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George street The

R eview



Oliver Kidd


To Pay or Not to Pay?


BIG Management Competition


Telstra’s $11 Billion Deal




M&A Exposed


New Ideas Gaining Momentum Contributions from:


Comparing the Big 4


The ECB’s Battle Against Central Banking


Obama and Asia’s Two Futures


The Globalisation of Protest

BIG: Lewis Bourne Lachlan McCarthy Max Toovey Lewis Sheilds Liam Auer Nitesh Chawda Project Syndicate: Joseph E. Stiglitz Yuriko Kioke J. Bradford DeLong

See p19 for links to any and all republished materials.

All articles (where necessary) are republished with full permission; see p 19.


A Semester in Review: Value Added. FROM THE CHAIR What a semester 113 has been so far! Kicking off with the usual frenetic pace in Week 1 with Club Sign on Day and the various social events, it simply has not stopped for Bond or BIG! Once Week 12 is done and dusted, BIG will have:

1. Made BIG members challenge their perceptions with some provoking discussion at the 2011 Titans of Industry Forum 2. Mentored younger students through careers in finance with the BIG Edge program and hopefully broadened their horizons 3. Challenged Bondies to think BIG in the BIG Management Consulting Competition

4. Kept bringing in the best news and analysis of all things business, finance and economics on campus through multiple editions of the George Street Review

So, all-in-all, we haven’t exactly rested on our laurels after winning Best Club again last semester. That’s because we’re hungry for more, and want to keep providing you all with the best services to help add-value to your time here at Bond.

5. Cleaned house of all the old fogies (including me, soon) and brought on five new committee members 6. Hosted some top-notch industry professionals as part of the Advanced Speaker Series, including hedge fund manager John Hempton this week; and


7. Launched an all-new service to our media line-up – the BIG in Business video podcast program which will keep Bondies in touch with Australia’s leading business figures

November 2011


To Pay, or Not to Pay? Ongoing concerns about the long term financial viability of firms exposed to the perils of flagging markets are detrimentally affecting company bottom lines. In response, companies are looking to make improvements to their balance sheets through cost cutting initiatives – starting with the reducing of executive-level staff pay packages, writes

there has been heated debate regarding whether such measures are warranted.

Sure, such a trend is understandably perpetuated when all is ‘right’ in the business world – firms are profitable, with a thriving corporate culture characterised by a happy and content workforce, and a share price trending upwards to keep the shareholders happier still. But what happens when faced with a cataclysmic situation such as the GFC? Should remuneration be directly reflective of conditions conducive to that which the company is operating within?

Lachlan McCarthy Amidst the onset of highly uncertain financial conditions and all time low levels of consumer sentiment across the globe, the business world is truly headed into unchartered waters per se. In 2010, US corporations alone held a combined $1.93 trillion on their balance sheets; and if that doesn’t raise alarm bells I don’t know what will. Whilst highly erratic, volatile markets aren’t a new development in the business world, financial issues of this magnitude present considerable challenges which must be overcome.

With that said, the current plight is somewhat alarming; especially given the markets are at the mercy of but a few individuals who seemingly have the world hanging on their every word for any signs which may indicate the coming of most positive outcomes. Despite the onset of highly fluctuating conditions, there are also a number of variables which remain integral constants - most notably the exorbitant remuneration packages enjoyed by executive level employees within the business community. Given the unfavourable economic conditions of the present,

Regardless of how you perceive it on an individual level, there are some startling insights derived from a 2010 report conducted by the Australian Council of Superannuation Investors, detailing a decade long review on executive pay. For one, the median CEO fixed pay amongst the top 100 ASX companies rose 131%; easily surpassing the 31% rise in the S&P/ASX 100. In addition, the median bonus of the focus group increased by 190% over the period, with 90% of the group receiving a bonus in 2010 despite being subjected to adverse market conditions. Meanwhile, returns to shareholders only rose by 31%; a paltry amount in comparison to the other amounts being thrown around.

Abroad, the situation is even more baffling. According to a report undertaken by, CEO’s of companies listed on S&P’s 500 Index received, on average, a total of $11.4 million in total compensation; representing a 23% increase over the space of a one year period. Yet another recent report on CEO pay revealed that 25% of firms in the bracket paid their CEOs more in 2010 than they paid in income taxes.

Such figures come amidst record lows on the stock market and serious concerns pertaining to sovereign debt issues in the USA and the greater Eurozone region.

Such mind-boggling figures point to the emergence of a genuine problem most prevalently in the USA, followed then by here in Australia and/ or other afflicted areas around the globe. The next question is how do we go about tackling it? If collective action were to be taken to combat the issue, what should be done? All are valid considerations which must be taken into account.

