Transnational Law Blog

The Case Of Ben Bernanke

Last week, most news applauded Obama’s reappointment of Ben Bernanke as the chairman of the Federal Reserve. Of the few commentators who opposed the reappointment, Morgan Stanley Asia's Stephen Roach lists three critical mistakes that Bernanke made leading toward the financial crisis. He argues that Bernanke should not be reappointed because his “pre-crisis actions played an equally critical role in setting the stage for the most wrenching recession since the 1930s.”

First, and foremost, he was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to asset bubbles. On this count, he stood with his predecessor - serial bubble-blowing Alan Greenspan - who argued that monetary authorities are best positioned to clean up the mess after the bursting of asset bubbles rather than to pre-empt the damage. As a corollary to this approach, both Mr. Bernanke and Mr. Greenspan drew the wrong conclusions from postbubble strategies earlier in this decade put in place after the bursting of the equity bubble in 2000. In retrospect, the Fed's injection of excess liquidity in 2001-2003, which Mr. Bernanke endorsed with fervour, played a key role in setting the stage for the lethal mix of property and credit bubbles.

Second, Mr. Bernanke was the intellectual champion of the "global saving glut" defence that exonerated the US from its bubble-prone tendencies and pinned the blame on surplus savers in Asia. While there is no denying the demand for dollar assets by foreign creditors, it is absurd to blame overseas lenders for reckless behaviour by Americans that a US central bank should have contained. Asia's surplus savers had nothing to do with America's irresponsible penchant for leveraging a housing bubble and using the proceeds to fund consumption. Mr. Bernanke's saving glut argument was at the core of a deep-seated US denial that failed to look in the mirror and pinned blame on others.

Third, Mr. Bernanke is cut from the same market libertarian cloth that got the Fed into this mess. Steeped in the Greenspan credo that markets know better than regulators, Mr. Bernanke was aligned with the prevailing Fed mindset that abrogated its regulatory authority in the era of excess. The derivatives explosion, extreme leverage of regulated and shadow banks and excesses of mortgage lending were all flagrant abuses that both Mr. Bernanke and Mr Greenspan could have said no to. But they did not. As a result, a complex and unstable system veered dangerously out of control.

I thought to myself what would be the risk of not having Bernanke being in charge of the Federal Reserves and whether the outcome would be worse or better given how susceptible investors are to internal changes. The argument that the monetary authorities should not pre-empt the damage of an asset bubble is a valid one. History, including the Great Depression, and Japan’s lost decade, repeatedly demonstrates how monetary tightening in the bull market is damaging to the economy in which speculations are inherently pervasive. Secondly, even if “global saving glut” should not be an excuse for American deteriorating saving accounts during the pre-crisis period, it is, by all means, a true phenomenon, which played a partial role in forming the financial crisis. Asia was not to blame for the crisis; although, the unprecedented accumulation of reserves in foreign currencies inadvertently augmented the US asset price bubble and widened derivative markets. Lastly, it is inescapable that more regulations are knocking on the door notwithstanding if it’s desirable to the Fed’s chairman. I suspect the reforms of banking and financial sectors will take the center stage as health care reform and economic recovery progress. Unless Stephen Roach could point out a better alternative to replace Ben Bernanke, at the moment, the risk appears to supersede the benefit of replacing him.

Sheehan is out of Retirement

I've talked about Cindy Sheehan before and was under the impression she had given up her war protest. I'm glad to read that Sheehan has once again taken up her charge and is dogging Obama while he is on vacation. The Breit Bart put it as follows:

After spending weeks dogging George W. Bush's presidential vacations, anti-war protester Cindy Sheehan is now trying to make life uncomfortable for President Barack Obama. Sheehan used to pitch a peace camp near Bush's ranch in Crawford, Texas, becoming a symbol of the anti-war movement after her son Casey died in action in Iraq. On Thursday, she and a band of anti-war protesters turned up outside the media center used by journalists covering Obama's vacation on the well-heeled east coast resort island of Martha's Vineyard.

"The reason I am here is because ... even though the facade has changed in Washington DC, the policies are still the same," Sheehan told a handful of journalists, against a backdrop of her "Camp Casey" banner. She told US peace activists to wake up and protest Obama's escalation of the war in Afghanistan, and complained that despite the president's anti-war stance, US troops remained in Iraq.

"We have to realize, it is not the president who is power, it is not the party that is in power it is the system that stays the same, no matter who is in charge."

"We are here to make the wars unpopular again," she said.

Won't get fooled again?

