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Politics this week

    Oct 18th 2007

    From The Economist print edition

    Turkey's parliament voted to authorise a military incursion into northern Iraq, where many Kurdish PKK fighters are based. They have killed 20 Turkish soldiers in two weeks. Turkey's government promised that an invasion was not imminent, however. See article

    Ukraine's ―orange‖ coalition government was re-formed, following lengthy negotiations after

    the September 30th election. The likely prime minister will be Yulia Tymoshenko, who served in the job in 2005 before being sacked by her orange ally, President Viktor Yushchenko. France was crippled by transport, electricity and gas strikes, staged in protest at President Nicolas Sarkozy's plans to end the ―special regimes‖ that entrench generous pensions for these public-sector workers. Yet in contrast to 1995, when similar protests overturned an attempt to end the special regimes, the public seems to be on Mr Sarkozy's side, not the workers'. See article

    In a landmark decision the European Court of Justice ruled that a mandatory retirement age

    may not be illegal, despite laws banning age discrimination in the workplace, so long as it promotes policies in the public interest, such as lowering unemployment.

Talking peace

    After visiting Israel and the Palestinian West Bank, including Bethlehem, Condoleezza Rice, the American secretary of state, said that a conference to rekindle the Israeli-Palestinian peace process, planned for next month or December in America, stood a ―reasonable chance of success‖, despite outstanding differences. But the Palestinian leader, Mahmoud Abbas, said he would not attend the conference ―at any price‖.

    A peace agreement signed in 2005 between south Sudan and the Sudanese government of

    President Omar al-Bashir was in danger of collapsing after the southern ministers walked out of the national unity government. Mr Bashir let the Sudan People's Liberation Movement, the main southern group, reshuffle its ministers, but it refused to rejoin the government unless the north implemented its side of the agreement on issues such as troop withdrawal and boundary demarcations. See article

    The UN World Food Programme stopped distributing food in Somalia's embattled capital,

    Mogadishu, after its local head was abducted by government soldiers.

    Reporters Without Borders, a lobby group, ranked Eritrea bottom in the world for overall press

    freedom in its annual study, below North Korea. Under President Issaias Afeworki's regime four journalists have died in detention.

    The UN General Assembly elected Libya and Vietnam, along with Burkina Faso, Costa Rica and Croatia, to non-permanent seats on the Security Council. They take up the seats on January


Network call

    On a visit to Cuba, Venezuela's left-wing president, Hugo Chávez, called for the two countries to form a confederation. Mr Chávez signed economic co-operation agreements, including a plan for a $1 billion petrochemical plant in Cuba. He also carried out a telephone interview, broadcast live, with Fidel Castro, the island's ailing president.

    Canada's conservative minority government announced an ambitious programme for the new parliamentary year, including tax cuts and environmental legislation, and promised to keep


    troops in Afghanistan beyond 2009. The Liberals, the main opposition, appeared unlikely to force an early election by voting against the programme. See article

     In southern Colombia, a landslide triggered by local residents digging EPA for rumoured gold deposits in an abandoned mine killed at least 21


Opposition move

    Benazir Bhutto, twice prime minister of Pakistan, returned home after eight years in exile, to the cheers of hundreds of thousands of her supporters in the Pakistan People's Party. General Pervez Musharraf had asked her to delay her return until the Supreme Court ruled whether his re-election to a new term as president was constitutional. See article

    Manmohan Singh, India's prime minister, called George Bush to explain the difficulties he is having in implementing an agreement with America on civilian nuclear co-operation. India's Communist parties, whose support the government needs for a parliamentary majority, continue to oppose the deal. See article

    Japan and the European Union both announced new sanctions against the military regime in Myanmar, which continued to round up those accused of backing protests last month. See article

    John Howard, Australia's prime minister, called an election for November 24th, in the hope of winning a fifth term in office. Opinion polls give the main opposition Labor Party a comfortable lead. See article

    China's ruling Communist Party opened its five-yearly congress with a speech from the party leader, President Hu Jintao. Although he used the word ―democracy‖ some 60 times, he offered little hope of serious political reform. He surprised some observers by the mildness of his rebukes to Taiwan and America. See article

    In Hong Kong, Donald Tsang, the chief executive, apologised after remarks in a radio broadcast linking democracy and China's tumultuous Cultural Revolution of the 1960s and 1970s. China protested fiercely when the Dalai Lama, Tibet's exiled spiritual leader, was awarded a

    congressional medal at a ceremony in Washington, DC, attended by Mr Bush.

