1. The CSU Widget Factory has been experiencing an increase in bac
Economist.4section.20100220
1.
2. Print edition
Politics in America printed lighting
What's gone Printed circuit
wrong in
Washington? private-sector space flight
American politics Moon dreams
seems unusually
bogged down at climate change
present. Blame Green.view: Copenhagen accounting
Barack Obama more than the system
Feb 18th 2010 polar ice shelves
Breaking waves
Leaders computer displays
Hands off
Nigeria's new president
Be focused, be bold the internet
Tech.view: World Wide Wait
Greece and the euro
Leant on recruitment
Science correspondent's job
Competition policy
Prosecutor, judge and jury more recruitment
The Richard Casement internship
Rethinking economics
Radical thoughts on 19th Street
Business&Finance
america's economy
A modest proposal
business in china
Power cut
a european monetary fund?
Economics focus: Disciplinary measures
the euro area’s crisis
Let the Greeks ruin themselves
sovereign-debt worries
Domino theory
competition policy in europe
Unchained watchdog
business and social responsibility
Business.view column: Unlikely heroes
a special report on financial risk
The gods strike back
Science&Technology
printed body parts
Making a bit of me
http://cafe.naver.com/economist365 Page 2 of 59
3. Politics in America
What's gone wrong in Washington?
Feb 18th 2010
From The Economist print edition
American politics seems unusually bogged down at present. Blame Barack
Obama more than the system
Derek Bacon
THIS week Evan Bayh, a senator from Indiana who nearly became Barack Obama’s
vice-president, said he was retiring from the Senate, blaming the inability of
Congress to get things done. Cynics think Mr Bayh was also worried about being
beaten in November (though he was ahead in the polls). Yet the idea that America’s
democracy is broken, unable to fix the country’s problems and condemned to
impotent partisan warfare, has gained a lot of support lately (see article).
Certainly the system looks dysfunctional. Although a Democratic president is in the
White House and Democrats control both House and Senate, Mr Obama has been
unable to enact health-care reform, a Democratic goal for many decades. His cap-
and-trade bill to reduce carbon emissions has passed the House but languishes in the
Senate. Now a bill to boost job-creation is stuck there as well. Nor is it just a
question of a governing party failing to get its way. Washington seems incapable of
fixing America’s deeper problems. Democrats and Republicans may disagree about
climate change and health, but nobody thinks that America can ignore the federal
4. deficit, already 10% of GDP and with a generation of baby-boomers just about to
retire. Yet an attempt to set up a bipartisan deficit-reduction commission has recently
collapsed—again.
This, argue the critics, is what happens when a mere 41 senators (in a 100-strong
chamber) can filibuster a bill to death; when states like Wyoming (population:
500,000) have the same clout in the Senate as California (37m), so that senators
representing less than 11% of the population can block bills; when, thanks to
gerrymandering, many congressional seats are immune from competitive elections;
when hateful bloggers and talk-radio hosts shoot down any hint of compromise;
when a tide of lobbying cash corrupts everything. And this dysfunctionality matters
far beyond America’s shores. A few years ago only Chinese bureaucrats dared
suggest that Beijing’s autocratic system of government was superior. Nowadays
there is no shortage of leaders from emerging countries, or even prominent American
businesspeople, who privately sing the praises of a system that can make decisions
swiftly.
It’s alright, Abe
We disagree. Washington has its faults, some of which could easily be fixed. But
much of the current fuss forgets the purpose of American government; and it lets
current politicians (Mr Obama in particular) off the hook.
To begin with, the critics exaggerate their case. It is simply not true to say that
nothing can get through Congress. Look at the current financial crisis. The huge TARP
bill, which set up a fund to save America’s banks, passed, even though it came at the
end of George Bush’s presidency. The stimulus bill, a $787 billion two-year package,
made it through within a month of Mr Obama taking office. The Democrats have also
passed a long list of lesser bills, from investments in green technology to making it
easier for women to sue for sex discrimination.
A criticism with more weight is that American government is good at solving acute
problems (like averting a Depression) but less good at confronting chronic ones (like
the burden of entitlements). Yet even this can be overstated. Mr Bush failed to
reform pensions, but he did push through No Child Left Behind, the biggest change to
schools for a generation. Bill Clinton reformed welfare. The system, in other words,
can work, even if it does not always do so. (That is hardly unusual anywhere: for all
its speed in authorising power stations, China has hardly made a success of health
care lately.) On the biggest worry of all, the budget, it may well take a crisis to force
action, but Americans have wrestled down huge deficits before.
America’s political structure was designed to make legislation at the federal level
difficult, not easy. Its founders believed that a country the size of America is best
governed locally, not nationally. True to this picture, several states have pushed
forward with health-care reform. The Senate, much ridiculed for antique practices
like the filibuster and the cloture vote, was expressly designed as a “cooling”
chamber, where bills might indeed die unless they commanded broad support.
Broad support from the voters is something that both the health bill and the cap-and-
trade bill clearly lack. Democrats could have a health bill tomorrow if the House
6. Nigeria's new president
Be focused, be bold
Feb 18th 2010
From The Economist print edition
Goodluck Jonathan probably has only a short time in office. He could still
make a difference
AFP
ACCORDING to his spokesman, the man who has just become the acting president of
Africa’s most populous country, Goodluck Jonathan, has vowed to “secure Nigeria’s
path to greatness and guarantee our place among the great nations of the world in
the shortest possible time.” That would be a tall order even for a freshly elected
leader with a thumping majority and two terms in office. In fact, the spokesman’s
desperate hyperbole reveals the truth of the matter: Mr Jonathan is taking over the
leadership of one of the world’s least governable countries in the least promising
circumstances.
Some doubt the constitutionality of his succession to Umaru Yar’Adua, who
supposedly still lies gravely ill in a Saudi hospital. And as the presidency rotates
between a northern Muslim and a southern Christian, to satisfy both sides of Nigeria’s
ethnic-religious divide, so Mr Jonathan, a southerner, probably has only a little more
than a year in office before being replaced in the next election. To many of Nigeria’s
ambitious politicians, he is more lame duck than Goodluck.
Given these constraints, Mr Jonathan could be forgiven, perhaps, for just keeping his
head down and the seat warm for his successor. His lacklustre record as vice-
8. Greece and the euro
Leant on
Feb 18th 2010
From The Economist print edition
The euro zone’s rescue plan for Greece is flawed
ON FEBRUARY 15th Greeks celebrated Clean Monday, the start of Orthodox Lent, by
flocking out of towns and cities to eat shellfish and fly kites. For a country in the
throes of an economic crisis, a national holiday to listen to the bouzouki smacks of
self-indulgence. But then Greeks and other members of the euro zone are perhaps
allowing themselves to believe that, after an awful, bickering month, things are
looking up. Fortified by a couple of European Union summits, plus a more ambitious
Greek pledge to cut the deficit and a euro-zone counterpledge to stand behind the
country, the market for Greek government debt looks stable.
But for how long? The bond market’s assault has indeed abated, but only the most
carried-away kite-flying oyster-eater could believe that this crisis is over for good. At
some point in the next few months, during which Greece has to raise at least €20
billion ($27 billion) in the bond markets, its finances are likely to be tested again.
Greece’s plans to restructure its economy lack credibility, the euro zone’s promised
rescue is vague and the whole confection threatens to be needlessly expensive.
European leaders bought time this week. They should use it to devise something
better.