However, one interesting aspect I believed was poignant to explore was the consideration of how firms would utilise the re-directed funds. What is a matter on deciding whether the money should sit idly in a company account; be used to service company debts/improve the balance sheet; or be reinvested into the company to create new jobs? By my reckoning, the first isn’t likely an option (given the limited investment options available in the current climate); and the second isn’t either, given that holding debt up to your eye balls is becoming a common theme and almost acceptable (again, I stress ALMOST). So, perhaps, the third option is worth pursuing?

I found it most interesting that despite poor conditions, companies remain unperturbed in their pursuit of highly successful university graduates. According to Wall Street Journal, despite undergoing significant downsizing operations sector wide, USA banks, hedge funds, investment managers, private equity and venture capital firms hired 39% of jobseeking 2011 graduates from Harvard Business School and the Yale School of Management, 36% at the Stanford Graduate School of Busi-

ness and 51% at Columbia Business School. Despite the influx of fresh enthusiasm, perspective and ideas, it must be acknowledged that such a strategy also carries inherent, sizeable risks – as Alan Johnson, managing director of compensation-consulting firm Johnson Associates Inc. said, “you’re vulnerable if you’re in that five-nine year range [out of university], [because] you’re expensive and you don’t have clients”.

The Australian Federal Government also waded in on the debate after recognizing the widespread concern amongst the public and decided to influence the issue from a regulatory level. Under the auspices of the Productivity Commission, the body conducted a public inquiry - the results of which highlighted a gap between executive earnings and average weekly earnings. The outcome was the creation and utilisation of a number of effective policy options to rein in the excesses. Such measures helped to institute a more formalized framework around the issue, in addition to helping to foster further understanding for individuals throughout the wider community.

en position, while also adequately managing and satisfying stakeholders concerns. Should both these mandates be addressed, Mr. Morrow emphasizes, only then leaders can then be justly rewarded in accordance with current standards.

For mind, I am of the belief that the whole issue of executive level remuneration is just a topical discussion point which is likely to date sooner rather than later, at least within the Australian context. Eventually, shareholders and the general

public alike will realize that there is sound reasoning and rationale behind the compensation packages afforded to the leaders of the largest companies in the nation. Whilst their subordinates may do the dirty work, they are charged with making the hard decisions which directly impact upon the future direction of business. After all, as Warren Buffet once said, while “the price is what you pay, value is what you get”; or, at least that’s what you’re hoping.

At the end of the day though, all figures and biased opinions aside, it is important that we don’t lose sight of how important such individuals can be to the long term success of a firm – ensuring that sound direction from an operational and strategic perspective is provided can make all the difference to performance irrespective of time constraints. Such a view was echoed by Martin Morrow, a Partner in the Equity Based Compensation Department of KPMG Australia is his report to the Australian CEOForum which emphasizes the need for people in senior position holders to institute remuneration measures which are reflective of corporate social responsibilities in their giv-

November 2011


The Bond Investment Group Management Competition What is the Bond Investment Group (BIG) Management Competition? The BIG Management Competition is an internal competition that will run on Saturday of Week Nine this semester (the 12th of November). The Management Competition aims to provide students with an opportunity to apply the theoretical concepts that they learn about throughout their degree. The Management Competition also aims to prepare students for the intensive internship and graduate recruitment process within many Consulting and Professional Service Firms. The competition is targeted to both Business and Commerce students. How is it that the Management Competition will work?

Teams will comprise of two students and teams will be given a ‘Problem Document’ and the ‘Competition Rules’ approximately 24 hours before they are due to present. Teams will be required to create a short presentation responding to the questions posed in the ‘Problem Document’. Each team is authorized to use laptop computers to create a PowerPoint presentation and each team will be given only 10 minutes to present their arguments to a panel of judges. This will be followed by five minutes of question time in which the panel of judges will have an opportunity to assess how well teams are able to justify their opinions. Finally, there will be a five minute de-brief in which judges can provide students with feedback from which they can then learn and improve. The Management Competition replicates one stage of the recruitment process in many Consulting and Professional Service Firms. These firms often give applicants a problem document that contains a number of different questions and then ask applicants to put together a short presentation responding to the questions posed in the problem document. Applicants will only be given a very short period of time in which to develop a presentation before they have to present to a number of executives. Is any pre-existing knowledge required?

The Bond Investment group recommends that contestants have undertaken Strategic Management (CORE 11-130) given that this core subject provides you with a broad overview of many strategic concepts. However, do not stress as the judging panel will take into consideration each contestant’s progress through their respective degrees. Why should I participate in the Management Competition?

There are two main reasons that students should participate in the Management Competition:

1) It will provide you with an edge over other applicants in the final stages of the recruitment process in consultancy firms. 2) There are fantastic prizes available for both the team that conducts the best strategic analysis and the team that conducts the best overall presentation.