The last word?



Al Gore said (again) that he is not planning to run for the American presidency (again). The former Democratic vice-president was

    speaking after he won the Nobel peace prize in conjunction with the United Nations Intergovernmental Panel on Climate Change for informing the world about climate change. See article

    Rudy Giuliani's presidential campaign was endorsed by Rick Perry, the governor of Texas. The backing, from such a prominent conservative, should help Mr Giuliani, who is pro-choice, in his effort to win over the Republican rank-and-file during the primaries.

    Iowa's Republicans set January 3rd as the date for their party caucus, earlier than had been expected. The Democrats are considering the same date to hold their vote. See article

    Business this week

    Oct 18th 2007

    From The Economist print edition

    Hank Paulson, America's treasury secretary, gave his strongest warning yet that the slowdown in the housing market and concurrent crisis in the credit and mortgage markets posed a ―significant‖ risk to America's economy. Mr Paulson pointed out that the problems did not stem only from the subprime-mortgage market, and that the number of homeowners finding it difficult to make their mortgage payments in the ―prime‖ market was on the rise.

    Mr Paulson spoke soon after the Treasury prompted Citigroup, Bank of America and JPMorgan Chase to set up a fund that will buy highly rated assets from structured investment vehicles,

    which own mortgage-backed securities and have had trouble raising cash during the credit squeeze. Worth up to $100 billion (but involving no government money), the fund is designed to boost liquidity and confidence in the money markets. See article

Rocky foundations

    Underlining the woes besetting America's homebuilders, DR Horton, the biggest by sales, said

    almost half its orders had been cancelled in the three months to September 30th. Meanwhile, figures showed that the construction of new homes in September was the lowest, at an annual rate, for 14 years.

    Big banks continued to report mixed quarterly earnings. Whereas Citigroup's net income fell by

    57%, compared with a year earlier, JPMorgan Chase's net profit rose slightly thanks to revenue

    from private-equity deals, which offset $1.6 billion in write-downs on leveraged loans and collateralised-debt obligations.

    Northern Rock's share price took another battering amid anxiety about the benefit to shareholders of a potential takeover. The British bank was bailed out last month when it could not raise cash in the credit markets. Several parties are pondering a bid, including a consortium led by Sir Richard Branson's Virgin Group that includes AIG, America's biggest insurer. See article

    India's stockmarket briefly tumbled after regulators proposed restricting capital inflows from derivatives sold offshore, which would affect a sizeable chunk of foreign portfolio investment. The government blames a surge of cash from abroad for driving up the rupee. See article

A graceful exit

    Mike Turner said he would retire as chief executive of BAE Systems next August, much sooner

    than had been expected. Rumours that Mr Turner was pushed by the board of Europe's biggest defence company were denied. BAE gets around half its business in the United States, where its dealings with Saudi Arabia are being scrutinised by the Justice Department. See article


After a delay of two years caused by assembly problems, Airbus finally delivered its first A380

    super-jumbo, to Singapore Airlines. The jet was handed over at a ceremony in Toulouse, where Airbus is based. Its first commercial flight, between Singapore and Sydney, is due to take place at the end of this month.

    Boeing replaced the head of its 787 Dreamliner project. The company recently admitted that the first deliveries of the new jet will be postponed because of production snags. Oracle made a $6.7 billion offer for BEA Systems, a rival business-software company, which was

    promptly rejected by BEA's board as too low. Carl Icahn, a veteran activist investor with a stake in BEA, has been pushing for a sale. See article

    It was a busy week for Mr Icahn. Biogen, a biotechnology company based in Cambridge,

    Massachusetts, announced that it was seeking a buyer and had received expressions of interest from several parties about a possible sale. Included is a proposal, rumoured to be worth $23 billion, from Mr Icahn.

    Ericsson's share price plunged by 24% after the company issued a profit warning for the third quarter. The Swedish telecoms-equipment maker has seen sales fall because of a drop in demand for network upgrades in North America and Europe.

