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Stefaan De Rynck

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Stefaan De Rynck

Category Archives: Public Policy

The German Judge and the Italian Banker

13 Thursday Feb 2014

Posted by Stefaan De Rynck in EU Politics, Leadership, Public Policy

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EU democracy, Germany, Karlsruhe, Mario Draghi, OMT

Wednesday, on a flight from Brussels to Boston, the NSA agent sitting next to me had a transcript from a telephone conversation between Herbert Landau, who is a judge on Germany’s Federal Constitutional Court, and Mario Draghi, President of the European Central Bank.

For non-Euro buffs, the German Court said last week that Draghi’s offer in 2012 to buy as much government bonds on the financial markets as he saw fit, which is widely claimed to have brought down the Euro crisis from scary heights, was most likely illegal under European Union law. But the final ruling will only come after the European Union court had its say.

Angela Merkel: "I usually do whatever it takes to avoid Karlsruhe rulings."

Angela Merkel: “I usually do whatever it takes to avoid Karlsruhe rulings.”

Herbert Landau in Karlsruhe calls Frankfurt …

Herbert: “Can I speak to Mario Draghi?”
Mario: “Speaking.”
Herbert: “What did you mean when you said you would do whatever it takes to preserve the Euro?”
Mario: “That I was ready to defend the Euro, no matter what.”
Herbert: “Is it really your job to defend the Euro?”
Mario: “Excuse me?”
Herbert: “Is that within your mandate, defending the Euro?”
Mario: “I would think so, I am the Central Banker.”
Herbert: “I see. I am the Constitutional judge of your largest shareholder.”
Mario: “I am the lender of last resort. It must be within my mandate to put up the last defence when markets attack. Markets are driven by animal spirits. I need to tame them.”
Herbert: “I am a constitutional judge; my job is to tame you. Did you act within the limits of your mandate? Did you consider more limited approaches to taming those markets?”
Mario: “Either the lion eats me, or I eat the lion. And to kill a lion I prefer a bazooka.”
Herbert: “You could use a handgun for that, no?” Continue reading →

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Elections, change and policy legacy

21 Tuesday Jan 2014

Posted by Stefaan De Rynck in EU Politics, Leadership, Public Policy

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EU democracy, European Commission President, European elections

European Union watchers are bracing themselves for the political excitement of the next seven weeks. All major political parties will nominate their candidate for the European Commission Presidency, the key executive post, with the European People’s Party going last at its Dublin conference on March 7. The Greens are organizing debates this week between their four candidates. In the liberal-democrat race Olli Rehn just pulled the plug on his presidential ambitions in favour of Guy Verhofstadt who is now certain of the nomination. The social-democrats will confirm Martin Schulz, the current Parliament President, as their candidate at the end of February.

European Parliament elections in May 2014

European Parliament elections in May 2014

Once all nominations are done, candidates and their parties will have two and a half months to spell out their manifestos to the electorate of the 28 countries in the run-up to the May elections. All of this is a first for the EU, in an attempt to stir up more debate and personalize clashes between different policy visions.

No doubt this will lead to promises for change. However, once in office in the Autumn, the new Commission President will face heavy constraints to change the policy course of Europe. The budget is fixed for the period 2014-2020, so the next Commission will have to execute what was already decided. Continue reading →

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Who are the most powerful politicians?

13 Friday Dec 2013

Posted by Stefaan De Rynck in Leadership, Public Policy

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Democracy, Leadership, Merkel, Obama, Putin

Ranking political leaders is a tricky matter. Forbes’ list of most powerful people recently put Russian President Vladimir Putin ahead of “the handcuffed” Barack Obama, with German Chancellor Angela Merkel trailing closely behind. But can one really compare individual leaders and their power across different political systems?

