The Economist

It is not so much that cheats don’t prosper, but that prosperity does not cheat

FOR the evolutionarily minded, the existence of fairness is a puzzle. What biological advantage accrues to those who behave in a trusting and co-operative way with unrelated individuals? And when those encounters are one-off events with strangers it is even harder to explain why humans do not choose to behave selfishly. The standard answer is that people are born with an innate social psychology that is calibrated to the lives of their ancestors in the small-scale societies of the Palaeolithic. Fairness, in other words, is an evolutionary hangover from a time when most human relationships were with relatives with whom one shared a genetic interest and who it was generally, therefore, pointless to cheat.

The problem with this idea is that the concept of fairness varies a lot, depending on which society it happens to come from—something that does not sit well with the idea that it is an evolved psychological tool. Another suggestion, then, is that fairness is a social construct that emerged recently in response to cultural changes such as the development of trade. It may also, some suggest, be bound up with the rise of organised religion. ...

Alan Greenspan and Ben Bernanke still do not believe monetary policy bears any blame for the crisis

THE desire to rescue a damaged reputation is a powerful motivator. That is one conclusion to draw from a new 48-page paper written for the Brookings Institution by Alan Greenspan, the 83-year-old former chairman of America’s Federal Reserve. A man once hailed as the world’s outstanding central banker is now routinely blamed for the asset bubble and subsequent collapse. This is Mr Greenspan’s attempt to set the record straight.

The crisis, he argues, stemmed from a “classic euphoric bubble” whose roots lay in the sharp global decline in nominal and real long-term interest rates in the early part of the 2000s, which fuelled an unsustainable boom in house prices. Thanks to this euphoria, banks misread the risks embedded in complex new financial instruments. Mr Greenspan reckons the best remedy is to improve the system’s capacity to absorb losses by raising banks’ capital and liquidity ratios and increasing collateral requirements for traded financial products. ...

But which one will succeed the president?

ALTHOUGH he is barred by the constitution from seeking a third term in the presidential election in May, Alvaro Uribe’s influence over Colombia will remain great. As votes were slowly tallied in an election for a new Congress on March 14th, it became clear that parties which formed part of his centre-right coalition will retain a clear majority. Who will command these legislators is less so.

The vote seemed to strengthen the claims of Juan Manuel Santos, a former defence minister who more than anyone else embodies the continuation of Mr Uribe’s “democratic security” policy. Mr Santos’s U Party (that’s U for Uribe) won 25% of the valid votes, and increased its representation in the 102-seat Senate to 28, from 20. ...

Banks’ professional advisers come under scrutiny

IF SUNSHINE really is the best disinfectant, the 2,200-page report into Lehman Brothers’ downfall by its court-appointed bankruptcy examiner may do more to clean up finance than any number of new regulations. It paints a remarkably detailed, and damning, picture of Dick Fuld, Lehman’s ex-boss, and the executives around him. Their spectacularly ill-advised strategy was to take on oodles more risk in property just as everyone else was running the other way. Risk management was risible, with risk limits raised whenever they were breached and dodgy investments excluded from stress tests.

Lehman’s former leaders are not the only ones squirming in the glare. Some of its counterparty banks get a slap on the wrist for changing the terms of their collateral demands, for instance. But the strongest criticism of those who interacted with the flailing firm is reserved for Lehman’s auditor, Ernst & Young (E&Y), for failing to “question and challenge improper or inadequate disclosures”. The main “accounting gimmick” hidden from investors, but apparently known to the auditor, was called Repo 105. This technique helped the firm flatter its numbers by temporarily moving assets off its balance-sheet at the end of each quarter. Lawyers are also in the spotlight: unable to find an American law firm to approve the transaction as a “true sale” of assets, Lehman got the nod from Linklaters in London. Both E&Y and Linklaters deny any wrongdoing. ...