    Following the joint venture between SABMiller and Molson Coors, there was further talk of consolidation in the beer industry after Carlsberg and Heineken said they were considering a

    joint bid for Scottish & Newcastle, Britain's biggest brewer.

    Led Zeppelin agreed to make its lucrative back catalogue of songs available at online music

    stores. The legendary band had been one of only a handful of big acts still resisting digital sales of their work.


    Oil prices rose to record highs amid the prospect of a Turkish incursion into northern Iraq. Economists debated whether and when the seemingly ever-higher price of oil would damage the world economy. See article

    KAL's cartoon

    Oct 18th 2007

    From The Economist print edition

    Illustration by Kevin Kallaugher


The world economy

Lessons from the credit crunch

    Oct 18th 2007

    From The Economist print edition

Central banks have worked miracles for 30 years. Don't count on that continuing

    AFTER a sudden market panic, all is well. Prices dropped precipitately, but investors have come to see that the Federal Reserve, under its new chairman, will not let the economy slide. Normality has been restored.

    That was 20 years ago. Black Monday, October 19th 1987, was the day stockmarkets plunged; and Alan Greenspan, who won his central-banking spurs in that crisis, was the Fed chairman (see article). Two decades on, in the wake of this summer's subprime squeeze, stockmarkets are showing similar faith in Ben Bernanke, Mr Greenspan's successor. Despite bad news from the housing market and warnings from the treasury secretary, America's equity markets are still


    higher than they were in May. Amazingly, investors have been buying both on good news (don't worry, the economy is fine) and on bad (don't worry, the Fed will come to the rescue by cutting rates).

    But the parallel with Black Monday does not work as well as investors might hope, for two reasons. First, this financial crisis is centred on the debt markets, not equities. Debt is more dangerous and in its current securitised form much harder to isolate. Interestingly, the money markets seem more worried about how the credit crunch may end than equity investors are. Interbank rates, though they have eased, are still high: not knowing which institutions might be on the hook for subprime losses and spooked by their own exposures, banks remain wary of lending to one another. And the repricing of mortgage-backed securities looks likely to be a protracted business. The news that big American banks, prodded by the Treasury, plan to set up a ―super-conduit‖ in

    which to park instruments once valued at dozens of billions of dollars is a sign of how gummed up that market still is.

    The more important flaw in the parallel concerns the role of central banks. The Fed emerged from the crisis 20 years ago with its reputation not just unscathed but also enhanced. This time round, the central banks' faults are painfully visible.

Dodgy dentists

    Since the 1970s, the central banks' record has been remarkable. A generation ago, inflation around the world was high and variable. Now, by and large, it is low and stable. That has helped to foster steady growth. Central banks have done more than enough to justify the argument that monetary policy should be run by technicians rather than by elected politiciansan astonishing

    achievement in a democratic age. And ―technicians‖ is the right word: central banking has become an increasingly technical business, performed by leading monetary economists equipped with ever more sophisticated theories and statistical techniques. Granted, there is still a lot of art amid all the science, but if any economists have become the ―dentists‖ that John Maynard Keynes thought they should aspire to be, it is those in central banks.

    Nevertheless, as our special report in this issue argues, the past couple of months have

    demonstrated the limitations of central bankers and financial supervisors (they are not always under the same roof). This is so in at least three respects: monetary policy, economic modelling and bank supervision.

    Loose monetary policy is partly responsible for the mess the central bankers are now trying to clear up. Other factors contributed to the crunch, including rash lending, securitisation and globalisation: when American subprime loans went bad, banks in Leipzig (which had bought the stuff) and in Newcastle upon Tyne (which hadn'tsee article) were caught out. But whichever

    way you look at it, central banks kept interest rates too low for too long. That is most true of the Fed, which slashed rates between 2001 and 2003, held them at 1% for a year and then raised them in slow, predictable quarter-point steps, fuelling the housing boom. The results of that are plain to subprime borrowers facing the loss of their homes and to investors who ended up with subprime debt.

    The other two limitations are both related to central banks' and supervisors' ability to control a much-changed financial system. One has to do with asset-price bubbles. The macroeconomic models used by many central banks focus on short-term influences on inflation; they focus less on the supply of money and credit. Even when they do have the right tools, central banks have preferred to wait till bubbles have burst, before mopping up afterwards by cutting rates. The snag is that this can start off new bubbles (as it did after the dotcom bust).

