevitable, is Euro-exit next?
The €110bn ($142 bn) EU-IMF joint bailout package for Greece (€80 billion by EU and €30 billion from the IMF) is surely a short pause in Euroland's fight for survival. The markets have clearly signalled that it is far from enough.
With every passing day, the Greek situation becomes ever more desperate. Some form of restructuring and even a default now looks inevitable. The only question is about its timing and the extent of "haircut" the bond holders may have to suffer. Further, as the market confidence about Greece's ability to repay its debts plummets, the million dollar question now is whether Greece will exit the Euro.
In a famous paper, Barry Eichengreen had argued three years back about the near impossibility of dissolution of Euro area or any member leaving it. He based his case on the grounds of economic costs (in anticipation of devaluation, workers would raise wage demands; and debt service burdens will increase), political costs (anatagonizing other members and the certainty of being treated as a second-class member in EU), and most critically procedural costs (reintroduction of the national currency would involve a massive logistics exercise). Further, any move to leave the euro would require time and preparation, and during the transition period there would be devastating bank runs. Households and firms anticipating that domestic deposits would be redenominated into the lira, which would then lose value against the euro, would shift their deposits to other euro-area banks.
However, others like Paul Krugman have argued that these challenges are not insurmountable and an exit from Euro is a real possibility. Krugman points to Argentina's sudden decision in 2001 to abandon its supposedly permanent peso-dollar convertibility peg on the face of a debt crisis that ultimately led to owners of Argentine debt taking a 67% haircut in 2005. He writes,
In another post, Krugman highlights the enormity of Greece's fiscal mess by pointing to its massive primary deficit (fiscal deficit minus interest payments) of 8.5% for 2009. This effectively means that "even a complete debt default wouldn’t save Greece from the necessity of savage fiscal austerity".
In fact, as Peter Boone and Simon Johnson have shown here and here, the figures are so heavily stacked up against Greece that a default and more is inevitable. The EU-IMF bailout proposes severe fiscal austerity resulting in spending cuts amounting to 11% of GDP in 2010, 4.3% in 2011, and 2% in 2012 and 2013, with the total debt-to-GDP ratio peaking at 149% in 2012-13 before starting a gentle glide path back down to sanity. It assumes that these measures will lower the Greek GDP 4% this year, then by another 2.6% in 2011, before recovering to positive growth in 2012 and beyond. But, going by Daniel Gros's estimate that for each 1 percent of GDP decline in Greek government spending, total demand in the country falls by 2.5 percent of GDP, the spending cuts would devastate the Greek GDP by nearly 30%.
As Boone and Johnson writes, with more realistic figures, such steep GDP declines would only further increase Greece's debt stock (as a share of GDP) and debt servicing burdens. In fact, they argue that assuming the GDP falling by 12% in 2011, resulting in the debt to GDP ratio touching 155%, and 5% real interest rate and no growth, Greece would need a primary surplus at 8% of GDP merely to keep the debt-to-G.D.P. ratio stable.
In the circumstances, it would appear that Greece (and Euroland) has only two options. One, debt restructuring with help of a massive IMF-EU bailout with concessional rate loans to enable Greece to refinance its debt with long term bonds or to extend the maturity of its loan obligations at the same terms. Second, a sovereign default with debt holders taking a substantial haircut. In either case, "savage fiscal austerity" is a sine-qua-non.
And even with any of these, Greece can pull it off only if the economy bounces back quickly enough to generate the required revenue buoyancy and aggregate demand. Given its current economic condition, extremely remote possibility of its European partners offering any assistance beyond debt restructuring support, and the constraints imposed by the Stability Pact and single currency, the prospects for the Greek economy, even in the medium-term, looks bleak. In the circumstances, as Krugman argues, exit from Euro followed by devaluation looms large.