The problem is that European leaders seem to like their handiwork. The euro zone’s
chieftains promised “determined and co-ordinated action” should the euro come
under threat. There was no detail, but that was intentional. Details would be harder
than generalities for member states to agree on and they would give speculators a
target. Details would also draw the anger of voters at a time when European
solidarity is in short supply. Almost seven out of ten French voters say they now
9. regret the loss of the franc. Germans wonder why a 67-year-old worker from Aachen
must cough up so that an Athenian can retire early at 54 (see article). As its part of
the deal, Greece has to get its deficit below 3% of GDP by the end of 2012, including
a four-percentage-point cut this year. If by mid-March Greece is falling behind, the
euro zone can ask for further cuts. To German ears that sounds like reassuringly
harsh punishment for Greece’s fiddled accounts and profligacy.
Between extremes, uncomfortable reality lies
What is more, the fix appears to have seen off the two extremes that dismay
Europe’s leaders. One is the Eurosceptic fantasy that Greece’s travails herald the
breaking apart of the euro. That will not happen if Greece has support. The other is a
push towards further European integration—which, after the poison spread by the
Lisbon treaty, finally ratified last year, is firmly off the menu (see Charlemagne).
True, Greece will be watched closely, but if compliance counted as federalism, then
the IMF, which has overseen countless such programmes, would long ago have
brought about world government.
The trouble is that the euro-zone plan also has some grave weaknesses. The first is
that its vagueness may come to be seen as a symptom of how hard it would be to
carry out—that, say, domestic objections in France or Germany could thwart it. If so,
investors in Greek bonds may come to doubt the credibility of the rescue promise.
You can see why George Papandreou, the Greek prime minister, asked for more
precision.
The second weakness is that Greece may not be able to restructure fast enough. That
is not only because of the scale of the task. In just a few months Mr Papandreou’s
Socialist government is seeking to overturn decades of tax evasion and easy
government money. The finance minister has already seen his own staff go on
strike—and his ministry’s job is to force the programme through. There is a limit to
what Greeks will tolerate, but nobody knows where it lies. That is why the euro zone
has said it will call on the experts at the IMF to help ensure that Greece stays on
course. However Greece is a full member of the EU and the euro zone. For as long as
the main judgments are in Brussels, it will be hard to convince investors that the
Greek programme is immune from backroom favours.
Some economists favour setting up a European Monetary Fund (see article). We
would rather give the IMF overall charge, even if in Brussels this is seen as a
humiliation and in Athens the fund is viewed as an arm of the American government.
The IMF would lend credibility to Greece’s restructuring and lower the cost of
emergency borrowing: euro-zone countries would have to lend to Greece at punitive
interest rates, to deter future spendthrifts, but the fund can lend its own cash at low
rates. A credible IMF programme would also mean bond-market investors would
charge the Greeks less too. And the less it has to pay, the more restructuring Greece
can get done. The euro zone may be too proud to go to the IMF, but as any Lenten
penitent should know, pride comes before a fall.
11. Competition policy
Prosecutor, judge and jury
Feb 18th 2010
From The Economist print edition
Enforcement of competition law in Europe is unjust and must change
Illustration by David Simonds
EUROPE’S trustbusters have plenty to boast about. Over several decades the
European Commission’s competition directorate has evolved into perhaps the most
important regulator of its kind in the world. It has been rigorous in the development
of antitrust theory and an energetic enforcer of the law. While antitrust policy across
the Atlantic has veered between the activism of the Clinton administration and the
relative laissez-faire of the Bush years, it has shown consistency. More than any
other body it has upheld the principles of the single market, often incurring the wrath
of powerful member states. Yet despite its fine record, there are deep flaws in the
way the directorate operates. The priority of the new competition commissioner,
Joaquín Almunia, must be to address them.
The problems are not new, but they have been given fresh salience by the fallout
from the European Union’s case against Intel (see article). Last May the commission
fined the chipmaker a record €1.06 billion ($1.5 billion) under Article 82 (now 102) of
the European treaty, which forbids dominant firms from abusing their power. The
specific complaint against Intel, brought by its smaller rival, AMD, was that it had
bribed PC-makers to buy its own processors.
12. The sheer size of the fine had an element of grandstanding about it. But a much
bigger worry was that the commission’s trustbusters may have ignored evidence that
could have weakened their case and made Intel’s conduct look less sinister. The EU’s
ombudsman found that in the course of the commission’s investigation, it had failed
to keep a record of a meeting with a senior executive from Dell, one of Intel’s biggest
customers. Critics, whose concerns have increased with the ferocity of the sanctions
imposed, say that by acting simultaneously as investigator, prosecutor, jury and
sentencing judge, the commission is denying defendant firms the basic right to be
heard by an impartial tribunal. They are right.
The rules under which the competition directorate operates, which date back nearly
half a century, are grossly inadequate for the hugely enhanced role it plays today.
There are three main objections. The first is the conflicted role of the case teams.
These are appointed when the competition directorate decides to investigate a
complaint about abusive behaviour from a business rival, an accusation of collusion
or a merger with potentially anti-competitive consequences. The case teams
investigate, propose a verdict and argue for a particular penalty. From the outset, the
process is polluted by a prosecutorial bias. The second objection is that the accused
company is denied a fair hearing. Although it gets the chance to put forward its side
of the argument, it does so only to the case team, not to a neutral judge or hearing
officer. As things stand, the role of the hearing officer is purely procedural. The third
objection is that the final decision on culpability is taken on a vote by 27 politically
appointed commissioners, only one of whom may have attended the defendant’s
hearing.
A fair hearing, please
In no other area of law would it be thought acceptable for the outcome of such
important cases to be determined by a bunch of politicians. In America the antitrust
division of the Department of Justice has to make its arguments in open court, while
even the quasi-judicial commissioners of the Federal Trade Commission appoint a
judge to preside over hearings and publish findings. The process is long-winded and
expensive but it is an intrinsically fairer way to establish the facts.
Even if Mr Almunia procrastinates, change is coming. Europe’s Charter of
Fundamental Rights will finally be ratified next year. It is highly probable that
antitrust appeals to the European Court of Human Rights (based on the unfairness of
a process that levies huge fines but falls far short of the standards expected of the
criminal law) will succeed. Realistically, amending the treaty to remove the
commission’s role as the enforcer of competition law is a non-starter. A more modest
change would, however, improve things greatly and bring European practice closer to
America’s without importing all its excesses. That is to give the hearing officer the
power to make a factual and legal determination based on a proper examination of
the evidence; the 27 commissioners would then have to accept or reject this. The
system would still be far from perfect, but it would be a good deal more just.
14. Rethinking economics
Radical thoughts on 19th Street
Feb 18th 2010
From The Economist print edition
A higher inflation target for central banks would be a bad idea
EVEN in economics, the guardians of orthodoxy are not given to capricious changes
of mind. So when economists at the IMF question received wisdom and the fund’s
established views twice in a week, it is no small matter. Two new papers have done
exactly that. The first reversal, on inflation targets, makes less sense than the
second, on capital controls.
The initial firecracker came on February 12th, with an analysis of the lessons of the
financial crisis for macroeconomic policy, led by Olivier Blanchard, the IMF’s chief
economist. The report called for several bold innovations. The most radical of these is
that central banks should raise their inflation targets—perhaps to 4% from the
standard 2% or so.
The logic is seductive. Because inflation and interest rates were low when the crisis
hit, central banks had little room to cut rates to cushion the economic blow. Once
their policy rates were down to almost zero, the world’s big central banks had to turn
to untested tools, such as quantitative easing. Politicians had to boost enfeebled
monetary policy by loosening their budgets generously. Had inflation and interest
rates been higher, policymakers would have had more room to cut rates. That gain,
Mr Blanchard argues, might outweigh the small distortions from modestly higher
inflation, especially if countries reformed their tax systems to make them inflation-
neutral.