Obama: "I checked the pictures on Angela's smartphone. She has no selfies". - Photo German government

Obama: “I checked the pictures on Angela’s smartphone. She has no selfies”. – Photo German government

Let’s start with Obama versus Merkel. Democracies are often lumped together and opposed to authoritarian regimes. But this ignores the wide variation between the countries within the democratic family. Germany is a consensus democracy based on a proportional electoral system. While the US President often comes into office with less than half of the popular vote (or with just over 50% as currently for Obama), the parties forming a German government have usually the support of large majorities. The German executive controls policy-making and legislation, whereas forces in both executive and legislator determine the American President’s agenda. The White House is expected to beg and cajole legislators, or defers the initiative to Congress as with the mini-budget deal this week. Such a situation would be unthinkable in Germany.

Under Merkel Germany’s economy has boomed. Her 2013 election result Continue reading →

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Surprise surprise? You haven’t been paying attention

14 Thursday Nov 2013

Posted by Stefaan De Rynck in Leadership, Public Policy

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financial crisis, Greenspan, Leadership

Will an ecological crisis surprise us, just like the 2008 financial crisis did? This question sets up a trap, because there was no surprise in 2008.

What is going up so fast: house prices, derivatives' trades, global warming emissions? Are we in for a surprise?

What is going up so fast: house prices, derivatives’ trades, global warming emissions? Are we in for a surprise?

In the latest issue of Foreign Affairs Alan Greenspan, the former Federal Reserve Governor, endorses a pervasive narrative that economists “never saw the crisis coming”. But that narrative is wrong. Ample warning signs announced the looming financial disaster before 2008. Policy makers and regulators simply chose to ignore them.

If plenty of indicators herald the arrival of bad stuff, acting as if you are surprised only demonstrates that you were not paying attention or did not care enough to get into action.

A new book Guardians of Finance by James Barth, Gerald Caprio and Ross Levine claims that financial regulators were aware of what was going on, but that their deep-seated assumptions on finance and free markets obfuscated reality and led to inertia. With the vast amount of books out on Lehman Brothers, AIG and other firms, we already knew that many financial players saw themselves as dancing and drinking the night away, waiting until the music would stop and the lights go on.

Here are some randomly picked data that regulators knew before 2008:

1. The FBI recorded a rise in mortgage frauds by 272% from 2004 to 2008, and issued public warnings.
2. In Ireland, house prices rose by 250% from 1995 to 2006; the bank Anglo Irish expanded by 40% a year from 1999 to 2006 (every year!).
3. Greenspan’s Fed allowed banks to reduce capital drastically by purchasing credit default swaps, an insurance product. By 2006 the Fed knew of AIG’s fragility as a result from selling tons of such credit insurance, and thus knew of the fragility of the banks that had purchased the swaps.
4. Gillian Tett writes in her book Fool’s Gold that the New York Fed became very concerned about the spectacular rise in Credit Default Swaps already in 2004, especially because of the opaque nature of the trades.
5. Debt of Spanish household and nonfinancial firms went from 70% of GDP in 1997 to 170% of GDP in 2008.
6. In 1998 the CFTC (the US regulator for swaps) proposed to regulate over-the-counter derivatives, but no one heeded the call. That same year hedge fund LTCM blew up in part because of OTC products.
7. Many bank reviews before 2007 by the FDIC, a US bank regulator, signalled that banks’ exposures to risks were too large, but no one followed up.
8. Multi-billion dollar losses by rogue traders demonstrated the taking of excessive risks.

Government agencies and experts are gathering data on the possibility of an upcoming ecological crisis, just as they did on the financial crisis. A United Nations’ report of a few weeks ago showed carbon dioxide emissions today that are unprecedentedly high. The negative impact already hits communities around the world, and the longer we wait, the costlier the adaptation will be. If only financial regulators had stopped the party well before 2008, we would not pay the huge price of adaptation now. In the US, 15 million people more are in poverty today compared to 2000, and nearly all of this increase happened since 2008. In Europe, the rapid turnaround of the economy in countries like Greece and Portugal tests the limits of what societies can bear.