Felix Salmon writes that the choice now is whether to "default and devalue now, or... wait a couple of years". He feels that while Germany and France might want to wait, in the hope that their banks will be better able to cope with such a thing in a couple of years’ time, it may be in Greece's interest to "go through it now and bring forward the growth rebound, rather than push off the devaluation stimulus to an indefinite point in the future".
In a Vox post, Domingo Cavallo, Argentina’s former finance minister, draws four lessons from Argentina’s crisis - devaluation/exit is not the answer; orderly debt restructuring involving a ‘Brady Plan’ now is better than a disorderly one later; fiscal consolidation that improves external competitiveness is a must; and all these must be done simultaneously.
Given the inevitability of default-cum-bailout and long recession for Greece, Barry Eichengreen advocates four measures to contain the crisis - the IMF and the European Commission should encourage Greece to reach a social consensus on restructuring and reform by showing that the creditors will also contribute by way of providing credit enhancements, or guarantees, on the new bonds offered the creditors in the exchange; Portugal and Spain must do more to convince the markets they are not Greece by labor market reforms, spending cuts etc; the Iberians should be given time, so as to prevent them from being infected by the Greek contagion - the ECB will have to support their bond markets and buy their governments’ bonds directly on the secondary market; the Germans need to support European growth by spending and investing more.
Paul Krugman sees three options for Greece - large wage cuts for Greek workers would make Greece competitive enough to add jobs again; ECB could engage in much more expansionary policy, among other things buying lots of government debt, and accepting the resulting inflation, thereby making adjustment in Greece and other troubled euro-zone nations much easier; or fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable. He argues that given the political difficulty of each of these options, leaving the euro does not unrealistic.
Update 1 (23/5/2010)
Simon Johnson and Peter Boone highlight the unsustainability of Greece's debt crisis. The IMF estimates that by the end of 2011 Greece’s debt will be around 150% of GDP, about 80% of which is foreign-owned (with a large part held by residents of France and Germany). Every 1 percentage point rise in interest rates means Greece needs to send an additional 1.2% of GDP abroad to those bondholders.
In the circumstances, if Greek interest rates rises to 10% (a modest enough premium for a country with the highest external public debt/GDP ratio in the world), it would need to send at total of 12% of GDP abroad per year, once it rolls over the existing stock of debt to these new rates (nearly half of Greek debt will roll over within three years). To put this in perspective, German reparation payments were 2.4% of GDP from 1925 to 1932, and in the years immediately after 1982 the net transfer of resources from Latin America was 3.5% of GDP.
In another article, Johnson and Boone examined the problems faced by Portugal whose challenges are no different from that of Greece. Over the last several years, Portugal's debt rose to 78% of GDP at the end of 2009 (compared with Greece’s 114% of GDP and Argentina’s 62% at default), and the debt has been largely financed by foreigners, and as with Greece, the country has not paid interest outright, but instead refinances its interest payments each year by issuing new debt. By 2012 Portugal’s debt-to-GDP ratio should reach 108% if the country meets its planned budget deficit targets, thereby forcing the markets to sit up and demand ever higher rates.
Like Greece, Ireland and Spain, Portugal too is stuck with a highly overvalued exchange rate and needs far-reaching fiscal adjustments. Just to keep its debt stock constant and pay annual interest on debt at an optimistic 5% interest rate, the country would need to run a primary surplus of 5.4% GDP by 2012. With a planned primary deficit of 5.2% of GDP this year (i.e., a budget surplus, excluding interest payments), it needs roughly 10% of GDP in fiscal tightening. It is nearly impossible to do this in a fixed exchange-rate regime — i.e., the euro zone — without vast unemployment. The government can expect several years of high unemployment and tough politics, even if it is to extract itself from this mess.
Update 1 (25/1/2011)
Excellent article about why Greece has no choice but to impose haircuts on its bond holders.
With every passing day, the Greek situation becomes ever more desperate. Some form of restructuring and even a default now looks inevitable. The only question is about its timing and the extent of "haircut" the bond holders may have to suffer. Further, as the market confidence about Greece's ability to repay its debts plummets, the million dollar question now is whether Greece will exit the Euro.