Were central banks starting from scratch, such a cost-benefit analysis would indeed
be the right way to set an inflation target. Even then, Mr Blanchard might be wrong.
He may be understating the costs of higher inflation. Many studies suggest that
17. Economics focus
Disciplinary measures
Feb 18th 2010
From The Economist print edition
In a guest article, Daniel Gros of the Centre for European Policy Studies
(pictured left) and Thomas Mayer of Deutsche Bank argue the case for a
European Monetary Fund
CEPS/Deutsche Bank
THE difficulties facing Greece and other European borrowers expose two big failures
of discipline at the heart of the euro zone. The first is a failure to encourage member
governments to maintain control of their finances. The second, and more overlooked,
is a failure to allow for an orderly sovereign default. To address these issues, we
propose a new euro-area institution, which we dub the European Monetary Fund
(EMF). Although the EMF could not be set up overnight, it is not too late to do so.
Past experience (with Argentina, for instance) suggests that the road to eventual
sovereign insolvency is a long one.
The EMF could be run along similar governance lines to the IMF, by having a
professional staff remote from direct political influence and a board with
representatives from euro-area countries. Just as the existing fund does, the EMF
would conduct regular and broad economic surveillance of member countries. But its
main role would be to design, monitor and fund assistance programmes for euro-area
countries in difficulties, just as the IMF does on a global scale.
Guilt payments
18. For its initial funding the EMF should be given authority to borrow in the markets with
the full and joint backing of all its member countries. Going forward, however, a
simple funding mechanism would also limit the moral hazard that potentially results
from the creation of the fund. Only those countries in breach of set limits on
governments’ debt stocks and annual deficits would have to contribute, giving them
an incentive to keep their finances in order. (Basing contributions on market
indicators of default risk does not seem appropriate since the existence of the EMF
would itself depress credit-default-swap spreads and yield differentials among the
members.)
Countries could, for instance, be charged an annual contribution of 1% of their
“excess debt”, the difference between their actual level of public debt and the limit of
60% of GDP agreed on as one of the Maastricht criteria for euro entry. A similar
charge could be levied on governments’ excess deficits, the amount exceeding the
Maastricht limit of 3% of GDP. Under these parameters the EMF would have
accumulated about €120 billion ($163 billion) over the past decade, enough to cover
the likely costs of rescuing Greece. These levies are not so big that they make it
impossible for offenders to get to grips with their finances. Under this scheme the
Greek contribution to an EMF would have been 0.65% of GDP in 2009.
Any member country could call on the funds of the EMF up to the amount it has
deposited in the past (including interest), provided its fiscal-adjustment programme
has been approved by the Eurogroup of euro-area finance ministers. Any call on EMF
funds above this amount would be possible only if the country agreed to a tailor-
made adjustment programme supervised jointly by the European Commission and
the Eurogroup, and on condition that the EMF ranked ahead of all other creditors.
The EMF’s other job would be to deal with the aftermath of a sudden withdrawal of
market funding from a euro-zone government. The strongest negotiating asset of a
big debtor is always that default cannot be contemplated because it would bring
down the financial system. Few now doubt that euro-area countries would step in and
pick up the bill were Greece’s deficit-reduction programme to fail. To eliminate the
moral hazard this presumption creates, among profligate governments and reckless
investors alike, it is crucial to create mechanisms that minimise the disruptions
caused by a default.
One simple answer is to draw on the successful experience of the Brady bonds that
were used to deal with the impaired debt of Latin American countries in the 1980s. A
default creates ripple effects throughout the financial system because all debt
instruments of a defaulting country become, at least temporarily, worthless and
illiquid. If a euro-area country loses access to market financing, the EMF could step in
and offer all holders of debt issued by the defaulting country an exchange against
new bonds issued by the EMF. The fund would require creditors to take a uniform
“haircut”, or loss, on their existing debt in order to protect taxpayers. The EMF could,
for example, tie its guarantees to the 60%-of-GDP Maastricht limit on debt, so that
creditors of a country with a debt stock of 120% of GDP would face a 50% haircut.
The losses to financial institutions would be limited and certain, reducing the risk of
contagion. The EMF would only exchange debt instruments that had been registered
with it beforehand. That would provide a strong incentive for transparency, because
20. Germany and the euro
Let the Greeks ruin themselves
Feb 18th 2010 | BERLIN
From The Economist print edition
Germany has Europe’s deepest pockets, but it does not want to pay to save
troubled euro-zone economies
Illustration by Peter Schrank
LESS than a year before the euro became the currency of 11 European countries in
January 1999, a declaration signed by 155 German-speaking economists called for an
“orderly”—ie, long—delay. The prospective euro members, they said, had not yet
reduced their debt and deficits to suit a workable monetary union; some were using
“creative accounting” to get there, and a casual attitude towards deficits would
undermine confidence in the euro’s stability.
Now the prediction is coming true, says Wim Kösters, of the Ruhr University in
Bochum and one of the original signatories. Greece, which joined the euro two years
after its inception, has concealed the dodgy state of its finances. Now it is under
attack from speculators. A default could spread panic to other deficit-plagued
economies, including those of Spain and Portugal, with scary consequences for
21. Europe’s already shaky banking system. But if Greece’s partners bail it out, defying
the euro’s founding treaty, the currency will suffer. Either way, the euro is in trouble.
This dilemma is felt especially keenly in Germany. It was a wrench to surrender the
Deutschmark, symbol of post-war recovery and economic success. On the eve of
monetary union 55% of Germans were against it, making their nation the euro zone’s
most reluctant founders. When a “rescue” is mentioned, all eyes fix on Germany,
Europe’s biggest economy and most creditworthy borrower. Germans fear that a
rescue of Greece would, in effect, extend their welfare state to the Mediterranean.
Greece’s travails put Angela Merkel, the chancellor, in an uncomfortable position.
German taxpayers are in no mood to save what they see as profligate Greeks, having
already pledged €500 billion ($682 billion) to shore up their own banks and billions
more for companies. The liberal Free Democratic Party (FDP), the junior partner in
her coalition government, is against a rescue, as are many politicians from her own
Christian Democratic Union (CDU). The Young Entrepreneurs’ Association declared
that it would be “fatal” for Germany to foot the bill for Greece’s “budget chaos”.
A domestic row over welfare makes charity for foreigners a still more awkward
subject. This month the constitutional court ruled that the government had erred in
setting benefits for the main welfare programme, called Hartz IV. It has until the end
of the year to come up with a new formula, which may cost more money. Guido
Westerwelle, the FDP leader, lamented the “late Roman decadence” of a society that
treats welfare beneficiaries more generously than workers. His outburst, in turn,
annoyed Ms Merkel. “I can’t explain to someone on Hartz IV that we can’t give him a
single cent more but that a Greek gets to retire at 63”, said Michael Fuchs, a CDU
leader in the Bundestag.
On February 11th Mrs Merkel joined other European leaders in offering Greece vague
support, while demanding concrete plans to slash its budget deficit. Since the
summit, the demands have become more concrete and talk of aid even more vague.
On February 15th finance ministers from the 16 euro-zone countries told Greece to
take additional steps to cut its budget deficit by four percentage points of GDP to
8.7% this year. A harsh austerity plan, they hope, will be enough to deter
speculators—and to reassure their voters at home that Greece is not getting off
lightly. The model is Ireland, whose brutal spending cuts restored market confidence
without aid from its European neighbours.