How do I sign up? Students can sign up for the Management Competition on the “sign-up sheets” that are located on the BSA Office door. Due to time constraints, only nine teams of two students can compete! Be quick to sign-up as nominations will be processed on a first in, first served basis! If you have any questions pertaining to this competition please contact Lewis Bourne at lewis.bourne@

November 2011


The end of Telstra’s monopolistic strangle on the fixed line market? – The Telstra & NBN $11bn Deal Telstra’s $11bn deal with NBN Co. which was proposed to shareholders at Telstra’s AGM recently, has been approved by its shareholders with almost %99 of the voters voting in favour of the deal. What does it mean for Telstra’s wholesale business and where will Telstra’s new direction lead it? Lewis Sheilds You would have to be living under a rock to not have heard about the NBN (National Broadband Network), if this is the case a refresher: The NBN is a government initiative designed to deliver highspeed broadband to Australians.

The fixed line (fibre) will cover 93 per cent of Australia, capable of up to 1 gigabit per second. While the remaining premises will be connected via next-generation fixed  wireless and satellite technologies, providing peak speeds of 12 Megabits per second (Mbps). The government has since established NBN Co Limited (NBN Co), to design, build and operate the NBN. It was originally expected to cost $43bn but the NBN Co. confirmed the total capital expenditure in December, 2010 to be $35.9billion.

NBN Co. has since been looking to strike a deal with Telstra to gain access to its pits, manholes and exchanges, progressively decommission its 10 year old fixed line communication (copper-based network) and allow NBN to purchase some of its infrastructure through an $11billion dollar deal, with the financial benefits to come over a period of 30 years.

When the vote was put toward Telstra’s 1.6 million shareholders the support were almost unanimously in support of the deal. Telstra reported to the shareholders it would be $4.7billion better off by selling infrastructure to rather competing with the NBN. As some may recall Telstra was originally government owned but has since been progressively sold of with the government now own-

ing just below 11%. There have been mixed results from shareholders, some feel as if their hand is being forced to vote in favour of the deal with little options and information. One shareholder was quoted saying ‘I don’t think a company can be sold then told what to do and dictated by the government now with Telstra owning all the infrastructure, they should have thought about that before they sold it’.

The ACCC has yet to approve the deal and NBN Co. will be eagerly awaiting the result, it is expected the deal will be approved due to the political nature and ramifications of such a deal being blocked. Another issue facing NBN Co. is the possible change in leadership at the next federal election on the basis the coalition will decide to halt NBN construction. Telstra’s CEO David Thodey is fairly confident with its termination clauses and the prospect of the coalition deciding not to rip up the NBN due its late stage of development that it won’t greatly affect the company rather it will happily go back to running its fixed line copper network. In addition the Greens who hold a balance of power in the senate have said they will do what they can to ensure the destruction of the half built NBN does not come about if the election sees a shift of leadership. If the deal is approved it will see an end to Telstra’s lucrative fixed line monopoly, and c o n s e q u e n t ly see the loss of its wholesale business. Telstra is reported to be focusing on new services that will become prominent and possible with the Fibre network. BuddeComm a research/consultancy company with focus on the Telecommunication market predicts that as much as 25% of future telecoms revenues will come from the e-health services. In light of this Telstra has been investigating such services and plans on as mentioned earlier, pursing new areas of business by investing some of the cash that will come from the NBN deal.


The global economy may sit tight with low confidence, but below are some audacious companies that continue to surge. Max Toovey and Lewis Bourne

Groupon seeks $16 to $18 a share in IPO – The daily deals giant said in a revised prospectus that it expects to sell 30 million shares in its initial public offering at a price of $16 to $18 per share. This would value the company at as much as $11.4 billion (which is significantly lower than the $25 billion valuation that was discussed as a potential valuation when Groupon met with underwriters early this year). There is chatter that the valuation of the company may need to drop as low as $3 billion to attract investors, given the criticism that Groupon has drawn with respect to its unusual accounting practices.

PEAMCoal almost in control of Macarthur Coal –

The long-running battle for control of Queensland miner Macarthur Coal appears to have been settled after its largest shareholder, Citic, agreed to accept a $4.90 billion takeover bid from Peabody Energy and ArcelorMittal (PEAM Coal.) PEAMCoal has agreed to raise the price of its offer by $0.25 to $16.25 if it gains acceptance from 90 percent of the register.

Yahoo Takeover Speculation – There

has been much speculation that a number of different firms are considering bidding for Yahoo, including Alibaba Group (which owns the world’s largest online business to business trading platform for small businesses) as well as a number of private equity firms, including Silver Lake that is said to be in talks with Microsoft and the Canadian Pension Plan Investment Board about launching a potential takeover bid. However, Yahoo’s share price has rallied over the last month fuelled by takeover talks. It is possible that continued speculation will drive the price of Yahoo even higher, making any potential takeover too expensive.