There are lots of private-equity funds in Japan, but very few deals

“PRIVATE equity is the garbage can of corporate Japan,” laments the boss of one fund with more than $1 billion invested in the country. The firm wants to do more deals, but there is nothing worth buying. By the time ailing firms are willing to accept outside capital and advice, it is too late: they are on their deathbeds. “They need morticians, not doctors,” sighs the boss of another private-equity fund.

Across Tokyo it is the same refrain: private equity in Japan barely exists. “I’m in the non-profit sector,” grumbles one manager. The value of all transactions in 2009 totalled a mere $3.8 billion, according to Dealogic (see chart). For the world’s second-largest economy, it is a pittance. Permira, a major international fund, has done one deal since it came to Japan in 2005. Kohlberg Kravis Roberts (KKR), which opened a Tokyo office the same year, has the same tally. Carlyle has done numerous good deals, but on March 12th it saw a $330m investment in Willcom, a bankrupt wireless operator, wiped out in a refinancing. ...

Companies are buying lots of their own shares again

FEW expenditures are more discretionary for a firm than buying its own shares. Although companies collectively were the biggest net buyers of shares before the financial crisis, buy-backs fell by the wayside when the markets froze in 2008 and firms began clinging to any cash they did not urgently need to spend. Sooner than might have been expected, however, companies have regained confidence in their financial health.

On March 15th PepsiCo announced its intention to buy some $15 billion of its shares by June 2013, including $4.4 billion this year—the biggest repurchase programme launched since the crisis hit. Even before Pepsi’s announcement, buy-backs unveiled this year had already reached $65 billion, nearly half of 2009’s total of $137 billion, according to Citigroup. Pepsi’s scheme alone amounts to over a tenth of the entire 2009 figure. ...

Mediobanca’s grip on Generali shows the effects of cross-shareholdings

THE power of Italy’s salotto buono—meaning the “fine drawing room” of top industrialists and bankers which controlled business for decades through a complex system of cross-shareholdings—may have declined, but it still wields influence. By the end of the month Mediobanca, an investment bank which sits at the heart of the web, will use a smallish stake in Generali, Europe’s third-largest insurer, to nominate new management.

Investors have complained for more than a decade that Mediobanca exercises a disproportionate influence over Generali, which itself wields power in Italian business through an investment portfolio of stakes in dozens of big firms. From 1999-2002 Mediobanca replaced Generali’s chairman three times, in the end giving the job back to Antoine Bernheim, a Frenchman it had ousted in 1999. Mr Bernheim has since presided over a period of stability but now, at 85, he is not officially seeking another full term, though he would stay if shareholders asked him to. Mediobanca has just 13% of Generali’s shares, but that stake, plus the votes of allies, will almost certainly ensure that its list of candidates for the board prevails at the insurer’s annual general meeting next month. ...

And the gloom in Toronto

TIME was when the decision over where to put a new Canadian capital-markets regulator would have been automatic. Toronto, Canada’s most populous city and the capital of Ontario, the most populous province, has long been the country’s business and financial centre. The biggest banks are there, as is the stock exchange. Legions of lawyers, accountants and bankers flock daily to the towers surrounding King and Bay streets. And yet the Canadian government is in two minds over the home for the new authority, and may end up splitting it between several cities—partly to placate provincial regulators jealous of their purviews.

This hesitation has brought grumbles from politicians in Ontario. But it is tacit recognition that economic and political power in Canada are slowly shifting westward, and in particular to Calgary, the main business centre in Alberta, a province with a large oil and gas industry. ...

Productivity has surged in America and slumped in Europe. Neither trend can last

LIKE physical fitness or a healthy diet, productivity is a worthy goal that can require an unappetising change in habits. Producing more by working less is the key to rising living standards, but in the short term there is a tension between efficiency and jobs. America and Europe have managed this trade-off rather differently. America has gone on a diet: it has squeezed extra output from a smaller workforce and suffered a big rise in unemployment as a consequence. Europe, meanwhile, is hoping to burn off the calories in the future. It has opted to contain job losses at the cost of lower productivity. That probably means America’s recovery will be swifter. Further out, productivity trends in both continents are likely to be uniformly sluggish.