Credit where it is due

    The last restriction has to do with supervision. Central bankers certainly gave warning that financial risks were being underpriced; contrary to some of their critics, they also had an eye on the off-balance-sheet entities in which banks parked their subprime assets. But they did not appreciate what the impact on the banks would be if those risky assets suddenly lost value. Like most of the people they regulated, the central bankers did not factor in the full effects of a liquidity squeeze.


    In one way addressing these shortcomings is simply a matter of learning from experience. If monetary policy was too loose, very well: central bankers will have the chance not to repeat their mistakes. Fortunately inflation, as conventionally measured, has not taken off: that inflation expectations have remained low is a sign that markets and the public still believe central banks can keep prices stable. That may become more difficult, if, say, China is truly turning into a source of inflationary rather than disinflationary pressure. But it can be done. Central banks should also think harder about what can be done to head off asset-price and credit booms before they turn into damaging and dislocating busts. One answer would be to consider extending the definition of inflation they already aim at to include property and shares. Alternativelyand perhaps more feasiblythey should be more willing to raise interest rates

    when credit growth is strong or asset prices are booming, even if consumer-price inflation is under control.

    Supervision is hardernot least because over-regulation is a danger. Despite the howls from politicians, securitisation has been a boon for the world economy. That said, central banks and supervisors surely need more information not only about what banks have on their books, but also about what they may have to stump up for if liquidity dries up. One focus should be accounting: remarkably, pricing some instruments is so complicated that banks on both sides of an intricate trade have reported profits. The new Basel 2 banking regulations will force banks to recognise liabilities that until now they have been able to hide. But the Basel rules set too much store on the setting aside of capital; at times like these, what banks need is liquidity (which Basel puts less stress on).

    No doubt central bankers will work at these shortcomings. But consider a paradox: the credit crunch has been caused by their successes as much as their failures. Low, stable inflation and strong, steady growth created an incentive for investors to go hunting for risk. The returns were tempting and with wise central bankers in charge, who could lose? Too many investors and bankers have outsourced risk measurement to the likes of Mr Greenspan and Mr Bernanke. Given the complexity of their job, that was truly irrational exuberance. If there is one lesson everybody should take away from the credit crunch it is that central bankers, no less than dentists, are only human.

    Turkey and Armenia

A resolution too far

    Oct 18th 2007

    From The Economist print edition

A congressional vote in Washington that could jeopardise Turkey's path westwards Get article background

    THE Turks are a proud, prickly people, easily offended by

    criticism. That much is clear from the row over a resolution,

    passed by a committee of the United States House of

    Representatives on October 10th, calling the slaughter of

    Armenians by Ottoman Turks in 1915 genocide. The full House

    has yet to vote on the resolution. But Turkey has reacted angrily,

    recalling its ambassador. It is talking of cutting military ties and

    even denying the Americans use of the Incirlik airbase that is vital for the supply of their troops in Iraq (see article).

    As such threats demonstrate, Turkey is not just an angry ally. It is also a vital one, with a population of 75m and the world's 19th-biggest economy. It is a strategically important hinge between Europe and Asia; it has the biggest army in NATO after America's; it forms a crucial energy corridor to the West; and it borders on such awkward places as Iran and Syria as well as Iraq. Moreover, it is a rare example in the Muslim world of a lively, secular democracy. Yet internal tensions are exacerbated when clumsy outsiders intervene.

    This year has seen a series of clashes between the army and secularists on one side and the mildly Islamist Justice and Development (AK) government led by Recep Tayyip Erdogan on the other, culminating in a big AK win in the election in July. Mr Erdogan is trying manfully to keep Turkey on the path towards membership of the European Union, even though many Europeans


    have become openly hostile. He also wants to preserve good relations with America despite renewed fighting with guerrillas of the Kurdistan Workers' Party (PKK), some based in the Kurdish region of northern Iraq. This is a bad moment for America to pick a fight over something that happened 90 years ago, before modern Turkey even existed.