Scotiabank pays $1 billion for Colombian bank – Bank

of Nova Scotia has agreed to pay about $1 billion in cash and stock for a majority stake in Colombia’s unlisted Banco Colpatria, expanding the Canadian bank’s footprint in Latin America. It is thought that Latin America presents a growth opportunity for established foreign banks given that only 60% of the population in Latin America currently uses a bank.

Valero - Shares of Valero

are popping about 8.8% in early trading after the U.K.’s Daily Mail suggested the petroleum refiner could be in the middle of a takeover war between the company’s bigger rivals. A Valero spokesman said the company doesn’t comment on rumors and speculation. Valero’s


stock price has gained 23% in the last month after a lackluster stock run for most of 2011. Valero is the largest independent refiner in the U.S., and it is spending money to buy refining equipment being jettisoned by other companies. Recently, Valero closed on a $325 million purchase of a Louisiana refinery previously owned by Murphy Oil, and earlier this year it bought U.K. refinery from Chevron.

Oracle Corporation - said it is buying

customer-service software maker RightNow Technologies Inc. for $1.43 billion in cash, continuing a recent push into the fast-growing field of cloud computing. The deal marks the first time Oracle has bought a company that sells application programs accessed primarily over the Internet, a segment known as software as a service. The acquisition comes shortly after Oracle introduced several internally developed applications that are accessed in the “cloud,” a catchall term for online data and programs. Oracle is purchasing RightNow as the market for online software has swelled, outstripping the growth in traditional software. Sales of online software, which was $10 billion in 2010, is expected to more than double to $21.3 billion in 2015, research firm Gartner said. Traditional software, which businesses install on equipment they own, is much larger—$104 billion in 2010, according to Gartner, but growing much slower. Oracle offered $43 a share for RightNow and said the deal, expected to close by early next year, is valued at about $1.5 billion net of RightNow’s cash and debt.

November 2011



Liam Auer

This is the second of a multi-part series of articles by Liam Auer on the causes of the ongoing economic crisis. In each edition of the George Street Review, Liam will examine the different theories of the crisis and what policy solutions flow on from these theories. The first, “Why the downturn?” looked at one demand-based explanation and one supply-based explanation. The edition, he looks at nominal GDP targeting and zero-marginal product workers.

on two decades now. In short, he believes that the Federal Reserve’s implicit inflation target is inconsistent with and inadequate for its explicit dual mandate of price stability and full employment. Figure 1. Demand-based explanations

etarism”. Like the old-school monetarism of Nobel Laureate Milton Friedman, it believes that monetary policy is the best tool policy for stabilising the macroeconomy. Unlike Friedman’s monetarism, which suffered major credibility blows in the 1970s and 1980s due to the volatility it caused, Market Monetarism does not place

If you recall back to my previous feature, I went through two different demand-based and supply-based explanations of the current sluggish economic performance in most developed economies. Each different approach in these respective spheres can be summarised in the two figures in this article. On the demand-side this edition, I will be looking at nominal GDP targeting (“NGDP targeting”), which has gained momentum as a serious policy option recently. On the supplyside, I will be looking at zeromarginal product workers. Sumner on NGDP Targeting

Scott Sumner, a professor of monetary economics at Bentley University in Boston, has been pushing for central banks to adopt NGDP targeting for nigh

Source: Mike Konczal, http:// His solution also provides a narrative for why the downturn was so savage in developed countries, particularly in the US.

Sumner, along with Lars Christensen, Bill Woolsey, David Beckworth and Nick Rowe, belongs to a school of thought in economics that has recently been labelled “Market Mon-

much faith in using monetary aggregates as policy instruments or as indicators for the stance of monetary policy.

Rather, Market Monetarists believe in using market pricing to evaluate the stance of monetary policy, as well as using a NGDP target as a policy tool. Generally speaking, the explanation of the Great Recession (or Lesser Depression – economists are still yet to agree on what to call the ongoing eco-

nomic malaise) is that excessively tight monetary policy in 2007 and 2008 caused a savage economic downturn. The inflation-targeting regimes of central banks caused them to misjudge the correct monetary policy then, and are inadequate in combatting the ongoing downturn now. This evidence does speak for itself. As Sumner notes, the housing bubble burst in 2006, but unemployment only rose slightly from 4.5% to 4.7% in March 2006 and April 2008, respectively. It was not until October 2009 that unemployment soared to 10.1%, long after the housing bubble had burst and the financial crisis had gotten underway. Figure 2. Supply-side explanations

So what caused the crisis, then? The same thing that has caused most economic downturns in the post-WWII era: too tight monetary policy. An oil shock (remember the days of threedigit per barrel oil) caused the Consumer Price Index (CPI) to surge in 2006 and 2007. Despite the weakening economies and already-fragile financial systems due to the bursting of the housing bubble, central banks around the world started raising interest rates to contain inflation, as they are often mandated to do. The rest, they say, is history. This monetary tightening destroyed remaining confidence in growth and the financial system, resulting in a full-blown financial crisis that spread to the ‘real’ economy as well. In

flationary and growth expectations plunged, as evidenced by the spreads on inflation-indexed Treasury bonds (TIPS).