A bail-out, Mrs Merkel fears, would break the bargain Germany struck in accepting
the euro: that the single currency’s members would never jeopardise its stability nor
ask Germans to pay for anyone else’s mismanagement. That said, the currency union
was hardly an act of martyrdom by Germany. In the past decade its firms have
modernised and their workers have accepted miserly pay rises, boosting their
competitiveness. In a euro-less Europe, its trading partners could have erased some
of that advantage by devaluing their currencies. Instead, many of Europe’s weaker
economies failed to reform and Germany accumulated gratifyingly large current-
account surpluses. Nor has the crisis been entirely bad news. The euro has weakened
by about 10% against the dollar since the beginning of 2010. Under the
circumstances, that was not a harbinger of inflation but a welcome tonic for European
exports—especially German ones.
23. Sovereign-debt theories
Domino theory
Feb 18th 2010 | WASHINGTON, DC
From The Economist print edition
Assessing the risk that Greece’s woes herald something far worse
Satoshi Kambayashi
HOW far is it from Athens to America and which countries lie on the way? That may
sound like an esoteric geography question, but it is being asked by investors as
Greece’s debt crisis creates global jitters about the safety of sovereign debt. So far
Portugal, Ireland and Spain, the other high-deficit countries on the periphery of the
euro zone, are thought to be next in line. In most big rich economies, yields have
been stable and well below their long-term average (see chart).
But nerves are fraying elsewhere. The cost of insuring against sovereign default has
risen in 47 of the 50 countries for which these instruments exist. Dubai’s sovereign
credit-default-swap spreads soared to their highest level in a year this week, amid
concern about the terms of a debt restructuring by a state-owned conglomerate.
There is increasingly shrill commentary arguing that Greece is the start of a far
24. bigger problem. “A Greek crisis is coming to America”, blared the headline on a
recent Financial Times article by Niall Ferguson, a financial historian.
The stakes are high. A sudden loss of confidence in all sovereign debt, and especially
in American Treasuries, the world’s benchmark “risk-free” asset, would have
calamitous consequences in a still-fragile recovery. Equally, an exaggerated fear of
sovereign risk could prompt governments into premature fiscal austerity, which
might itself push the world economy back into recession.
Neither the shrill nor the sanguine arguments can be dismissed out of hand. Fiscal
pessimists point both to past experience and to the arithmetic of public debt for
evidence that sovereign-debt crises could spread far beyond Greece. The lesson of
history, as documented in a magisterial study of financial crises by Carmen Reinhart
and Ken Rogoff, is that public debt tends to soar after financial crises, rising by an
average of 86% in real terms. Sovereign defaults have often followed.
The arithmetic argument for pessimism is equally compelling. Virtually no rich
country has a “sustainable” debt position, in the narrow sense that none is running a
tight enough budget or is growing quickly enough to stop its debt burden from rising.
The worst offenders on this count are the euro area’s peripheral economies, as well
as Britain and America.
Greece stands out for the size of its debt stock, the scale of its budget deficit and the
grimness of its growth prospects given high domestic costs and an inability to
devalue. Worries about where growth will come from are the main reason why fears
have, so far, focused on the other weak members of the euro zone (although Spain
attracted decent demand for a 15-year bond sale on February 17th).
America and Britain, having their own currencies, are in a different position. But they
are not immune to concerns about growth and debt dynamics. On February 18th
Britain reported a deficit for January, a month of surplus since records began in
1993. Pessimists also fret about the sheer scale of America’s public borrowing and,
25. especially, China’s role in funding it. News that foreign demand for Treasuries fell
sharply in December and that Beijing was a big seller has fanned their concerns.
Nonsense, says the sanguine camp, whose members include Paul Krugman, a
prominent New York Times columnist. In their view, those who fear a sudden rise in
sovereign risk, particularly for America, misunderstand the reasons for the build-up
of sovereign debt and underestimate the role of Treasuries as a safe haven.
Sovereign-bond yields are low because private demand for capital is weak. And it is
likely to stay that way as Anglo-Saxon households rebuild their savings and firms
hold back from investing.
On this view, America and Britain are better compared to Japan than to Greece.
Japan’s public debt—almost 200% of GDP on a gross basis—has risen steadily in the
two decades since its asset bubble burst. It is far higher than in any Anglo-Saxon
economies. Despite several downgrades, Japan has not had a debt crisis.
It is true that Japan, as a big creditor nation, can tap into ample savings at home,
whereas America relies more on foreign investors. But the breadth of the financial
crisis across the rich world, and hence the surfeit of savings relative to investment,
means this distinction can be overdone. What is more, investors still flee to, not
from, American assets when they worry about risk. The dollar has risen by 4.8%
against the euro since the start of the year. Existing investors in American debt, such
as China, have no incentive to drive down its value with a fire sale of their holdings.
If Greece’s plight shows that investor sentiment can change quickly and Japan’s
history shows that it need not, where do other sovereigns stand? So far low yields
have vindicated the sanguine view for all but those on the very edge of the euro
zone. But there are three reasons to believe that could change.
The first lies in the strength of emerging markets. A gradual reorientation of their
economies towards domestic spending will slowly reduce the global supply of savings,
even if rich-country growth remains weak. Other things being equal, that ought to
push up the cost of capital. At the same time rapid growth means most emerging
economies’ sovereign-debt ratios, already much lower than those in the rich world,
will fall. True, rich countries can point to a far superior payment record. Over the
past 50 years sovereign defaults have been confined to the emerging world. But the
definition of what is a “safe” borrower could shift, benefiting Brazil, say, and hurting
America and Britain.
Second, the debt problems in big rich economies go well beyond the temporary
effects of the crisis. It is thanks to an ageing population and soaring health and
pension costs that America’s debt ratio will still be rising in a decade. Investors have
long shrugged off this structural deterioration. Insouciance seems less likely when
the starting point is much higher debt.
Third, the rise in interest rates that should naturally accompany an economic
recovery and increased investment demand might itself spawn a higher risk premium
on sovereign debt, especially in America. The average maturity on federal debt is less
than five years, so higher yields translate relatively quickly into bigger interest
payments, worsening the fiscal position. Richard Berner of Morgan Stanley expects
ten-year bond yields to reach 5.5% by December, up from 3.7% now.
27. Antitrust in the European Union
Unchained watchdog
Feb 18th 2010
From The Economist print edition
Businesses think Europe’s trustbusters should be kept on a tighter leash
Illustration by David Simonds
IT WAS probably with some relief that Joaquín Almunia took up his post as the
European Union’s competition commissioner earlier this month. One of his main tasks
in his previous job, as commissioner for monetary affairs, was to police the public
finances of the countries that use the euro. But he lacked any means to sanction the
fiscally lax, such as Greece. That left a mess that his successor is now struggling to
clean up.
In his new job Mr Almunia may have the opposite problem: too much power. He has
the authority to block mergers, to force companies to sell assets and to fine heavily
firms judged to have thwarted fair competition. There is only limited redress for
businesses that feel they have been punished unfairly. All this has prompted a
growing fuss about how his agency treats companies it accuses of taking part in
28. cartels or of trying to maintain monopolies by freezing out smaller rivals. The
commission, competition lawyers complain, acts as prosecutor, judge and jury.
Cases often start with a complaint, which is taken up by a “case team”. After a long
investigation the commission issues a “statement of objections”—an indictment, in
effect. Companies are then entitled to a hearing at which they can dispute the
charges. If the commission feels its case still stands up, it finds against the firm and
determines a penalty.
The previous commissioner, Neelie Kroes, boasted about the fines she raised from
miscreants, including Microsoft and Intel. Penalties have often been big enough to
dent profits, even at mammoth corporations. Companies argue, reasonably, that
there should be legal safeguards to match the punishments they face. They would
prefer a court-like process in which they could question witnesses and introduce
evidence. The issue has already stirred the Brussels bureaucracy. Before Mr
Almunia’s feet were under the desk, the commission had circulated draft proposals on
ways to tighten up its procedures when investigating cartels and anti-competitive
practices.