    That is not to deny it is a good idea for countries to face up to their past, especially when it was as violent as that of the Ottomans in the early 20th century. Germany has been admirably open about admitting the sins of the Nazi period; Japan has been less candid. It would be good for modern, democratic Turkey to come to terms with the terrible treatment of Armenians in the first world war (as also, in later times, of other minorities, including Greeks, Alevis and Kurds). In recent years, there have been encouraging signs: a few historians' conferences, an attempt to improve relations with Armenia, growing acceptance of the Kurdish language and occasional talk of amending Article 301 of the penal code. This makes ―insulting Turkishness‖ a criminal offence and is used to shut down discussion of the Armenian genocide.

    But the adoption of a highly political resolution in America's Congress is the worst possible way to encourage more steps in the right direction. Rather, it would serve only to fan the flames of Turkish nationalism and leave liberals within Turkey who want more open debate about the past even more exposed. Those in Congress who are pushing this resolution have little interest in Turkey or even Armenia, but a lot in the wealthy Armenian-American constituents who are lobbying them. It is telling that many Turkish Armenians, and even the Patriarch of the Armenian church of Istanbul, have not welcomed the House resolution.

One blunder after another

    Recognising the damaging repercussions in Turkey as well as for Turkish-American relations, the Bush administration has been fighting to stop the resolution's passage. It has mustered all eight living former secretaries of state, both Democrat and Republican, to argue against it. This is testimony to the strategic importance of Turkey. But it also reflects the especially sensitive time. This week the Turkish parliament gave its approval for a possible cross-border military incursion into northern Iraq to root out PKK terrorists based there.

    That would be another blunder. The Turks' frustration over northern Iraq is understandable. In the past two weeks alone, some 20 Turkish soldiers have been killed by the PKK. Repeated requests to the Iraqis and local Kurdish authorities to clamp down on the group have been ignored. Yet an invasion would not only upset the most stable region of Iraq but also be unlikely to work, as even some Turkish generals recognise. It would be better for the Americans to do more to counter the PKK in northern Iraqand for Turkey to renew its earlier efforts to improve

    the lot of Kurds in its south-east.

    Keeping Turkey on its pro-Western course is vital, not just for Iraq, but for the sake of all Turks, including the country's own big Kurdish population. Recent rows have helped to turn Turkish public opinion sharply against both the European Union and the United States, a situation that countries such as Iran and Russia are all too ready to exploit. Pressure to scrap Article 301 and allow open debate in Turkey should continue. But the House resolution is not the way to do it. The Republicans and business

Fractured alliance

    Oct 18th 2007

    From The Economist print edition

American conservatives need to rediscover the charm of small government



    ONE thing the Republican Party has usually been able to depend on is the support of well-off capitalists: from Calvin Coolidge's declaration that ―the chief business of the American people is business‖ to George Bush's generous tax cuts, it has always been pretty clear to wealth-creators

    which side their bread is buttered on. No longer. With all polls predicting a Democratic sweep of House, Senate and presidency in 2008, the smart money is flowing the Democrats' way. A poll last month showed that only 37% of professionals and managers Wall Street Journal

    identify themselves as Republicans or leaning that way. A YouGov/Polimetrix poll for The

    finds that only 44% of those earning more than $150,000 plan to vote Republican. So Economist

    it is no surprisethough historically astonishingthat the Democrats' presidential candidates

    have raised substantially more than Republican ones.

    There are several obvious reasons for this. The shrill voices of religious conservatives have driven away many pragmatic Republicans who feel that banning abortion and gay marriage are not the most pressing issues confronting America. The Bush administration's incompetence, evident from Iraq to Louisiana, alienates people who know about management.

    But the most damaging factor has been the Republicans' inability to control the federal budget. By slashing taxes without cutting spending, Mr Bush turned the budget surplus of $240 billion he inherited from Bill Clinton into a deficit that bottomed out at over $400 billion, and is still running at $160 billion. Mr Clinton's free-trade record was better as well. The current crop of Democrats are less angelic: they are a protectionist bunch and they show few signs of wanting to curb big entitlement programmes. But, for the moment at least, they look better than the Republicans on spending. For instance, they have instituted ―pay-go‖ rules, which mean that any new spending

    must be fully funded; and they have stuck to them.