The important thing to take away from here is, as Sumner says, “In an important sense, the sharp drop in NGDP precipitated the crisis: It was the proximate cause, even if the housing crisis was the ultimate cause. This suggests that NGDP is useful not only as a predictor and indicator of trouble, but as a target for monetary policy.” And now respected economists such as Paul Krugman, Brad DeLong, Jan Hatzius and more have come out in favour of NGDP targeting to bring the US out of its poor economic performance. Perhaps it’s time for the Reserve Bank of Australia (RBA) to also start considering

Source: Mike Konczal, http://

November 2011


the merits of a NGDP target.

Cowen and Zero-Marginal Product workers

Tyler Cowen, a professor of economics at George Mason University and author of the popular economics blog Marginal Revolution, explains the persistently high unemployment despite a return to, albeit weak, growth through the emergence of ‘zero-marginal product workers’.

Essentially, before the crisis, there was a great deal of workers who weren’t actually doing much. This is evidenced by the fact that the US has reached pre-crisis levels of output with much, much fewer workers. The reason that firms didn’t crack down on these unproductive workers is that when the times are good, it’s easier to just let these problems lie. Productive workers don’t like being spied upon, firings – whenever they happen – have issues for morale and it’s expensive to measure how productive workers are.

Once the Great Recession hit, that all changed. Firms had to cut payroll dramatically in the face of plunging demand for their goods and services, and they cut these least productive workers first. In short, a very good reason had come along to fire these workers, and so they went. The data supports this assertion – unemployment for those with a college degree is around 5% in the States, whereas it is around 16% for those with no high school diploma. So now there is a class of ‘ze-

ro-marginal product’ workers. They marginal product might not be zero, but it is less than the cost of hiring, training and insuring them.

This marks a very important shift in how labour markets work during economic downturns. Although firms always shed workers when recessions came along, they often tried to hoard labour in the anticipation that the good times would return soon, and it was cheaper to keep people on the job than hiring and training new people when demand picked up again. Instead, firms disgorged labour during this crisis. Essentially, instead of productivity being counter-cyclical and mitigating the severity of a downturn, it has turned pro-cyclical and exacerbates the severity of a downturn. Why? There are a number of possible reasons according to Alex Taborrok, fellow author of Marginal Revolution and professor of economics at George Mason University: 1. The recession is structural (essentially, the supply side arguments listed above);

2. Firms expect a long recession (this is consistent with the views of Krugman, DeLong and Sumner on the deficit of demand);

3. We are in a balancesheet recession, so firms are debt-constrained and they cannot borrow to hoard labour as they used to (consistent with Koo’s theory of a

balance-sheet recession above); and

4. Labour markets have become more competitive (firms used to be monopsonists and would hold onto workers to long as their wage was less than the marginal revenue from the productivity; this is no longer)

What is right, then?

I think there is merit to both of these stories, but with a heavier weighting towards the deficit of demand argument. Labour productivity is high, but unemployment is low because of firms cannot employ more workers without more demand. As Brad DeLong notes, “Were it not for the shortage of demand, firms would want to employ not fewer but rather more workers at the trough than they had employed at the peak.” There is one important idea to take away from this, however. This crisis started as an aggregate demand problem, and still largely remains an aggregate demand problem, but the longer the anemic economic growth and high unemployment drags on, it will begin to morph into a supply-side problem. This is a phenomenon known as hysteresis in labour markets. That, however, is for another week. Right now, developed economies need to tackle their demand problem to get the global economy back on trend.

November 2011



the BIG 4...

growth can be accountable to the PwC recent remarketing of the firm as not just an accounting firm but also a “professional service firm”.

Comparing the Big Four Professional Service Firms Nitesh Chawda In times of an uncertain global economy, one wouldn’t expect prosperity from many firms. However, a recent update on the big four professional service firms (“Big Four”); PwC, Deliotte, KPMG and Ernst and Young, has proved this perception wrong. The following article compares the Big Four and highlights where exactly this prosperity is flowing.

The 2010-11 financial year saw PwC receive $1.43 billion of revenue. The highest amongs the Big Four. This was a 14.7% increases from the 2009-10 financial year. PwC growth was seen in a 30% increase in private clients, 30% increase in business advisory and 24% increase in risk advisory. However, PwC traditional tax and audit sectors grew from 5% to 2% respectively. Such

KMPG fell second to PwC receiving $1.06 billion in revenue. This was still an 11.1% increase from the 2009-10 financial year.

The growth of the firm was predominantly due to the 44% increase in its advisory services. In particular management consulting, risk consulting and risk management. KPMG envisions greater growth in the Asian markets. Focusing on mainly China, but also Japan, South Korea and India.