In a famous paper, Barry Eichengreen had argued three years back about the near impossibility of dissolution of Euro area or any member leaving it. He based his case on the grounds of economic costs (in anticipation of devaluation, workers would raise wage demands; and debt service burdens will increase), political costs (anatagonizing other members and the certainty of being treated as a second-class member in EU), and most critically procedural costs (reintroduction of the national currency would involve a massive logistics exercise). Further, any move to leave the euro would require time and preparation, and during the transition period there would be devastating bank runs. Households and firms anticipating that domestic deposits would be redenominated into the lira, which would then lose value against the euro, would shift their deposits to other euro-area banks.
However, others like Paul Krugman have argued that these challenges are not insurmountable and an exit from Euro is a real possibility. Krugman points to Argentina's sudden decision in 2001 to abandon its supposedly permanent peso-dollar convertibility peg on the face of a debt crisis that ultimately led to owners of Argentine debt taking a 67% haircut in 2005. He writes,
"The Eichengreen argument is a reason not to plan on leaving the euro — but what if the bank runs and financial crisis happen anyway? In that case the marginal cost of leaving falls dramatically, and in fact the decision may effectively be taken out of policymakers’ hands...
the Greek government cannot announce a policy of leaving the euro — and I’m sure it has no intention of doing that. But at this point it’s all too easy to imagine a default on debt, triggering a crisis of confidence, which forces the government to impose a banking holiday — and at that point the logic of hanging on to the common currency come hell or high water becomes a lot less compelling."
In another post, Krugman highlights the enormity of Greece's fiscal mess by pointing to its massive primary deficit (fiscal deficit minus interest payments) of 8.5% for 2009. This effectively means that "even a complete debt default wouldn’t save Greece from the necessity of savage fiscal austerity".
In fact, as Peter Boone and Simon Johnson have shown here and here, the figures are so heavily stacked up against Greece that a default and more is inevitable. The EU-IMF bailout proposes severe fiscal austerity resulting in spending cuts amounting to 11% of GDP in 2010, 4.3% in 2011, and 2% in 2012 and 2013, with the total debt-to-GDP ratio peaking at 149% in 2012-13 before starting a gentle glide path back down to sanity. It assumes that these measures will lower the Greek GDP 4% this year, then by another 2.6% in 2011, before recovering to positive growth in 2012 and beyond. But, going by Daniel Gros's estimate that for each 1 percent of GDP decline in Greek government spending, total demand in the country falls by 2.5 percent of GDP, the spending cuts would devastate the Greek GDP by nearly 30%.
As Boone and Johnson writes, with more realistic figures, such steep GDP declines would only further increase Greece's debt stock (as a share of GDP) and debt servicing burdens. In fact, they argue that assuming the GDP falling by 12% in 2011, resulting in the debt to GDP ratio touching 155%, and 5% real interest rate and no growth, Greece would need a primary surplus at 8% of GDP merely to keep the debt-to-G.D.P. ratio stable.
In the circumstances, it would appear that Greece (and Euroland) has only two options. One, debt restructuring with help of a massive IMF-EU bailout with concessional rate loans to enable Greece to refinance its debt with long term bonds or to extend the maturity of its loan obligations at the same terms. Second, a sovereign default with debt holders taking a substantial haircut. In either case, "savage fiscal austerity" is a sine-qua-non.
And even with any of these, Greece can pull it off only if the economy bounces back quickly enough to generate the required revenue buoyancy and aggregate demand. Given its current economic condition, extremely remote possibility of its European partners offering any assistance beyond debt restructuring support, and the constraints imposed by the Stability Pact and single currency, the prospects for the Greek economy, even in the medium-term, looks bleak. In the circumstances, as Krugman argues, exit from Euro followed by devaluation looms large.