The soul-searching is part of the fallout from the EU’s case against Intel. The
commission fined the chipmaker a record €1.06 billion ($1.5 billion) last May for
using loyalty discounts to stop its main rival, AMD, from challenging its dominance. It
soon emerged that the trustbusters had failed to keep a record of a meeting with an
executive from Dell, a big computer-maker. For some, this oversight only confirmed
suspicions that commission staff overlook potentially exculpatory evidence.
Moreover, trustbusters are as much settlers of disputes between rival firms as
guardians of vibrant competition, and that dual role may encourage meretricious
cases. Companies are well aware that a plausible complaint to the commission can be
a way of tying rivals up in costly litigation. The EU’s trustbusters routinely proclaim
that they aim to protect competition not competitors. Yet big technology firms
acknowledge that antitrust lawsuits have become just another weapon in the battle
for markets.
Establishing the facts in such cases is far from straightforward. Loyalty discounts, for
example, can benefit consumers in that they pave the way for lower prices, but can
also make it hard for competitors to survive, which can lead to higher prices in the
long run. Judgments may turn on motive, and there are fears that prosecutors
convinced of their case may miss evidence at odds with it.
Companies complain that by the time hearings take place case teams are wedded to
their version of events, even if they hear a convincing defence. It rankles that the
commissioner, who in effect decides cases, does not always attend hearings. There is
no cross-examination of witnesses. No independent arbiter judges the merits of
opposing arguments. “It’s just a bunch of lawyers showing PowerPoint slides,” says
one firm’s legal counsel. Companies have the right to appeal against the
commission’s rulings but that can take two or three years. The courts do not retry
cases or hear new evidence. They merely assess whether a verdict was plausible, and
defer to the commission’s reasoning on anything “complex”.
Cartel cases may be more clear-cut but the calls for better safeguards are just as
loud. The EU’s trustbusters rely on amnesties to crack price-fixing rings: the first
30. Business.view
Unlikely heroes
Feb 16th 2010
From Economist.com
Can hedge funds save the world? One pundit thinks so
“HEDGE funds are fundamentally evil and there is no way to view them in any other
light. You’re a great guy, but let’s not be ridiculous!” This was the response that Jed
Emerson received from several erstwhile supporters when he circulated a draft paper
claiming that, in at least some circumstances, the activities of hedge funds could be
good for society and even for the planet.
Many people might struggle with the idea of hedge funds being a force for good,
regarding them as obsessively focused on short-term financial gain regardless of the
environmental or social consequences. And Mr Emerson makes an unlikely defender
of them, since he is as green in tooth and claw as a capitalist can be. Having first
worked organising projects for the homeless, then as one of the first “venture
philanthropists”, he made his name with a series of academic papers on what he calls
blended value—the notion that the performance of a business should be judged not
just by its profitability, but also by its impact on society and the environment.
After a stint in the philanthropic arm of Al Gore’s environmentalist money-
management firm, Generation Investment Management, in the summer of 2008 he
started working for a fund of hedge funds. This triggered a period of soul-searching
that ultimately produced his controversial new paper, “Beyond Good Versus Evil:
Hedge Fund Investing, Capital Markets and the Sustainability Challenge.”
In the financial
crisis, supposedly
risky “socially
tinged”
investments did
reasonably well
Soon after Mr Emerson entered the hedge-fund world, it collapsed spectacularly in
the financial crisis. But he noticed that supposedly risky “socially tinged”
investments, such as those in microfinance bonds, performed reasonably well,
turning in positive returns as many hedge funds lost a large chunk of their value.
31. “The financial world as defined by traditional measures of risk and return was rolled
on its head,” he says. This prompted Mr Emerson to start probing hedge funds’
investment practices, and he was surprised to discover how similar they often were
to those of a socially and environmentally driven movement known as sustainable
finance. “Not the same, mind you, but quite similar nonetheless,” he says. According
to the paper, such sustainable investing accounts for around $2.7 trillion of the $25
trillion invested in America’s capital markets. The total invested in hedge funds of
every variety in early 2009 was about $1.3 trillion.
Mr Emerson’s paper focuses only on that part of the hedge fund-world which employs
fundamental long/short strategies, which means researching the long-term prospects
of a company and either holding its shares or shorting them accordingly. He does not
explore, for example, macro strategies (which bet on, say, movements in exchange
rates), let alone “black box” trading strategies that plough through masses of data,
seeking patterns that can be exploited.
Trading according to rigorous fundamental research can often mirror sustainable
investing, which seeks to profit by taking into account social and environmental
factors, he says. Fundamental hedge funds are far more likely than other investors to
try to identify a firm’s off-balance-sheet exposures, of which a growing proportion
may be “environmental or social liabilities present in a market or company but not
explicitly accounted for in traditional numeric valuation or mainstream investor
analysis”. These types of hedge fund also tend to make relatively little use of
leverage, so they are less easily convicted than some of their hedge-fund peers of
recklessly gambling with other people’s money. Nor do they try to profit by “creating
market distortions within the very markets they are investing in”.
Even short-selling
could be socially
useful
The most interesting section of Mr Emerson’s paper is entitled “Shorting as a Social
Act?”. It has become fashionable even among mainstream capitalists to condemn the
hedge funds that, for example, shorted the shares of banks in the run up to the
meltdown in the markets in 2008. There are two sides to this coin, he points out,
since shorting can also act as a “canary in a coal mine” to warn the wider market of
impending problems and the potential for decreased future performance. Shorting
can also help stop market bubbles forming. Used judiciously, to reward attentive
investors and alert the broader market to ill-understood risks that a company faces,
shorting may indeed be seen as a positive social act, he says.
You can take the man out of the movement, but you can’t take the movement out of
the man: Mr Emerson now sees the potential for a powerful coalition of hedgies (who
short, but only rarely engage in shareholder activism) and investors with a yen for
sustainability, such as pension funds (which may press for better management or
33. The gods strike back
Feb 11th 2010
From The Economist print edition
Financial risk got ahead of the world’s ability to manage it. Matthew
Valencia (interviewed here) asks if it can be tamed again
Illustration by Tim Marrs
“THE revolutionary idea that defines the boundary between modern times and the
past is the mastery of risk: the notion that the future is more than a whim of the
gods and that men and women are not passive before nature.” So wrote Peter
Bernstein in his seminal history of risk, “Against the Gods”, published in 1996. And so
it seemed, to all but a few Cassandras, for much of the decade that followed. Finance
enjoyed a golden period, with low interest rates, low volatility and high returns. Risk
seemed to have been reduced to a permanently lower level.
This purported new paradigm hinged, in large part, on three closely linked
developments: the huge growth of derivatives; the decomposition and distribution of
credit risk through securitisation; and the formidable combination of mathematics
and computing power in risk management that had its roots in academic work of the
mid-20th century. It blossomed in the 1990s at firms such as Bankers Trust and
JPMorgan, which developed “value-at-risk” (VAR), a way for banks to calculate how
much they could expect to lose when things got really rough.
34. Suddenly it seemed possible for any financial risk to be measured to five decimal
places, and for expected returns to be adjusted accordingly. Banks hired hordes of
PhD-wielding “quants” to fine-tune ever more complex risk models. The belief took
hold that, even as profits were being boosted by larger balance sheets and greater
leverage (borrowing), risk was being capped by a technological shift.