E&Y saw an increase of 14.8% in total revenues summing up to $1.05 billion for the 2010-11 financial year.

Once again, advisory proved to be the fastest growing area, totalling $225 million in revenue. That is a 29% percent increase. Unlike PwC, E&Y tax services grew substantially, increasing some 14%. Likewise, transactions grew 13.5%. E&Y are placing a larger em-

phasise on growth in the government sector. In particular state and federal spending in health, education and defence.

Coming in fourth, Deloitte received $935 million in revenues, a growth of 14%. Top growth areas for Deloitte included business advisory, tax and risk advisory.

Deloitte has shifted its focuses to consolidations. In May merging with Access Economists, later purchasing the Australian advisory firm SAHA international in December. General Trends

Audit has shown to be the steady revenue streams for the Big Four. However, of recent, advisory has proven to be an area of great development and growth. Over the past couple of years, each of the Big Four have taken steps to increase their partner numbers and exploit the private and public sectors appetite for advice in technology, performance management and risk improvement. It is clear that institutional clients are seeking to invest but are wary of the need to cut costs and improve productivity. It will be interested to see where advisory services can continue its growth over the long run. Adapted from BRW October 1319, 2011.

The ECB’s Battle Against Central Banking J. Bradford DeLong BERKELEY – When the European Central Bank announced its program of government-bond purchases, it let financial markets know that it thoroughly disliked the idea, was not fully committed to it, and would reverse the policy as soon as it could. Indeed, the ECB proclaimed its belief that the stabilization of government-bond prices brought about by such purchases would be only temporary. It is difficult to think of a more selfdefeating way to implement a bondpurchase program. By making it clear from the outset that it did not trust its own policy, the ECB practically guaranteed its failure. If it so evidently lacked confidence in the very bonds that it was buying, why should investors feel any differently? The ECB continues to believe that financial stability is not part of its core business. As its outgoing president, Jean-Claude Trichet, put it, the ECB has “only one needle on [its] compass, and that is inflation.” The ECB’s refusal to be a lender of last resort forced the creation of a surrogate institution, the European Financial Stability Facility. But everyone in the financial markets knows that the EFSF has insufficient firepower to undertake that task – and that it has an unworkable governance structure to boot. Perhaps the most astonishing thing about the ECB’s monochromatic price-stability mission and utter dis-

regard for financial stability – much less for the welfare of the workers and businesses that make up the economy – is its radical departure from the central-banking tradition. Modern central banking got its start in the collapse of the British canal boom of the early 1820’s. During the financial crisis and recession of 1825-1826, a central bank – the Bank of England – intervened in the interest of financial stability as the irrational exuberance of the boom turned into the remorseful pessimism of the bust. In his book Lombard Street, Walter Bagehot quoted Jeremiah Harman, the governor of the Bank of England in the 1825-1826 crisis: “We every possible means and in modes we had never adopted before; we took in stock on security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some cases over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power...” The Bank of England’s charter did not give it the legal authority to undertake such lender-of-last-resort financial-stability operations. But the Bank undertook them anyway.

Half a generation later, Britain’s Parliament debated whether the modifications of the Bank’s charter should give it explicit power to conduct lender-of-last-resort operations. The answer was no: granting explicit power would undermine confidence in price stability, for already there was “difficulty restrain[ing] over-issue, depreciation, and fraud.” Indeed, granting explicit lender-of-lastresort powers to the Bank of England would mean that the “millennium of the paper-mongers would be at hand.” But the leaders of Parliament also believed that the absence of a codified authority to act as lender of last resort would not keep the Bank of England from doing so when necessity commanded. As First Lord of the Treasury Sir Robert Peel wrote: “If it be necessary to assume a grave responsibility, I dare say men will be willing to assume such a responsibility.” Our current political and economic institutions rest upon the wager that a decentralized market provides a better social-planning, coordination, and capital-allocation mechanism than any other that we have yet been able to devise. But, since the dawn of the Industrial Revolution, part of that system has been a central financial authority that preserves trust that contracts will be fulfilled and promises kept. Time and again, the lender-of-last-resort role has been an indispensable part of that function. That is what the ECB is now throwing away. J. Bradford DeLong, a former assistant secretary of the US Treasury, is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau for Economic Research.

November 2011


Obama and Asia’s Two Futures

Yuriko Kioke

issues are coming to a boil.