Felix Salmon writes that the choice now is whether to "default and devalue now, or... wait a couple of years". He feels that while Germany and France might want to wait, in the hope that their banks will be better able to cope with such a thing in a couple of years’ time, it may be in Greece's interest to "go through it now and bring forward the growth rebound, rather than push off the devaluation stimulus to an indefinite point in the future".
In a Vox post, Domingo Cavallo, Argentina’s former finance minister, draws four lessons from Argentina’s crisis - devaluation/exit is not the answer; orderly debt restructuring involving a ‘Brady Plan’ now is better than a disorderly one later; fiscal consolidation that improves external competitiveness is a must; and all these must be done simultaneously.
Given the inevitability of default-cum-bailout and long recession for Greece, Barry Eichengreen advocates four measures to contain the crisis - the IMF and the European Commission should encourage Greece to reach a social consensus on restructuring and reform by showing that the creditors will also contribute by way of providing credit enhancements, or guarantees, on the new bonds offered the creditors in the exchange; Portugal and Spain must do more to convince the markets they are not Greece by labor market reforms, spending cuts etc; the Iberians should be given time, so as to prevent them from being infected by the Greek contagion - the ECB will have to support their bond markets and buy their governments’ bonds directly on the secondary market; the Germans need to support European growth by spending and investing more.
Paul Krugman sees three options for Greece - large wage cuts for Greek workers would make Greece competitive enough to add jobs again; ECB could engage in much more expansionary policy, among other things buying lots of government debt, and accepting the resulting inflation, thereby making adjustment in Greece and other troubled euro-zone nations much easier; or fiscally stronger European governments could offer their weaker neighbors enough aid to make the crisis bearable. He argues that given the political difficulty of each of these options, leaving the euro does not unrealistic.
Update 1 (23/5/2010)
Simon Johnson and Peter Boone highlight the unsustainability of Greece's debt crisis. The IMF estimates that by the end of 2011 Greece’s debt will be around 150% of GDP, about 80% of which is foreign-owned (with a large part held by residents of France and Germany). Every 1 percentage point rise in interest rates means Greece needs to send an additional 1.2% of GDP abroad to those bondholders.
In the circumstances, if Greek interest rates rises to 10% (a modest enough premium for a country with the highest external public debt/GDP ratio in the world), it would need to send at total of 12% of GDP abroad per year, once it rolls over the existing stock of debt to these new rates (nearly half of Greek debt will roll over within three years). To put this in perspective, German reparation payments were 2.4% of GDP from 1925 to 1932, and in the years immediately after 1982 the net transfer of resources from Latin America was 3.5% of GDP.
In another article, Johnson and Boone examined the problems faced by Portugal whose challenges are no different from that of Greece. Over the last several years, Portugal's debt rose to 78% of GDP at the end of 2009 (compared with Greece’s 114% of GDP and Argentina’s 62% at default), and the debt has been largely financed by foreigners, and as with Greece, the country has not paid interest outright, but instead refinances its interest payments each year by issuing new debt. By 2012 Portugal’s debt-to-GDP ratio should reach 108% if the country meets its planned budget deficit targets, thereby forcing the markets to sit up and demand ever higher rates.
Like Greece, Ireland and Spain, Portugal too is stuck with a highly overvalued exchange rate and needs far-reaching fiscal adjustments. Just to keep its debt stock constant and pay annual interest on debt at an optimistic 5% interest rate, the country would need to run a primary surplus of 5.4% GDP by 2012. With a planned primary deficit of 5.2% of GDP this year (i.e., a budget surplus, excluding interest payments), it needs roughly 10% of GDP in fiscal tightening. It is nearly impossible to do this in a fixed exchange-rate regime — i.e., the euro zone — without vast unemployment. The government can expect several years of high unemployment and tough politics, even if it is to extract itself from this mess.
Update 1 (25/1/2011)
Excellent article about why Greece has no choice but to impose haircuts on its bond holders.
