That is: For the most part, African-American Pittsburgh seems to be invisible, not only to the public relations hucksters who tout Pittsburgh’s successes, but we are equally invisible to the protesters.

Certainly, black Pittsburgh is as proud as anybody in that the black President we worked so hard to elect has selected Pittsburgh as the host of the G-20 Summit. We even enjoy the re-invention of Pittsburgh from a dirty, smoky steel-churning history to the bright, clean, green financial success that the business leaders and politicians boast about so loudly. Nobody is more proud of the Super Bowl winning African-American coach of the Pittsburgh Steelers, Mike Tomlin. But none of that feel-good stuff erases the pain of the stubbornly high unemployment among African American young adults and the staggering dropout rate for young black males from the public school system.

I think though that unfortunately the groupthink happens again and again at many different levels, starting from the base levels of academia. As a result, the head games replicate themselves as a cultural phenomena and the exercise of actually questioning anything is routinely censored (from the bottom up). However I think this still boils down to the intellectual insecurity that surfaces when there is failure of theory… If little lies and unreasonable assumptions underlie everything (and can not be questioned) – then any quest for knowledge can be turned into a head game – and at any level of social or political rank.

When you have an group of regulators in a room and hear them coming up with what they believe are fancy and sophisticated ways of living out their bedroom fantasies of a world without any bank crisis; and these regulators device a system of capital requirements for banks based on risk assessments made by credit rating agencies; which allows among other that a bank can leverage its equity 62.5 to 1 times as long as there is an AAA rating involved…and there is not one single hand allowed to go up and pose the simple question of: “what if the credit rating agencies are captured by other interests or as humans are just fallible? Well then my friend, you just know you find yourself within a quite dangerous incestuous groupthink group.

As an Executive Director in the World Bank I saw it happening right in front of me, which is why, in a letter that the Financial Times published in November 2004, before FT censored me, I wrote:

“We also wonder how many Basel propositions it will take before they start realizing the damage they are doing …. Please, help us get some diversity of thinking to Basel urgently; at the moment it is just a mutual admiration club of firefighters trying to avoid bank crisis at any cost – even at the cost of growth.”

Yes appears is the code word… because if you reduce the assets exposure by applying risk weights of only 20% or less… anything can appear to be well capitalized”

A 1.000 billion exposure to AAAs is only reflected as 200 billion.

If you then have 16 billion in capital and you look at 200 billion investments you see an 8 percent equity a 12.5 leverage and you will say “it appears to be well capitalized”

but the hard and cruel reality, the way you have been misled by Basel is that it could be 16 billion for a 1.000 billion exposure only 1.6 percent in capital and a leverage of 62.5 to 1 …does not appear reasonable any longer!!!

That is a great and necessary move…but why is the US pushing this, rather than the Chinese and Indians themselves? Is the US getting anything in return? Is FX re-valuation (INR and CNY) the basic objective?

1) Even if the US merely legislates capital requirements that match current levels, that’s still better than where we were. It may feel worthless now(and therefore be easier to pass Congress), but the effect will be felt as the economy (hopefully) improves and banks are prevented from returning to the worst of their ways. Ideally, we will phase in stricter capital requirements over time, too. I’m not saying mandating current levels is good, but it isn’t completely worthless. I still struggle with the Lehman failure since they _appeared_ to be “well capitalized” and clearly their executives did, in fact, suffer huge personal wealth losses from Lehman’s failure… This suggests we need to look at one of the competing explanations – like black swan events or animal spirits. Neither satisfying since both are hard to fix.

2) Just to clarify from previous comments, restoring balance to global currency/consumption/exports is important (even though the G20 is not the right forum for pursuing this goal) because it is strongly related to finance regulation and monetary policy. This is because Fed policy is highly constrained by international currency flows and expectations. I have argued before that the threat to the dollar helped push the Fed’s attack on the commodity bubble in July/August/Sept. 08, and kept the Fed committed to an anti-inflationary policy line all the way through March of 09, which very much helped accelerate an unnecessary asset price collapse. Some would argue (especially after seeing the spectacle of Geithner and Clinton flying to Beijing to beg for continuing commitments to buy US debt) that an implicit threat from foreign central banks to withdraw support from US debt auctions prevented the Fed from moving earlier.

The Fed is discovering just how much monetary policy, like fiscal policy, is constrained by international flows (trade and capital) when there is lack of coordination. We already know that asymmetric fiscal stimulus “bleeds” into other economies through imports. Asymmetric monetary stimulus also bleeds, it seems, though conventional macroeconomists don’t seem to be getting this yet. The bleed occurs through asset price inflation induced by expectations of devaluation. In other words, the fed can run Monetary stimulus, which decreases investor willingness to hold dollars. In a closed economy, this forces investors into other assets – including investment assets. Investment/consumption spending surges, restoring the investment/savings equillibrium (which was broken by a spike in perceived default risk) as holding cash or reserves becomes unattractive and higher demand decreases default risk.

In an OPEN economy, however, this can simply force investors into non-dollar assets, including foreign investments and investment in commodities and exporting firms. In other words, capital flight. Note the recent trends in the markets… The extreme of this is an anti-dollar carry trade in which investors borrow at low US dollar rates and buy foreign government securities. This depresses the dollar, and accelerates devaluation – which might normally be stimulative, unless it results in commodity driven price inflation. But even commodity inflation might be OK (it finally got us to seriously think about our oil addiction).

But devaluation is politically difficult because China vigorously opposes this (for fear of devaluing its currency reserves) and at the same time does not want to allow the dollar to depreciate for (apparently) fear that it will lose its export advantage and go the way of Japan in the lost decade. China, in short, wants to have its cake and eat it to… They want to maintain a huge export surplus to a country whose currency does not depreciate, and the only way this can happen is if that country (the US) keeps borrowing ever larger sums.

All of these imbalances are playing havoc with monetary policy. So how does this relate to financial regulation?

Because if we institute financial regulation (like higher capitalization requirements) we NEED to inject cash liquidity into the system to compensate for the lower velocity of money. Otherwise, overall money supply drops rapidly, and we risk deflation. This means the Fed needs to keep printing money, yet these visible efforts drive expectations of inflation/devaluation which are much worse because we continue to accumulate greater debt to forieign countries due to trade flows.

The trio of issues – capital asset ratios, financial regulation, and trade flows – are all linked through the value of the dollar and Fed policy. But G20 is a bad place to discuss a massive deal on trade flows. Most likely, we’ll get nothing more than Geithner’s vacuous “emerging consensus”.

But if we don’t fix the structural problems, then the Fed’s ability to regulate the economy through monetary policy is impaired.

Worth reading:

http://delong.typepad.com/sdj/2009/09/second-best-punchbowlism.html

http://www.washingtonpost.com/wp-dyn/content/article/2009/09/22/AR2009092203737_pf.html

http://curiouscapitalist.blogs.time.com/2009/09/23/why-china-should-stop-piling-up-dollars-and-why-it-wont/

http://dailyreckoning.com/the-real-and-untold-g-20-story/

The big development most likely will be china unloading discounted T-bills to the IMF in exchange for about $14 billion gold bullion.

That to me is a perfect description of the Basel Committee and their buddies