Posner v. Macroeconomists

This week brings a heated debate between Judge Posner and some prominent economists including Brad DeLong of UC Berkeley. The debate comes at the heart of my recent discussion with a lawyer who is also a faithful follower of Paul Krugman blog. I argued that certain opinions made by Paul Krugman are so political that readers should distinguish them from his academic accomplishment. Otherwise, the misjudgment may bring about misinformed opinion. Judge Posner took it one step further by questioning the ethical responsibility of academic economists in influencing public opinion through their academic tools. Here is a quoted entry from the Faculty Lounge by professor Kim Krawiec:

In his August 18 blog post for The Atlantic, Honesty about the Stimulus, Posner criticizes the August 6 talk by Christina Romer, chair of the President's Council of Economic Advisers, entitled "So, Is It Working? An Assessment of the American Recovery and Reinvestment Act at the Five-Month Mark."  She is referring, of course, to the economic stimulus package, and her answer is “absolutely.”

Posner, however, does “not think her analysis is responsible,” and is “concerned with the fact that academic economists, when they become either public officials or public intellectuals (like Paul Krugman), leave behind their academic scruples.”  Posner picks through Romer’s arguments in some detail, so you should read his post (and her report, linked above) in its entirety to fully understand the substance of the dispute.  Posner concludes by questioning the ethical responsibility of economists who write for the media or join the government:

This raises the question of the ethical responsibility of academic economists, such as Romer (and Krugman, and Lawrence Summers, and many others), who write for the media or join the government, either to adhere to academic standards in their nonacademic work or to make clear to the public that they are on holiday from those standards and that what they say in their public-intellectual or governmental careers should not be thought identical to their academic views.

Mark Thoma (here) and Brad DeLong (here) are not pleased, and quickly enter the fray in defense of Romer. In Unidentified Pretend Economist, Thoma asserts that Posner is wrong on many points:

Yet, nowhere does he say “I don’t know what I am talking about because I am a judge, not a macroeconomist.” Instead, in his role as a public intellectual, he acts like he is an expert in the field. Ethics indeed.

DeLong launches a more extended critique.  In Richard A. Posner's Ethical Lapses, he argues that Posner writes dishonestly about the stimulus package, and that Posner’s piece contained at least seven major ethical lapses.  According to DeLong:

In my view, anyone holding themself out as a public intellectual has one duty: to be smart. Being smart involves (a) checking your arithmetic, (b) building up your intellectual tools, (c) using Google, (d) reading works until you understand them, and (e) not writing things where you have absolutely no clue about what you are talking about.

Does Richard Posner think that he is behaving ethically here? In my view, he has failed to satisfactporily [sic] perform any item of that checklist.

On August 19, Posner responded to DeLong, again on the Atlantic blog, in Christina Romer Defended by an Angry Academic Colleague, dismissing the bulk of DeLong’s claims and arguing that the piece reinforced his distrust of macroeconomists' analysis of the economic crisis.  That’s all for now, but you know where to get the blow-by-blow if (when?) Judge Posner starts arguing with someone else.  

The Transnational Law School

Much to my surprise and fascination, Peking University ("Bei Da") opened a School of Transnational Law in the Fall of 2008 that has a curriculum nearly identical to that of a U.S. juris doctor (JD) program and requires three years of study. Even more amazing is that the school is seeking ABA accreditation, the first law school outside of the U.S. to seek such accreditation. There is an excellent article on USC's US-China Institute Blog simply entitled China Legal (h/t China Law Blog) that provides a good overview of the program goals and development. I particularly enjoyed the following quote from the school's Dean, Jeffrey Lehman:

When pressed about whether his school constitutes possibly outsourcing American law, Dean Lehman replied, "I view it less in economics and more in cultural. What we're seeing is the spread and development worldwide of a transnational legal culture where features of different legal cultures and systems are being shared. I think it is good for American society; for American economy if those ideas and principles and systems become part of a shared worldwide vocabulary. The more lawyers everywhere speak American law as well as their own country's law, the better it is for America."

I find this particularly insightful, especially in light of articles like Business Taxes in China. Feels just Like Home from the China Law Blog, which recommend retaining an accountant who understands the tax laws in both your home country and the country where your business is located and adds that these people are few and far between. As the world gets smaller and business becomes more and more transnational, we're seeing an ever increasing need for not only multi-lingual attorneys but also attorneys who are fluent in multi-legalese. Peking University's School of Transnational Law is a large step in that direction.  

Adds Wang, "I'm very confident STL will get ABA accreditation. The Chinese students specializing in America law help maintain the growth of the international trade and business transaction rather than decrease it. The more Chinese people understand American law, the more Chinese know how to talk to Americans, the more business is created. This means more jobs, transactions, and opportunities will be created for paralegals and junior associates in the United States."

Anyone following the development of China readily knows that its modern legal system is very young but evolving rapidly. A common problem I recall from China is finding a PRC attorney who has the analytical and advocacy skills that are the staple of American legal training and practice. By introducing the curriculum of a US law school to Chinese students at the School of Transnational Law, it will greatly increase the caliber of attorneys in China.