High frequency trades and market volatility
In a wild spell of sixteen minutes of sell-offs in trading in the New York Stock Exchange on Thursday (6th May), the Dow fell by more than 1000 points. In what has been attributed to a trader error, Accenture fell more than 90% to a penny and P&G plunged to $39.37 from more than $60 within minutes, and its impact was amplified manifold by the presence of high-speed computer program trades.
The "huge, anomalous, unexplained surge in selling at about 2:45" has been attributed to a source in Chicago (believed to be single execution system that mistook a trade of $16 mn for $16 bn), which had apparently set off algorithmic trading strategies, which in turn rippled across everything, pushing trading out of whack and feeding on itself — until it started to reverse. Computers programmed to sell when prices hit a certain level did so en masse, prompting yet other computers to do the same, until the prices of some stocks were pushed down to nearly zero.
I have blogged earlier about high frequency trading (HFT), wherein very high-speed supercomputers with sophisticated programs use "real-time" share prices to detect or even predict the next instantaneous twitch in the stock market, and then buy and sell stocks within fractions of seconds. The traders using such algorithms, usually large Wall Street firms, make a tiny profit on the blip of price change of each share. In recent years, HFT has come to account 50-75% of daily trading volume, and more than 60% of trading in stocks listed on the New York Stock Exchange takes place on separate computerized exchanges.
See also Rajiv Sethi on HFT here.
Update 1 (9/5/2010)
Micheal Durbin argues that greater regulatory controls, software standards, and disclosure requirements identifying the originator of a trade can address the concerns with HFT.
Update 2 (2/9/2010)
See this inside story of the flash crash.
Update 3 (9/10/2011)
Movement picks up to regulate HFTs since they are percieved as being responsible for spurts opf market volatility and unfair to small investors.
Update 4 (17/10/2011)
Excellent speech by Andrew Haldane on HFT, which is discussed here by Alex Tabarrok. He writes,
The "huge, anomalous, unexplained surge in selling at about 2:45" has been attributed to a source in Chicago (believed to be single execution system that mistook a trade of $16 mn for $16 bn), which had apparently set off algorithmic trading strategies, which in turn rippled across everything, pushing trading out of whack and feeding on itself — until it started to reverse. Computers programmed to sell when prices hit a certain level did so en masse, prompting yet other computers to do the same, until the prices of some stocks were pushed down to nearly zero.
I have blogged earlier about high frequency trading (HFT), wherein very high-speed supercomputers with sophisticated programs use "real-time" share prices to detect or even predict the next instantaneous twitch in the stock market, and then buy and sell stocks within fractions of seconds. The traders using such algorithms, usually large Wall Street firms, make a tiny profit on the blip of price change of each share. In recent years, HFT has come to account 50-75% of daily trading volume, and more than 60% of trading in stocks listed on the New York Stock Exchange takes place on separate computerized exchanges.
See also Rajiv Sethi on HFT here.
Update 1 (9/5/2010)
Micheal Durbin argues that greater regulatory controls, software standards, and disclosure requirements identifying the originator of a trade can address the concerns with HFT.
Update 2 (2/9/2010)
See this inside story of the flash crash.
Update 3 (9/10/2011)
Movement picks up to regulate HFTs since they are percieved as being responsible for spurts opf market volatility and unfair to small investors.
Update 4 (17/10/2011)
Excellent speech by Andrew Haldane on HFT, which is discussed here by Alex Tabarrok. He writes,
"Cramming ever-larger volumes of strategic, adaptive trading into ever-smaller time intervals would, following Mandelbrot, tend to increase abnormalities in prices when measured in clock time. It will make for fatter, more persistent tails at ever-higher frequencies. That is what we appear, increasingly, to find in financial market prices in practice, whether in volatility and correlation or in fat tails and persistence."
Friday, May 7, 2010
MGI report on India's urban growth prospects
The McKinsey Global Institute (MGI) have a highly informative report (pdf of full report here and summary here) on the problems facing Indian cities and suggests a number of initiatives, which it claims if implemented could add 1-1.5% to the GDP growth rate.