TOKYO – Despite the relentless shift of global economic might to Asia, and China’s rise as a great power – the central historical events of our time, which will drive world affairs for the foreseeable future – America’s focus has been elsewhere. The terrorist attacks of 2001, followed by the Afghanistan and Iraq wars, the Great Contraction of 2008, the Arab Spring, and Europe’s sovereign debt crisis, all diverted the

The South China Sea, for example, is now churning with competing claims to its islands, atolls, and sea bed, including China’s bold assertion that all of it is Chinese sovereign territory. At this year’s ASEAN summit in Bali, it was agreed that these territorial disputes be settled through bilateral negotiations. But the scope of Chinese claims doomed that agreement from the start; indeed, China now insists that the sea constitutes a core national interest,

lied in this way recently, with both pushing back rather than submit to Chinese imposed terms. The presidential elections scheduled for next year in two of Asia’s strongest democracies – South Korea and Taiwan – are also likely to cause diplomatic temperatures to rise in the months ahead. The risk stems not from the conduct of the South Koreans or the Taiwanese, but from the democratic choices that they make, which may offend two of Asia’s last dictatorships. In South Korea, the remarkable Park Guen-hye’s bid to become her country’s first woman president may provide an excuse – as if any were needed – for North Korean mischiefmaking. The regime in Pyongyang is seeking to ensure that power passes to a third generation of Kims, represented by the pudgy and well-fed “Dear Young General,” Kim Jongun, and appears to believe that provocations such as its bombardment of a South Korean island earlier this year are the way to secure the succession. Taiwan, too, may elect a woman president, Tsai Ing-wen, the leader of the opposition Democratic Peoples’ Party, next year. That outcome would stoke Chinese ire, not because of Tsai’s gender, but owing to her politics. The DPP has long been the Taiwanese party keenest on securing independence for the country.

United States from helping to create a lasting structure of peace to accommodate today’s resurgent Asia. In November, US President Barack Obama can begin to redress this imbalance when he hosts the Asia Pacific Economic Cooperation summit in his native state of Hawaii. The meeting’s timing is fortunate, because a number of critical Asian

on a level with Taiwan and Tibet, for which it is prepared to fight. China’s willingness to throw its weight around amplifies the grave imbalance in size, and leverage, between it and the other countries bordering the South China Sea. This has made bilateral negotiations to settle these disputes unviable. Vietnam and the Philippines have been bul-

A third Asian issue with combustible potential is Burma, where another unique woman, the Nobel Peace Prize winner Aung San Suu Kyi, is at the heart of events. The elections earlier this year, which many at first assumed were a sham, now appear to have produced changes to which Asia’s countries will need to collectively and individually respond. The government not only freed Suu Kyi after two decades of house arrest, but has even begun a dialogue with her – talks for which the meticulous opposition leader has expressed real

hope. Indeed, President Thein Sein’s government has begun to release thousands of political prisoners, including the monk who led the massive street protests of 2007. Sein’s government has also listened to Burmese public disquiet at China’s massive influence in the country, and has canceled a huge $3.6 billion dam that Chinese firms were building. China, it is plain to see, is at the root of most of the disputes troubling Asia. Two main issues must be managed – one philosophical, the other structural – in seeking to ameliorate the problems caused by China’s unconstrained rise. Only by resolving the structural issue will Asia succeed in overcoming the philosophical problem. The philosophical problem concerns China’s renewed conception of itself as the “Middle Kingdom,” a state with no sovereign equal. Throughout its history, China has sought to treat its neighbors as vassals – a mindset currently reflected in the way that it has approached negotiations with Vietnam and the Philippines over the South China Sea. China’s free-floating rise, unan-

chored in any regional structure or settlement, makes this mindset particularly worrying. At the Hawaii summit, Obama must orchestrate the first steps toward constructing an effective multilateral framework within which the complications posed by China’s rise can be addressed. The absence of such a structure of peace has been obscured, to some extent, by America’s dominant role in Asia since the Pacific War. But China’s rise and America’s other global and domestic concerns have left many Asians wondering just how enduring those commitments will be in the future. Nevertheless, China’s recent strategic assertiveness has led many Asian democracies to seek to deepen their ties with the US, as South Korea has done with a bilateral free-trade agreement. The US is reciprocating by pledging not to cut Asia-related defense spending, despite the big reduction in overall US defense spending that lies ahead. What Asia most needs today is a well-conceived regional system, embedded in binding multilateral institutions. A “Trans-Pacific Partnership” between Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, the US, and Vietnam to

govern supply-chain management, intellectual-property protection, investment, rules on state-owned firms, and other trade issues – likely to be announced in Hawaii – is a good start in the economic sphere. But much more is needed. Ultimately, the best way for peace to prevail in the region is for the US and China to share responsibility for a regional order with Asia’s other powers, particularly India, Indonesia, Japan, and South Korea. Asia’s choice is clear: either the region embraces a multilateral structure of peace, or it will find itself constrained by a system of strategic military alliances. In Hawaii, Obama and the other assembled Asian leaders – particularly the Chinese – must begin to choose between these two Asian futures. Yuriko Koike is Japan’s former Minister of Defense and National Security Adviser. Copyright: Project Syndicate, 2011.