There was something self-serving about this. The more that risk could be calibrated,
the greater the opportunity to turn debt into securities that could be sold or held in
trading books, with lower capital charges than regular loans. Regulators accepted
this, arguing that the “great moderation” had subdued macroeconomic dangers and
that securitisation had chopped up individual firms’ risks into manageable lumps. This
faith in the new, technology-driven order was reflected in the Basel 2 bank-capital
rules, which relied heavily on the banks’ internal models.
There were bumps along the way, such as the near-collapse of Long-Term Capital
Management (LTCM), a hedge fund, and the dotcom bust, but each time markets
recovered relatively quickly. Banks grew cocky. But that sense of security was
destroyed by the meltdown of 2007-09, which as much as anything was a crisis of
modern metrics-based risk management. The idea that markets can be left to police
themselves turned out to be the world’s most expensive mistake, requiring $15
trillion in capital injections and other forms of support. “It has cost a lot to learn how
little we really knew,” says a senior central banker. Another lesson was that
managing risk is as much about judgment as about numbers. Trying ever harder to
capture risk in mathematical formulae can be counterproductive if such a degree of
accuracy is intrinsically unattainable.
For now, the hubris of spurious precision has given way to humility. It turns out that
in financial markets “black swans”, or extreme events, occur much more often than
the usual probability models suggest. Worse, finance is becoming more fragile: these
days blow-ups are twice as frequent as they were before the first world war,
according to Barry Eichengreen of the University of California at Berkeley and Michael
Bordo of Rutgers University. Benoit Mandelbrot, the father of fractal theory and a
pioneer in the study of market swings, argues that finance is prone to a “wild”
randomness not usually seen in nature. In markets, “rare big changes can be more
significant than the sum of many small changes,” he says. If financial markets
followed the normal bell-shaped distribution curve, in which meltdowns are very rare,
the stockmarket crash of 1987, the interest-rate turmoil of 1992 and the 2008 crash
would each be expected only once in the lifetime of the universe.
This is changing the way many financial firms think about risk, says Greg Case, chief
executive of Aon, an insurance broker. Before the crisis they were looking at things
like pandemics, cyber-security and terrorism as possible causes of black swans. Now
they are turning to risks from within the system, and how they can become amplified
in combination.
Cheap as chips, and just as bad for you
It would, though, be simplistic to blame the crisis solely, or even mainly, on sloppy
risk managers or wild-eyed quants. Cheap money led to the wholesale underpricing
35. of risk; America ran negative real interest rates in 2002-05, even though consumer-
price inflation was quiescent. Plenty of economists disagree with the recent assertion
by Ben Bernanke, chairman of the Federal Reserve, that the crisis had more to do
with lax regulation of mortgage products than loose monetary policy.
Equally damaging were policies to promote home ownership in America using Fannie
Mae and Freddie Mac, the country’s two mortgage giants. They led the duo to binge
on securities backed by shoddily underwritten loans.
In the absence of strict limits, higher leverage followed naturally from low interest
rates. The debt of America’s financial firms ballooned relative to the overall economy
(see chart 1). At the peak of the madness, the median large bank had borrowings of
37 times its equity, meaning it could be wiped out by a loss of just 2-3% of its
assets. Borrowed money allowed investors to fake “alpha”, or above-market returns,
says Benn Steil of the Council on Foreign Relations.
The agony was compounded by the proliferation of short-term debt to support illiquid
long-term assets, much of it issued beneath the regulatory radar in highly leveraged
“shadow” banks, such as structured investment vehicles. When markets froze,
sponsoring entities, usually banks, felt morally obliged to absorb their losses.
“Reputation risk was shown to have a very real financial price,” says Doug Roeder of
the Office of the Comptroller of the Currency, an American regulator.
Everywhere you looked, moreover, incentives were misaligned. Firms deemed “too
big to fail” nestled under implicit guarantees. Sensitivity to risk was dulled by the
“Greenspan put”, a belief that America’s Federal Reserve would ride to the rescue
with lower rates and liquidity support if needed. Scrutiny of borrowers was delegated
to rating agencies, who were paid by the debt-issuers. Some products were so
complex, and the chains from borrower to end-investor so long, that thorough due
diligence was impossible. A proper understanding of a typical collateralised debt
obligation (CDO), a structured bundle of debt securities, would have required reading
30,000 pages of documentation.
36. Fees for securitisers were paid largely upfront, increasing the temptation to originate,
flog and forget. The problems with bankers’ pay went much wider, meaning that it
was much better to be an employee than a shareholder (or, eventually, a taxpayer
picking up the bail-out tab). The role of top executives’ pay has been overblown. Top
brass at Lehman Brothers and American International Group (AIG) suffered massive
losses when share prices tumbled. A recent study found that banks where chief
executives had more of their wealth tied up in the firm performed worse, not better,
than those with apparently less strong incentives. One explanation is that they took
risks they thought were in shareholders’ best interests, but were proved wrong.
Motives lower down the chain were more suspect. It was too easy for traders to cash
in on short-term gains and skirt responsibility for any time-bombs they had set
ticking.
Asymmetries wreaked havoc in the vast over-the-counter derivatives market, too,
where even large dealing firms lacked the information to determine the
consequences of others failing. Losses on contracts linked to Lehman turned out to
be modest, but nobody knew that when it collapsed in September 2008, causing
panic. Likewise, it was hard to gauge the exposures to “tail” risks built up by sellers
of swaps on CDOs such as AIG and bond insurers. These were essentially put options,
with limited upside and a low but real probability of catastrophic losses.
Another factor in the build-up of excessive risk was what Andy Haldane, head of
financial stability at the Bank of England, has described as “disaster myopia”. Like
drivers who slow down after seeing a crash but soon speed up again, investors
exercise greater caution after a disaster, but these days it takes less than a decade
to make them reckless again. Not having seen a debt-market crash since 1998,
investors piled into ever riskier securities in 2003-07 to maintain yield at a time of
low interest rates. Risk-management models reinforced this myopia by relying too
heavily on recent data samples with a narrow distribution of outcomes, especially in
subprime mortgages.
A further hazard was summed up by the assertion in 2007 by Chuck Prince, then
Citigroup’s boss, that “as long as the music is playing, you’ve got to get up and
dance.” Performance is usually judged relative to rivals or to an industry benchmark,
encouraging banks to mimic each other’s risk-taking, even if in the long run it
benefits no one. In mortgages, bad lenders drove out good ones, keeping up with
aggressive competitors for fear of losing market share. A few held back, but it was
not easy: when JPMorgan sacrificed five percentage points of return on equity in the
short run, it was lambasted by shareholders who wanted it to “catch up” with zippier-
looking rivals.
An overarching worry is that the complexity of today’s global financial network makes
occasional catastrophic failure inevitable. For example, the market for credit
derivatives galloped far ahead of its supporting infrastructure. Only now are serious
moves being made to push these contracts through central clearing-houses which
ensure that trades are properly collateralised and guarantee their completion if one
party defaults.
37. Network overload
The push to allocate capital ever more efficiently over the past 20 years created what
Till Guldimann, the father of VAR and vice-chairman of SunGard, a technology firm,
calls “capitalism on steroids”. Banks got to depend on the modelling of prices in
esoteric markets to gauge risks and became adept at gaming the rules. As a result,
capital was not being spread around as efficiently as everyone believed.
Big banks had also grown increasingly interdependent through the boom in
derivatives, computer-driven equities trading and so on. Another bond was cross-
ownership: at the start of the crisis, financial firms held big dollops of each other’s
common and hybrid equity. Such tight coupling of components increases the danger
of “non-linear” outcomes, where a small change has a big impact. “Financial markets
are not only vulnerable to black swans but have become the perfect breeding ground
for them,” says Mr Guldimann. In such a network a firm’s troubles can have an
exaggerated effect on the perceived riskiness of its trading partners. When Lehman’s
credit-default spreads rose to distressed levels, AIG’s jumped by twice what would
have been expected on its own, according to the International Monetary Fund.