Analysis by the Conference Board, a research firm, shows just how different the recession was on either side of the Atlantic. America’s economy shrank by around 2.5% last year but hours worked fell at twice that rate, so productivity (GDP per hour) rose by 2.5%. The average drop in GDP in the 15 countries that made up the European Union before its expansion in 2004 was larger, at 4.2%. But hours worked fell less sharply than in America and, as a result, EU productivity fell by 1.1% (see table). Workers that held on to jobs in America and Europe had their hours cut by similar amounts. The reason total hours worked fell by more in America was that there were more job losses there: employment fell by 3.6% last year, compared with a 1.9% fall in the EU. ...

No crisis, says the White House, but American patience with Israel has run out

IT HAS been like a lovers’ tiff without the love—quickly tamped down but with none of the kissing and making up, and no soothing of the underlying rage. As Palestinian violence flared in Jerusalem, Barack Obama’s secretary of state, Hillary Clinton, said through gritted teeth on March 16th that Israel and America enjoyed “a close, unshakable bond”. On the same day Michael Oren, Israel’s ambassador to the United States, said he had been misquoted in a widely leaked report that he had called the quarrel the worst crisis between the allies for 35 years. And on March 17th Mr Obama himself chimed in, denying any crisis but admitting that “friends are going to disagree sometimes.”

And how. The spark was the approval by Israel’s interior ministry of 1,600 new homes in Ramat Shlomo, a Jewish suburb in East (Palestinian) Jerusalem. This coincided with a visit by Vice-President Joe Biden (above, left) and also with the eve of the “proximity talks” America had at last persuaded Mahmoud Abbas, the Palestinian leader, to enter with Binyamin (“Bibi”) Netanyahu, Israel’s prime minister (above, right). Mr Biden is known for his affection towards Israel but took the announcement as a gratuitous insult. So did Mrs Clinton, who on March 12th berated Mr Netanyahu for three-quarters of an hour on the phone. She reportedly told Mr Biden to “condemn” the announcement rather than merely “express concern”. ...

The decline of a once wildly popular idea

IN THE 1990s cap-and-trade—the idea of reducing carbon-dioxide emissions by auctioning off a set number of pollution permits, which could then be traded in a market—was the darling of the green policy circuit. A similar approach to sulphur dioxide emissions, introduced under the 1990 Clean Air Act, was credited with having helped solve acid-rain problems quickly and cheaply. And its great advantage was that it hardly looked like a tax at all, though it would bring in a lot of money.

The cap-and-trade provision expected in the climate legislation that Senators John Kerry, Joe Lieberman and Lindsey Graham have been working on, which may be unveiled shortly, will be a poor shadow of that once alluring idea. Cap-and-trade will not be the centrepiece of the legislation (as it was of last year’s House climate bill, Waxman-Markey), but is instead likely to apply only to electrical utilities, at least for the time being. Transport fuels will probably be approached with some sort of tax or fee; industrial emissions will be tackled with regulation and possibly, later on, carbon trading. The hope will be to cobble together cuts in emissions similar in scope to those foreseen under the House bill, in which the vast majority of domestic cuts in emissions came from utilities. ...

Pennsylvania’s state capital is on the brink of bankruptcy

“IT’S a long way to Heaven. It’s closer to Harrisburg,” sings Josh Ritter, a contemporary singer-songwriter. But these days Harrisburg, Pennsylvania’s picturesque state capital, home to 47,000 people, would make a poor alternative to heaven. Mainly because of a crippling $288m loan guarantee for a trouble-plagued rubbish incinerator, the city is in a hellish financial state. Its budget deficit over the next five years is projected to be $164m, including $68.7m of debt service due this year. Moody’s downgraded its bond rating last month. Some people, including Dan Miller, the city controller, are recommending that Harrisburg should seek protection in the bankruptcy courts. “It’s too late to do anything else,” he says.