    Belatedly (to put it mildly), the administration has realised that it has lost the mantle of sound economic management to the Democrats. On October 3rd Mr Bush picked up his dusty veto pen, using it to cut back spending for the first time in his presidency. Astonishingly, he chose the wrong issue to wield it on: a proposal to expand a highly popular scheme that subsidised health insurance for poorer children. This from a man who had let Republican pork through by the sty-load.

Try Main Street, not Church Street

    In truth, given his record, Mr Bush's chances of looking a convincing small-government conservative are close to zero. The presidential candidates are different. Both Rudy Giuliani, the current front-runner, and John McCain have proposed promising market-oriented proposals on health care (see article). They also talk much more favourably than Democrats do about free trade and fiscal control. What is needed from themand Mitt Romney as wellis more detail.

    Taxes, trade, health care: these are subjects Main Street wants to know more about. But the religious right does not. Rather than building a pragmatic centre-right alternative to Hillary Clinton, the conservative movement is stuck with God, gays and guns. The immensely powerful ―family‖ movement is gathering this weekend in Washington—and all Republican candidates are


    dutifully attending. As long as the business of the Republican Party seems not to be business, it can hardly complain if businesspeople look elsewhere.


That other war

    Oct 18th 2007

    From The Economist print edition

Relentless pressure got the UN into Darfur. More is needed to save the south Get article background

    NOT surprisingly, Darfur has grabbed the world's attention where

    Sudan is concerned. The horrors of the past three years, with at

    least 200,000 Darfuris dead, are unspeakable. But in the longer

    run another part of Africa's largest country has suffered even

    more death and misery: Sudan's southern region. Unless strong

    diplomacy is fast brought to bear there, an even bloodier cycle of

    despair and destruction could start all over againand make it

    much harder to make a lasting peace everywhere in the country, including in Darfur.

    Mercifully, an edgy peace has prevailed in the south since 2005, when a ―comprehensive peace agreement‖, known as the CPA, ended a war between Sudan's Muslim and mainly Arab north and its black Christian and animist south that had stretched back, with the occasional truce, to independence from Britain half a century agoat a cost of some 2m lives. But that agreement is

    now hanging by a thread. A complete breakdown could make the debacle in Darfur, in Sudan's west, look modest by comparison. Saving the southern peace accord must be the priority, even while the UN and the African Union prepare for a Darfur peace conference in Libya this month. A week ago the southern peace arrangement ceased to function when the Sudan People's Liberation Movement (SPLM), which led the southerners in their long war against the northern-dominated Sudanese army, walked out of Sudan's government of national unity in Khartoum, the capital (see article). The peace agreement stipulates that the SPLM and the ruling Islamist National Congress Party, led by the country's president, Omar al-Bashir, must implement the terms of the accord together. It provides for the revenue from south Sudan's abundant oil to be shared equally between north and south, and for a referendum to be held in 2011 whereby the south, if its people so wish, can secede and become a fully independent country. Under the deal, the north promised to remove its troops from the south and to accept independent arbitration to mark the boundary between north and south.

Bashir unabashed

    The southerners say, with justice, that Mr Bashir has been trying to wriggle out of the obligations laid down in the accord, just as he has spent years breaking promises to end the conflict in Darfur. In particular, he has refused to abide by a ―final and binding‖ ruling of an independent commission on a new boundary for Abyei state, which straddles the north-south division and holds a vast dollop of Sudan's oil.

    The only way to save the north-south agreement is to apply the same relentless pressure on the government in Khartoum that obliged it to sign the deal in the first place and which has now forced Mr Bashir to accept a UN force that is expected to arrive soon in Darfur. The Americans have pushed hardest but, preoccupied by Darfur and crises farther afield, they have relaxed their guard in Sudan's south. They must urgently rally the many governments, Western and African, that have wet-nursed Sudan's north-south agreement and persuade Mr Bashir to meet his obligations over the boundary and the troop withdrawals. They should threaten to apply the same sanctions against Sudan over the south as over Darfur.

    Nobody matters more than China. The biggest consumer of Sudan's oil has belatedly started to play its part over Darfur. It is in China's interest to have a stable Sudan. In the short run, some in Beijing may gamble it would be best for their friend Mr Bashir to keep as much of Abyei and its oil as he can. That would be a huge mistake: it would risk a return to a much bigger war than the


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