Mr Haldane has suggested that these knife-edge dynamics were caused not only by
complexity but also—paradoxically—by homogeneity. Banks, insurers, hedge funds
and others bought smorgasbords of debt securities to try to reduce risk through
diversification, but the ingredients were similar: leveraged loans, American
mortgages and the like. From the individual firm’s perspective this looked sensible.
But for the system as a whole it put everyone’s eggs in the same few baskets, as
reflected in their returns (see chart 2).
Efforts are now under way to deal with these risks. The Financial Stability Board, an
international group of regulators, is trying to co-ordinate global reforms in areas such
as capital, liquidity and mechanisms for rescuing or dismantling troubled banks. Its
biggest challenge will be to make the system more resilient to the failure of giants.
39. Printing body parts
Making a bit of me
Feb 18th 2010
From The Economist print edition
A machine that prints organs is coming to market
Illustration by David Simonds
THE great hope of transplant surgeons is that they will, one day, be able to order
replacement body parts on demand. At the moment, a patient may wait months,
sometimes years, for an organ from a suitable donor. During that time his condition
may worsen. He may even die. The ability to make organs as they are needed would
not only relieve suffering but also save lives. And that possibility may be closer with
the arrival of the first commercial 3D bio-printer for manufacturing human tissue and
organs.
The new machine, which costs around $200,000, has been developed by Organovo, a
company in San Diego that specialises in regenerative medicine, and Invetech, an
engineering and automation firm in Melbourne, Australia. One of Organovo’s
founders, Gabor Forgacs of the University of Missouri, developed the prototype on
which the new 3D bio-printer is based. The first production models will soon be
40. delivered to research groups which, like Dr Forgacs’s, are studying ways to produce
tissue and organs for repair and replacement. At present much of this work is done
by hand or by adapting existing instruments and devices.
To start with, only simple tissues, such as skin, muscle and short stretches of blood
vessels, will be made, says Keith Murphy, Organovo’s chief executive, and these will
be for research purposes. Mr Murphy says, however, that the company expects that
within five years, once clinical trials are complete, the printers will produce blood
vessels for use as grafts in bypass surgery. With more research it should be possible
to produce bigger, more complex body parts. Because the machines have the ability
to make branched tubes, the technology could, for example, be used to create the
networks of blood vessels needed to sustain larger printed organs, like kidneys, livers
and hearts.
Printing history
Organovo’s 3D bio-printer works in a similar way to some rapid-prototyping machines
used in industry to make parts and mechanically functioning models. These work like
inkjet printers, but with a third dimension. Such printers deposit droplets of polymer
which fuse together to form a structure. With each pass of the printing heads, the
base on which the object is being made moves down a notch. In this way, little by
little, the object takes shape. Voids in the structure and complex shapes are
supported by printing a “scaffold” of water-soluble material. Once the object is
complete, the scaffold is washed away.
Researchers have found that something similar can be done with biological materials.
When small clusters of cells are placed next to each other they flow together, fuse
and organise themselves. Various techniques are being explored to condition the cells
to mature into functioning body parts—for example, “exercising” incipient muscles
using small machines.
Though printing organs is new, growing them from scratch on scaffolds has already
been done successfully. In 2006 Anthony Atala and his colleagues at the Wake Forest
Institute for Regenerative Medicine in North Carolina made new bladders for seven
patients. These are still working.
Dr Atala’s process starts by taking a tiny sample of tissue from the patient’s own
bladder (so that the organ that is grown from it will not be rejected by his immune
system). From this he extracts precursor cells that can go on to form the muscle on
the outside of the bladder and the specialised cells within it. When more of these
cells have been cultured in the laboratory, they are painted onto a biodegradable
bladder-shaped scaffold which is warmed to body temperature. The cells then mature
and multiply. Six to eight weeks later, the bladder is ready to be put into the patient.
The advantage of using a bioprinter is that it eliminates the need for a scaffold, so Dr
Atala, too, is experimenting with inkjet technology. The Organovo machine uses stem
cells extracted from adult bone marrow and fat as the precursors. These cells can be
coaxed into differentiating into many other types of cells by the application of
appropriate growth factors. The cells are formed into droplets 100-500 microns in
42. Lighting
Printed circuit
Feb 18th 2010
From The Economist print edition
A way to turn out lighting by the metre
Alamy
You’re history!
THE printing of body parts (see article) will probably remain a bespoke industry for
ever. Printed lighting, though, might be mass produced. That, at least, is the promise
of a technology being developed in Sweden by Ludvig Edman of Umea University and
Nathaniel Robinson of Linkoping. Dr Edman and Dr Robinson have taken a promising
technique called the organic light-emitting diode, or OLED, and tweaked it in an
ingenious way. The result is a sheet similar to wallpaper that can illuminate itself at
the flick of a switch.
An OLED is a layer of semiconducting polymer sandwiched between two conductive
layers that act as electrodes. When a current is passed between these electrodes, the
polymer gives off light. The light is created by electrons released from one electrode
layer falling into positively charged “holes” that have been generated by the
polymer’s interaction with the other layer. These holes are gaps in the polymer’s
electronic structure where an electron ought to be, but isn’t.
44. Private-sector space flight
Moon dreams
Feb 18th 2010
From The Economist print edition
The Americans may still go to the moon before the Chinese
AP
Can you direct me to reception, please?
WHEN America’s space agency, NASA, announced its spending plans in February,
some people worried that its cancellation of the Constellation moon programme had
ended any hopes of Americans returning to the Earth’s rocky satellite. The next
footprints on the lunar regolith were therefore thought likely to be Chinese. Now,
though, the private sector is arguing that the new spending plan actually makes it
more likely America will return to the moon.
The new plan encourages firms to compete to provide transport to low Earth orbit
(LEO). The budget proposes $6 billion over five years to spur the development of
commercial crew and cargo services to the international space station. This money
will be spent on “man-rating” existing rockets, such as Boeing’s Atlas V, and on
developing new spacecraft that could be launched on many different rockets. The
point of all this activity is to create healthy private-sector competition for transport to
the space station—and in doing so to drive down the cost of getting into space.
45. Eric Anderson, the boss of a space-travel company called Space Adventures, is
optimistic about the changes. They will, he says, build “railroads into space”. Space
Adventures has already sent seven people to the space station, using Russian
rockets. It would certainly benefit from a new generation of cheap launchers.
Another potential beneficiary—and advocate of private-sector transport—is Robert
Bigelow, a wealthy entrepreneur who founded a hotel chain called Budget Suites of
America. Mr Bigelow has so far spent $180m of his own money on space
development—probably more than any other individual in history. He has been
developing so-called expandable space habitats, a technology he bought from NASA
a number of years ago.
These habitats, which are folded up for launch and then inflated in space, were
designed as interplanetary vehicles for a trip to Mars, but they are also likely to be
useful general-purpose accommodation. The company already has two scaled-down
versions in orbit.
Mr Bigelow is preparing to build a space station that will offer cheap access to space
to other governments—something he believes will generate a lot of interest. The
current plan is to launch the first full-scale habitat (called Sundancer) in 2014.
Further modules will be added to this over the course of a year, and the result will be
a space station with more usable volume than the existing international one. Mr
Bigelow’s price is just under $23m per astronaut. That is about half what Russia
charges for a trip to the international station, a price that is likely to go up after the
space shuttle retires later this year. He says he will be able to offer this price by bulk-
buying launches on newly man-rated rockets. Since most of the cost of space travel
is the launch, the price might come down even more if the private sector can lower
the costs of getting into orbit.