November 2011


The Globalization

of Protest Joseph E. Stiglitz NEW YORK – The protest movement that began in Tunisia in January, subsequently spreading to Egypt, and then to Spain, has now become global, with the protests engulfing Wall Street and cities across America. Globalization and modern technology now enables social movements to transcend borders as rapidly as ideas can. And social protest has found fertile ground everywhere: a sense that the “system” has failed, and the conviction that even in

a democracy, the electoral process will not set things right – at least not without strong pressure from the street. In May, I went to the site of the Tunisian protests; in July, I talked to Spain’s indignados; from there, I went to meet the young Egyptian revolutionaries in Cairo’s Tahrir Square; and, a few weeks ago, I talked with Occupy Wall Street protesters in New York. There is a common theme, expressed by the OWS movement in a simple phrase: “We are the 99%.” That slogan echoes the title of an article that I recently published, entitled “Of the 1%, for the 1%, and by the 1%,” describing the enormous increase in inequality in the United States: 1% of the population controls more than 40% of the wealth and receives more than 20% of the income. And those in this rarefied stratum often are rewarded so richly not because they have contributed more to society – bonuses and bailouts neatly gutted that justification for inequality – but because they are,

to put it bluntly, successful (and sometimes corrupt) rent-seekers. This is not to deny that some of the 1% have contributed a great deal. Indeed, the social benefits of many real innovations (as opposed to the novel financial “products” that ended up unleashing havoc on the world economy) typically far exceed what their innovators receive. But, around the world, political influence and anti-competitive practices (often sustained through politics) have been central to the increase in economic inequality. And tax systems in which a billionaire like Warren Buffett pays less tax (as a percentage of his income) than his secretary, or in which speculators, who helped to bring down the global economy, are taxed at lower rates than those who work for their income, have reinforced the trend. Research in recent years has shown how important and ingrained notions of fairness are. Spain’s protesters, and

those in other countries, are right to be indignant: here is a system in which the bankers got bailed out, while those whom they preyed upon have been left to fend for themselves. Worse, the bankers are now back at their desks, earning bonuses that amount to more than most workers hope to earn in a lifetime, while young people who studied hard and played by the rules see no prospects for fulfilling employment. The rise in inequality is the product of a vicious spiral: the rich rent-seekers use their wealth to shape legislation in order to protect and increase their wealth – and their influence. The US Supreme Court, in its notorious Citizens United decision, has given corporations free rein to use their money to influence the direction of politics. But, while the wealthy can use their money to amplify their views, back on the street, police wouldn’t allow me to address the OWS protesters through a megaphone. The contrast between overregulated democracy and unregulated bankers did not go unnoticed. But the protesters are ingenious: they echoed what I said through the crowd, so that all could hear. And, to avoid interrupting the “dialogue” by clapping, they used forceful hand signals to express their agreement. They are right that something is wrong about our “system.” Around the world, we have underutilized resources – people who want to work, machines that lie idle, buildings that are empty – and huge unmet needs: fighting poverty, promoting development, and retrofitting the economy for global warming, to name just a few. In America, after more than seven million home foreclosures in recent years, we have empty homes and homeless people. The protesters have been criticized for not having an agenda. But this misses the point of protest movements. They are an expression of frustration with the electoral process. They are an alarm.

be the inauguration of a new round of trade talks, called attention to the failures of globalization and the international institutions and agreements that govern it. When the press looked into the protesters’ allegations, they found that there was more than a grain of truth in them. The trade negotiations that followed were different – at least in principle, they were supposed to be a development round, to make up for some of the deficiencies highlighted by protesters – and the International Monetary Fund subsequently undertook significant reforms. So, too, in the US, the civil-rights protesters of the 1960’s called attention to pervasive institutionalized racism in American society. That legacy has not yet been overcome, but the election of President Barack Obama shows how far those protests moved America. On one level, today’s protesters are asking for little: a chance to use their skills, the right to decent work at decent pay, a fairer economy and society. Their hope is evolutionary, not revolutionary. But, on another level, they are asking for a great deal: a democracy where people, not dollars, matter, and a market economy that delivers on what it is supposed to do. The two are related: as we have seen, unfettered markets lead to economic and political crises. Markets work the way they should only when they operate within a framework of appropriate government regulations; and that framework can be erected only in a democracy that reflects the general interest – not the interests of the 1%. The best government that money can buy is no longer good enough. Joseph E. Stiglitz is University Professor at Columbia University, a Nobel laureate in economics, and the author of Freefall: Free Markets and the Sinking of the Global Economy.

The ECB’s Battle Against Central Banking J. Bradford DeLong

Obama and Asia’s Two Futures Yuriko Kioke

The Globalization of Protest Joseph E. Stiglitz


THE GEORGE STREET REVIEW: Publications Director Oliver Kidd

Copyright: Project Syndicate, 2011.

The anti-globalization protests in Seattle in 1999, at what was supposed to

November 2011


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George Street Review - November 2011