Zhang Lining, who graduated with an English degree from Ocean University in Qingdao states, "I was deeply interested and attracted by the school because it gave me chance to use analytical skills. I have an American coach in debating and during training, we analyzed the issues in two different ways. I think in law school, I can be trained as a thinker."

Even if the school never gets accreditation from the ABA, I have no doubt it will make a huge contribution to the educational and legal system in China.  I've commented in the past that the evolving legal system and culture in China is not only generating more business opportunities but is also changing how the Chinese perceive themselves as individuals within the Chinese legal system.

I've written a series of posts entitled A Reason to Have Faith in China's Legal System that comment on the development of grass-roots legal oragnizations that enforce the employment/contractual rights of migrant workers. Dean Lehman has stated that the curriculum of the Transnational Law School spans the entire spectrum of the legal practice, including but not limited to international business. As an example, he said Mark Rosenbaum of ACLU fame will be teaching about public interest advocacy next fall. In a country where we're already beginning to see grass-roots organizations forming such as those mentioned above, I can't wait to see how the students respond to someone like Mr. Rosenbaum! China's young lawyers are China's future and the Transnational Law School is a very exciting contribution to that future. I think it's AWESOME. I honestly can't think of any other way to describe it. Simply AWESOME.    

Trapped in the Middle-Income Class, Malaysia Is Finding Its Way Out

Once considered one of the Asian dragons, foreign investors have largely forgot Malaysia in the decade following the 1998 Asian financial crisis. However, there have been some important recent reforms in business law in Malaysia as the government of Najib Razak finds ways to push its liberalization agenda further in order to attract more foreign capital in the form of market exchange and direct investment.

The most important recent reform has been the relaxation of rules requiring ethnic Malay investors to have at least a 30% stake in any listed company. With the new law “newly listed companies will now be required to make available only a 12.5% stake to ethnic Malay investors without any obligation to achieve the quota if the issue is not taken up by them,” reported the Financial Times. The new regulation arguably aims to ease ethnic tensions and protectionism in favor of Malays of ethnic minorities. The three major ethnic group s include Malays (51%), Chinese (24%) and Indians (7%).

 In addition, the government also took a significant step by changing the restriction on the former foreign ownership ceiling for asset management funds and brokerages. According to the Financial Times, “under the new rules, ‘qualified and leading’ foreign fund management companies in the wholesale segment will be allowed to set up operations in Malaysia without need of a local equity partner, while the foreign shareholding limit for unit trusts in the retail sector will be raised to 70 per cent from 49 per cent. Similar change also applied to foreign ownership ceiling for brokerages.

Back in the early 1970s, while implementing various policies in order to attract foreign investors, particularly those that could bring in technological development, the Abdul Rayak government imposed legislation to the effect that Malays (the major ruling ethnic group) must own 30% of most local companies. This discriminatory condition, defended four decades ago as “a genuine assault on poverty”, eventually helped embed a system of privileges for well-connected insiders and widened the political gap between the government and various business groups to the extent that various policies can no longer be effectively implemented.

Like Thailand, Malaysia has absorbed manufacturing FDI for many decades. However, during the last decade, the rise of China, the impact of the Asian financial crisis and progress in regional and global integration have forced the country into a new developmental phase. Aside from attracting more foreign investment, improving domestic capacity has become the cornerstone for continuing the development of Malaysia; however, such “leveling up” efforts have for the most part been “excruciatingly slow”, if not entirely unsuccessful.

The steps taken by the Malaysian government in recent months have arguably come “more than a decade too late”. Nonetheless, foreign investors remain cautiously optimistic. The reforms in question are, by their nature, long-term; as such, eventual evidence of success will hopefully tempt investors to return to the country: “The Malaysian market was in danger of slipping off the edge of investors’ radar screens. Now it has the potential of becoming more important again,” said the Financial Times.

My impression is that external threats such as the rise of China, the Asian financial crisis or the global integration of the Asia Pacific region can only take partial responsibility for Malaysia’s economic standing. It is probable that the bigger and less apparent problem lies in the fragmentation of the political and social ties between the central government and various  interest groups causing failures to enforce or implement policy in recent years. For example, in the Malaysian government’s Second Industrial Master Plan (“IMP2”) of 1996-2005, the concept of “manufacturing plus plus”  correctly sets out,  what a middle-income country such as Malaysia should do in order to advance to the next stage of development. Yet Malaysia largely did not succeed in meeting its own goals during the implementation period of IMP2. Whatever the cause of the social and political fragmentation, it was not substantial enough to slow down the growth process in the decades prior to the Asian financial crisis; and yet for some reason, it appears that the crisis was a turning point after which the internal problems of Malaysia began to hinder further development. Consequently, any reform effort under the title of “liberalization” must offer adequate attention to the internal conflicts of the country, or else the dragon may continue to slumber.