The ultimate aim of all his investment, Mr Bigelow says, is to get to the moon. LEO is
merely his proving ground. He says that if the technology does work in orbit, the
habitats will be ideal for building bases on the moon. To go there, however, he will
have to prove that the expandable habitat does indeed work, and also generate
substantial returns on his investment in LEO, to provide the necessary cash.
If all goes well, the next target will be L1, the point 85% of the way to the moon
where the gravitational pulls of moon and Earth balance. “It’s a terrific dumping off
point,” he says. “We could transport a completed lunar base [to L1] and put it down
on the lunar surface intact.”
There are others with lunar ambitions, too. Some 20 teams are competing for the
Google Lunar X Prize, a purse of $30m that will be given to the first private mission
which lands a robot on the moon, travels across the surface and sends pictures back
to Earth. Space Adventures, meanwhile, is in discussions with almost a dozen
potential clients about a circumlunar mission, costing $100m a head.
The original Apollo project was mainly a race to prove the superiority of American
capitalism over Soviet communism. Capitalism won—but at the cost of creating, in
NASA, one of the largest bureaucracies in American history. If the United States is to
return to the moon, it needs to do so in a way that is demonstrably superior to the
first trip—for example, being led by business rather than government. Engaging in
47. Polar ice shelves
Breaking waves
Feb 18th 2010
From The Economist print edition
The coup de grace that shatters ice shelves is administered by ocean waves
IN 2008 part of the Wilkins ice shelf on the edge of the Antarctic peninsular suddenly
disintegrated. It was seen by some as a portend. If other, larger shelves—huge ice
sheets that have slipped off the land but are not floating freely on the sea—were to
break up in a similar way, their non-floating ice (which is not subject to Archimedes’s
principle that it displaces its own weight of water) would be converted into floating
ice (which is), and the sea level would rise.
The Wilkins shelf may or may not have been the victim, ultimately, of climate
change. Regardless of what weakened it, though, it was not rising temperatures that
caused the sudden break up. Peter Bromirski of the Scripps Institution of
Oceanography in San Diego thinks he knows what did: a little-studied phenomenon
called infragravity waves.
Ocean waves come in several varieties. Normal swells, known technically as gravity
waves, are created by wind pushing the surface of the sea up and gravity then
pulling it down, causing it to bounce. Gravity waves have a frequency of about once
every 30 seconds. When such swells hit the coast, however, part of their energy is
transformed into vibrations that have periods ranging from 50 to 350 seconds. These
are infragravity waves, so called because they are sub-harmonics of the original
gravity waves.
Most infragravity waves hug the coast. A few, though, break free—and such open-
ocean waves are powerful and can travel great distances. Some generated off the
coast of South America, for example, make it all the way to Antarctica.
Long-term monitoring of the vibrations induced by ocean waves in Antarctic ice
shelves is a recent phenomenon. In the past the seismometers required to do so
have not been robust enough to survive such brutal conditions. Dr Bromirski,
however, knew of a study that had deployed seismometers successfully on the Ross
ice shelf, and he was able to reanalyse the data from it.
The original analysis had detected storm-driven swell shaking the ice. Dr Bromirski’s
work showed a second signal. Waves with longer periods were also shaking the Ross
shelf—indeed, they were inducing a much larger response than the storm waves
were. Dr Bromirski and his colleagues report in Geophysical Research Letters that the
movements caused by infragravity waves were three times larger than those induced
by the swell. Moreover, although floating sea ice damped the swell, reducing its
49. Green.view
Copenhagen accounting
Feb 16th 2010
From Economist.com
What countries are currently offering on climate
SINCE the fractious negotiations that produced a last-minute “accord” at the
Copenhagen climate-change meeting last year, those in and out of government who
concern themselves with climate policy have been in a state of some befuddlement.
They wonder what it all means, how to build on it and whom to blame for its
perceived deficiencies and the troublesome circumstances of its birth. Despite this
the accord has already achieved a couple of the aims its framers intended. Neither is,
of itself, earth-shattering, far less Earth-saving. But they are worth noting, not least
for what they reveal about where climate diplomacy should be focusing.
The accord provided a way for countries to make public, if non-binding, commitments
on climate change. By the early February deadline that was set for this, some 90 of
them had done so. In the weeks since, various stalwarts of the climate-wonkery
circuit have been working out what those commitments might mean. That process is
made complex by the fact that countries can express their intentions in different
ways, and that many have provided two or more levels of commitment: a low one
that they say they will pursue regardless, and one or more higher ones that they will
try for if enough other countries are also going high.
AFP
The unsurprising bottom line of the various analyses is that even if you add up all the
high commitments, you do not get a package that keeps average warming below
50. 2°C. In an analysis provided by the Climate Scoreboard run by the Sustainability
Institute, a research group based in Vermont, adding up the more ambitious
commitments and extrapolating to 2100 gives a 90% probability that global
temperatures would be between 1.7 and 4.7°C above the pre-industrial baseline.
Given that range, the chances of being in the part below 2°C are slim. A 50-50
chance of staying the right side of two degrees would require cuts something like half
as large again.
Insufficient as they are, those high commitments remain pretty much the same as
the positions with which negotiators arrived in Copenhagen. As such, they represent
one of the accord’s modest successes. One of its purposes was to square away those
offers in the face of a total collapse of the conference: to provide a ratchet that, while
not offering progress, limited backsliding.
Another of the accord’s purposes was to provide a way for the world to move beyond
the besetting problem of the Kyoto protocol. That protocol requires developed
countries that have ratified it to reduce their emissions while imposing no such
strictures on the rest of the world, and politicians from the rich world who are critical
of Kyoto make much of this iniquity. They may be surprised, then, to learn that the
bulk of the commitments to reduced emissions in the Copenhagen accord come from
developing countries.
The effect is most striking if you look at the “low-abatement” figures—the sum of
what countries say they will do regardless of other countries’ actions. Before
Copenhagen, according to an analysis by the European Climate Foundation (ECF), a
not-for-profit organisation devoted to climate policy, these commitments added up to
an annual reduction of 3.6 billion tonnes of carbon dioxide, compared with business
as usual, by 2020. In the commitments under the accord that figure has risen to 5.0
billion tonnes, of which developing-country commitments account for 4.2 billion
tonnes. The developing world has increased its commitment by two-thirds since
Copenhagen. The developed world has cut its by about a quarter, from 1.1 billion
tonnes to 800m tonnes.
The developed-country change reflects alterations in professed policy by Russia,
Canada and a few others. The developing-country change comes mostly from the
growth and firming up of the commitments on deforestation made by Indonesia and
Brazil. One of the underappreciated aspects of Copenhagen was progress on the
question of what can be done about deforestation, which currently accounts for a bit
less than 20% of global emissions. Reducing deforestation is a comparatively cheap
way of reducing emissions, with other benefits to boot. The scope for going farther
than the current commitments, using various sorts of finance, remains high.
In increasing the amount of abatement from the 5 billion tonnes of those opening
bids to the 9.2 billion tonnes of the higher aspirations, the onus falls back on
developed countries, specifically America. If the American Senate were to pass a
climate bill that put a significant cost on carbon, and thus provided cuts of the same
size as those expected under the cap-and-trade bill which passed the House of
Representatives last year, America would be widely seen as having raised the stakes
with a commitment to a reduction of just under 2 billion tonnes of carbon dioxide. In
such a situation Europe might very well respond by increasing its own reductions by