Not everyone agrees. Linda Thompson, the new mayor, is adamant that the city will not file under Chapter 9 of the bankruptcy code, which allows cities to come up with a debt-repayment plan while staving off their creditors. Chapter 9 is milder than Chapter 11: the bankruptcy court cannot force a city to sell assets or impose a plan for recovery on it. Although the bankruptcy laws have been on the books since 1937, municipal bankruptcies are rare and are considered a last resort. Municipalities need state authorisation to file for Chapter 9, and 30 states prohibit doing so altogether. ...

Barack Obama’s plan to overhaul No Child Left Behind

HEALTH reform was supposed to be the crowning achievement of Barack Obama’s first year as president. Instead it has riled Republicans, alienated leftists and exhausted everyone else. However, on March 15th Mr Obama presented Congress with a plan that ought to have a greater chance of support: reforming No Child Left Behind (NCLB), America’s main federal education programme. Everyone agrees that America’s public schools are floundering, and NCLB is widely considered to have failed.

NCLB, enacted in 2002, transformed education policy. It gave the federal government a crucial role in education, forcing states to set standards and hold their schools accountable for meeting them. Schools that failed to make progress would face financial sanctions. All students were to be proficient in reading and maths by 2014. George Bush championed the law; Congress supported it wholeheartedly. ...

Jacob Zuma is facing a barrage of criticism. But he won’t give up without a battle

IN HIS new year’s address to the nation, President Jacob Zuma hailed 2010 as “the most important year in our country since 1994”. Even at the time, it seemed like hyperbole to compare the year of South Africa’s first post-apartheid elections to hosting the football World Cup. But little did Mr Zuma know how tough, at least for him, the first few months of 2010 would be. Less than a year into his presidency, he is facing calls from within his own party to step down after just one term. Some in his ruling African National Congress (ANC) say he should go by the end of the year.

Yet 2009 had ended on a high note. According to an Ipsos poll in November, 77% of South Africans said Mr Zuma was doing a good job, up from 50% seven months before, and 70% felt the government was doing well, despite a lack of progress in reducing crime, tackling corruption or creating jobs, nearly 1m of which were lost last year. But fully 71% said they would still vote for the ANC, up from an impressive 66% in the general election a year ago. ...

The annual rate of producer-price inflation in America slowed to 4.4% in February from 4.6% in January. Wholesale prices fell by 0.6% during the month of February, their biggest monthly fall in seven months, after rising by 1.4% in January. Elsewhere in the rich world, wholesale prices have not risen as much over the past year as they have in America. In the euro area, they were 1% lower in January than they were a year earlier, although they rose by 0.7% during the month. In America, the sharp decline in wholesale prices in February was due largely to a 2.9% decline in energy prices. Excluding food and energy costs, wholesale prices in America edged up by 0.1% during the month of February.

...

America’s industrial production edged up by 0.1% during February, and was 1.7% higher than a year earlier.

Inflation in the euro area fell to 0.9% in February from 1% in January. Industrial production grew by 1.4% in the year to the end of January. ...

America’s envoy to the Middle East, George Mitchell, pointedly put off a visit to Israel after senior people in Barack Obama’s administration accused Israel’s prime minister, Binyamin Netanyahu, of insulting the vice-president, Joe Biden. The Americans hoped Mr Netanyahu would let indirect talks between Israelis and Palestinians resume by rescinding his decision to allow a new spate of building in East Jerusalem, which the Palestinians see as their future capital. See article

With a fifth of the votes still to be counted after Iraq’s general election on March 7th, an electoral alliance led by the incumbent prime minister, Nuri al-Maliki, is neck-and-neck with a group led by one of his predecessors, Iyad Allawi. A Shia religious alliance that includes followers of a populist cleric, Muqtada al-Sadr, is coming third. Months of wrangling over the formation of a coalition government is likely and Mr Maliki may not retain his post. ...