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Shopping on Thanksgiving? Time to talk turkey

22 Tuesday Oct 2013

Posted by Stefaan De Rynck in Leadership, Public Policy

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Black Friday, Leadership, regulation, sales, shopping hours, Thanksgiving

If your brother or sister earns a living at JCPenney you may have to cut short the Thanksgiving family time spent together. At 8pm, the retailer announced last week, most of its 1,100 stores will open their doors. JCPenney had no choice. Macy’s announced a few days ago that it will be open as well, breaking with a century and a half tradition. Two years ago, Toys R Us started this, and Wal-Mart, Target and others followed suit last year.

2012 Black Friday Stampede (Brian Davies, AP)

2012 Black Friday Stampede (Brian Davies, AP)

Why does JCPenney have no choice? This is a classic case of the Prisoners’ dilemma in game theory. The best outcome of the game occurs when all retailers cooperate (i.e. stay closed on Thanksgiving). But the incentive to defect is extremely strong, in the hope that your shop could be the only one open and boost its sales. Continue reading →

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Do governments solve problems, or merely apply solutions?

15 Tuesday Oct 2013

Posted by Stefaan De Rynck in Leadership, Public Policy

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indicators, Leadership, moscovici, policy-making

Are governments driven by a search for better solutions, or do they apply existing solutions to new problems?

Can a country be competitive and enjoy life?

Can a country be competitive and enjoy life?

At a Harvard talk last week French Finance Minister Pierre Moscovici was questioned aggressively by a Chinese official. The claim by the Chinese economist was that France can never become competitive because of its addiction to holidays and short working weeks. And as Moscovici tried to corner the questioner with the higher productivity of French workers, someone else took the relay baton for bashing French economic policy. Part of the audience reacted approvingly, as often happens in US public debates when France is being criticized. Continue reading →

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Political leadership: should party unity trump clear purpose?

07 Monday Oct 2013

Posted by Stefaan De Rynck in Leadership, Public Policy

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government shutdown, Leadership, Republicans, US politics

Let’s assume that House Republican leader John Boehner is a reasonable man, as Democrats repeatedly say. Let’s also assume that he wants a Republican candidate to win the 2016 presidential elections. His behavior in the shutdown saga so far undermines these two assumptions. What then does Boehner value most in today’s crisis management? It must be the unity of his Republican caucus in the House. But chasing that value damages Republican prospects for future elections.

John Boehner and Democratic Senate leader Harry Reid secretly whispering - Photo taken from Tea Party News Network site

John Boehner and Democratic Senate leader Harry Reid secretly whispering – Photo taken from Tea Party News Network site

In the 2012 fiscal crisis, Boehner was outvoted when a majority of House Republicans pulled him back from a compromise with Obama on more taxes for the rich in exchange for expenditure cuts. Today, off the record Republican statements illustrate uncertainty about their end game. The Speaker is floating in order to avoid antagonizing some of his own members. Continue reading →

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Can you trade in a shotgun for a car?

01 Tuesday Oct 2013

Posted by Stefaan De Rynck in Leadership, Public Policy

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auto loans, Dodd-Frank, financial regulation, Leadership

I googled buying a used car in the Boston area upon arriving here, and now I get ads like: “$0 dollar Down/Low Monthly Lease Payment. Bad Credit, No Credit, No Problem!”

Picture taken at the lot of a used car dealer - Boston area (Medford)

Picture taken at the lot of a used car dealer – Boston area (Medford)

No problem for whom? Subprime car loans did not get much coverage in the financial crisis compared to bigger brother subprime mortgages. But the business model is similar, and it is partly based on predatory lending. This picture was taken on a car lot that I visited last week. Continue reading →

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  • Crimea and Kosovo, one stands where one sits
  • What kind of EU democracy is emerging?
  • The German Judge and the Italian Banker

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