It claims that India's urban population could rise from 340 million (30% 0f population) in 2008 to 590 million in 2030 (40% of population) and "cities could generate 70 percent of net new jobs created to 2030, produce around 70 percent of Indian GDP, and drive a near fourfold increase in per capita incomes across the nation". It estimates that Tamil Nadu, Gujarat, Maharashtra, Karnataka and Punjab will have more population living in cities than villages by 2030.
The report finds that across all major quality-of-life indicators Indian cities fall short of delivering even a basic standard of living. It argues that if current investment trends persist, cities could actually become stumbling blocks to the country achieving its ambitious growth projections.
It compares the current quality of life indicators with the basic services standard and the best performers - the current percapita water supply is 105 lpcd, against the basic minimum of 150 lpcd and global best of 220 lpcd; public transport forms just 30% of all trips, against basic standard of 50% and world class 82%; the percapita parks and open spaces area is a mere 2.7 sqm, against 9% and 16% respectively; only 30% of sewerage is treated and 72% of solid waste is collected against the basic minimum requirement of 100% in both; and slum population is 24% of city population.
MGI projects that India "will have to build between 700 million and 900 million square meters of residential and commercial space a year (adding two Mumbais or one Chicago). In transportation, India needs to build 350 to 400 kilometers of metros and subways every year, more than 20 times the capacity building of this type that India has achieved in the past decade. In addition, between 19,000 and 25,000 kilometers of road lanes would need to be built every year (including lanes for bus-based rapid transit systems), nearly equal to the road lanes constructed over the past decade."
About the infrastructure financing requirements, it writes,
It proposes immmediate tripling of the JNNURM funding and sharing 18-20% of GST with cities in the medium-term, besides percapita transfers of about $20 to Tier 3 and 4 cities. On urban housing, it advocates mandating 25% of area in new layouts above one acre for affordable housing with appropriate incentives; incentives to developers to promote slum development; create national mortgage guarante fund to incentivize lending to low income people; earmark 30% of all newly constructed low income housing to be available on rent etc.
See also MGI rport on China's urbanization prospects (full report here and summary here) for 2025.
It claims that India's urban population could rise from 340 million (30% 0f population) in 2008 to 590 million in 2030 (40% of population) and "cities could generate 70 percent of net new jobs created to 2030, produce around 70 percent of Indian GDP, and drive a near fourfold increase in per capita incomes across the nation". It estimates that Tamil Nadu, Gujarat, Maharashtra, Karnataka and Punjab will have more population living in cities than villages by 2030.
The report finds that across all major quality-of-life indicators Indian cities fall short of delivering even a basic standard of living. It argues that if current investment trends persist, cities could actually become stumbling blocks to the country achieving its ambitious growth projections.
It compares the current quality of life indicators with the basic services standard and the best performers - the current percapita water supply is 105 lpcd, against the basic minimum of 150 lpcd and global best of 220 lpcd; public transport forms just 30% of all trips, against basic standard of 50% and world class 82%; the percapita parks and open spaces area is a mere 2.7 sqm, against 9% and 16% respectively; only 30% of sewerage is treated and 72% of solid waste is collected against the basic minimum requirement of 100% in both; and slum population is 24% of city population.
MGI projects that India "will have to build between 700 million and 900 million square meters of residential and commercial space a year (adding two Mumbais or one Chicago). In transportation, India needs to build 350 to 400 kilometers of metros and subways every year, more than 20 times the capacity building of this type that India has achieved in the past decade. In addition, between 19,000 and 25,000 kilometers of road lanes would need to be built every year (including lanes for bus-based rapid transit systems), nearly equal to the road lanes constructed over the past decade."
About the infrastructure financing requirements, it writes,
"Today, in per capita terms, India's annual capital spending of $17 is only 14 percent of China’s $116 and less than 6 percent of New York's $292. MGI estimates that India needs to invest $1.2 trillion just in capital expenditure in its cities over the next 20 years, equivalent to $134 per capita per year, almost eight times the level of spending today. If India taps into five sources of funding used in cities around the world—monetized land assets, higher property taxes, user charges that reflect costs, debt and public-private partnerships, and formula-based government funding — its largest cities could generate as much as 80 percent of the funding they require from internal sources."
It proposes immmediate tripling of the JNNURM funding and sharing 18-20% of GST with cities in the medium-term, besides percapita transfers of about $20 to Tier 3 and 4 cities. On urban housing, it advocates mandating 25% of area in new layouts above one acre for affordable housing with appropriate incentives; incentives to developers to promote slum development; create national mortgage guarante fund to incentivize lending to low income people; earmark 30% of all newly constructed low income housing to be available on rent etc.
See also MGI rport on China's urbanization prospects (full report here and summary here) for 2025.
Reassessing Adam Smith
Much has been written about this. Adding to the literature are these two recent essays, by Amartya Sen and Stephen LeRoy, which tries to reassess the legacy and modern interpretation of Adam Smith in light of the spectacular financial market failures of the past two years.
Sen revisits the debate that Wealth of Nations cannot be read in isolation but has to be necessarily read with Smith's first book, The Theory of Moral Sentiments,
Far from beinng a fanatic laissez faire advocate, Smith acknolwedged the strong possibility of market failures
Stephen LeRoy examines the issue of the appropriate balance between the dynamics of the market and government intervention in the context of the debate about the causes of the recent financial market crisis. Instead of faulting the government for misconceived interference (as claimed by the free-marketers) or government's failure to place checks on destructive market practices and market failures (as claimed by opponents), he advocates identifying "specific problems in the financial system and introducing regulatory changes that address these clearly defined weaknesses, such as executive compensation practices that encourage excessive risk-taking".
Sen revisits the debate that Wealth of Nations cannot be read in isolation but has to be necessarily read with Smith's first book, The Theory of Moral Sentiments,
"Since the ideas presented in The Wealth of Nations have been interpreted largely without reference to the framework already developed in Moral Sentiments (on which Smith draws substantially in the later book), the typical understanding of The Wealth of Nations has been constrained, to the detriment of economics as a subject. The neglect applies, among other issues, to the appreciation of the demands of rationality, the need for recognising the plurality of human motivations, the connections between ethics and economics, and the codependent rather than free-standing role of institutions in general, and free markets in particular, in the functioning of the economy."
Far from beinng a fanatic laissez faire advocate, Smith acknolwedged the strong possibility of market failures
"The spirited attempt to see Smith as an advocate of pure capitalism, with complete reliance on the market mechanism guided by pure profit motive, is altogether misconceived. Smith never used the term "capitalism"... Smith was convinced of the necessity of a well-functioning market economy, but not of its sufficiency... He rejected market-excluding interventions, but not market-including interventions aimed at doing those important things that the market may leave undone...
He defended such public services as free education and poverty relief, while demanding greater freedom for the indigent who receives support than the rather punitive Poor Laws of his day permitted... in dealing with regulations that restrain the markets... he gives a formula of disarming simplicity: "When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters"...
He emphasised the class-related neglect of human talents through the lack of education and the unimaginative nature of the work that many members of the working classes are forced to do by economic circumstances. Class divisions, Smith argued, reflect this inequality of opportunity, rather than indicating differences of inborn talents and abilities..."
Stephen LeRoy examines the issue of the appropriate balance between the dynamics of the market and government intervention in the context of the debate about the causes of the recent financial market crisis. Instead of faulting the government for misconceived interference (as claimed by the free-marketers) or government's failure to place checks on destructive market practices and market failures (as claimed by opponents), he advocates identifying "specific problems in the financial system and introducing regulatory changes that address these clearly defined weaknesses, such as executive compensation practices that encourage excessive risk-taking".
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