Brazil

A few years ago, countries were seeking to expand their financial sector (move toward the left in the chart) in order to accelerate economic growth. But the crisis has made states more aware of the economic and political risks associated with over-sized banks, as demonstrated by the crisis in Iceland. The crisis has also illustrated the interdependence of the world banking system and the costs of letting foreign banks fail, highlighting the importance of international regulation. The following articles discuss how best to fix finance—through national regulation or international coordination. VoxEU.org: What G20 Leaders Must Do to Fix the Financial System Economist: A Plan B for Global Finance Setser: The Shape of Things to Come VoxEU.org: Reforming the Financial System Davis: IMF Urges Global Financial Rules

Congressional hearings have focused on the question of whether credit is being extended and by whom. Our chart shows why this question matters. The black and red lines show the tight correlation between home price appreciation and mortgage credit growth. The shaded areas show, through the 3rd quarter, that the government is extending while banks and the securities market are contracting home mortgage credit. Healy: Obama Plans $275 Billion Outlay to Fight Foreclosures Ward: Obama Unveils Foreclosure Plan Paletta: Obama Offers Housing Plan Leonhardt: Focusinig on Most Afflicted Homeowners Fact Sheet: Homeowner Affordability and Stability Plan

Financial stocks plunged this week, renewing the debate over how to fix the banking system. The Treasury’s remaining $350 billion in TARP funds would be enough to buy the existing common equity of the U.S. banking system, but buying existing stock wouldn’t provide the banks with new capital. To fix the banks, the Obama administration must select from a range of options that include capital injections, asset purchases, a ‘bad bank’, or nationalization. El-Erian: We Have to Bring the Banking Sector Back To Life Economist: Inside the Banks Economist: The Spectre of Nationalisation Gapper: Nationalisation is Not a Panacea Editorial: Big and Bad

With the formation of ALBA, Unasur, IIRSA, and many others, Latin American nations are pushing towards a new era of economic, political, and social integration. But how innovative are these efforts really? Will they differ from the failed attempts of the past? I recently wrote the following article for World Politics Review on the promise and perils of the region’s integration. The Promise and Perils of South American Integration Shannon O’Neil January 12, 2009 World Politics Review In the 21st century so far, regional integration has been one of the most notable elements of South American foreign relations. Picking up speed in recent years, the continent’s heads of state have enthusiastically met in numerous summits, promising increased political, economic, social, and development cooperation. Across the spectrum, governments are expanding current integration frameworks and entering into new agreements. Expectations are no less grand. As Brazil’s President Luis Inacio "Lula" da Silva recently stated, "South America, united, will move the board game of power in the world, not for its own benefit, but for everyone’s." Read the entire article here.

The latest initiative from the Federal Reserve is aimed at the collapse in consumer lending. As our chart shows, the Fed's promised infusion is roughly equivalent in size to the financing provided by private lenders to this class of borrower in recent years. A key architect of this initiative is Timothy Geithner, whom Barack Obama has nominated as Treasury Secretary. Below we provide links to some of Geithner's recent speeches and testimony. Geithner: Liquidity Risk and the Global Economy Geithner: Systemic Risk and Financial Markets Geithner: Reducing Systemic Risk in a Dynamic Financial System Geithner: Actions by the New York Fed-Testimony before the US Senate Geithner: Restoring Market Liquidity in a Financial Crisis

G20 leaders are meeting in Washington to discuss a possible overhaul of global finance. One topic on the agenda is whether to increase the resources of the IMF, which stood at $201 billion at the end of August. However, many underrepresented emerging market countries, such as China, would be wary of such a move without a shift in the power structure. The following articles tackle the agenda of the upcoming G20 meeting. IIE: Preparing for the G-20 Summit VoxEu.org: What the G20 Should Do on November 15th Davis: Nations Strive for Unity on Financial Crisis Bergsten: Stopping a Global Meltdown Kleefrom: Eyes on the Summit

Paulo Sotero, a veteran Brazilian analyst, discusses the hopes and concerns of his country, and many Latin American states, about the economic impact of the next U.S. administration.  

The U.S. Senate passed Paulson’s $700 billion rescue plan three days after the House rejected it. The House is expected to vote again on Friday. While the political maneuvering continues, the Federal Reserve is forced to hold things together through greater easing and expansion of its liquidity provisions, but as the graph above indicates, its balance sheet is severely stretched. The articles below discuss the limited options left for the Fed. Irwin, Cho: Treasury, Fed Low on Rescue Options Hilsenrath, Solomon, Reddy: Fed, Treasury Left with Familiar Arsenal Andrews: A New Role for the Fed-Investor of Last Resort Lanman, Torres: Fed Pumps $630 Billion into Financial System Blackstone: U.S. Moves to Bolster Fed Balance Sheet

The charts above put the size of Paulson’s $700 billion rescue plan into perspective. Given that $700 billion is small relative to the total assets of all FDIC insured institutions, the design of the bailout will be at least as important as the size. Government money may have more impact if it is used to bolster banks' capital rather than to bolster their assets. The following articles capture some of the debates around the bailout plan. Samuelson: What’s the True Cost? Setser: Math on the Financial Sector Wolf: Paulson’s Plan Soros: Paulson Can’t be Allowed a Blank Cheque Gross: How Main Street Will Profit

As the graph above indicates, the markets' perception of the risk of failure increased following the bankruptcy of Lehman Brothers. The Wall Street crisis has demonstrated the need for a systematic solution rather than case-by-case bailouts. Secretary Paulson has responded with a plan to create a $700 billion fund to buy up troubled assets from banks. The articles below discuss the risks involved and propose alternative solutions. The Paulson Plan The Dodd Plan Wyplosz: Why Paulson Is (Maybe) Right (voxeu.org) Zingales: Why Paulson Is Wrong (voxeu.org) Calomiris: Matched Preferred Stock Plan Wolf: Paulson's Plan

After years of celebrating the triumph of market capitalism, many of its advocates today are troubled by the emergence of 'state capitalism', particularly in the form of sovereign wealth funds. How should liberal capitalism respond when autocracy is the highest bidder? Is autocratic ownership dangerous to economic robustness? Wolf: The Brave New World of State Capitalism Summers: Funds That Shake Capitalist Logic Ferguson: An Ottoman Warning for Indebted America Drezner: The Emergent Regime for Sovereign Wealth Funds

This opinion piece I wrote for the Washington Post lays out many of the findings and recommendations of the Council on Foreign Relations sponsored Independent Task Force on U.S.-Latin America Relations, for which I served as Director. The report has gotten some great feedback so far, and I hope will help jumpstart a new conversation within the next Administration and Congress with regard to the region.

The Task Force report co-chairs, Charlene Barshefsky and General James T. Hill, published an editorial yesterday in the Miami Herald. It lays out the main themes of the report, in particular the call to recognize that U.S.-Latin American relations is increasingly about U.S. domestic policy: May 20, 2008 Tuesday BYLINE: CHARLENE BARSHEFSKY and JAMES T. HILL, www.cfr.org The Colombia and Panama free-trade agreements are stalled in Congress. The Merida Initiative -- President Bush’s proposal to aid Mexico in the fight against drugs -- languishes on CapitolHill. Last week, the president dismissed calls for a revised policy toward Cuba, despite the leadership change there. A wave of populist backlash has produced anti-American leaders such as Hugo Chávez and Evo Morales, challenging the political landscape of the region. At the same time, Latin America is strategically, culturally, economically and politically more important to the United States than ever before. The region provides 30 percent of U.S. oil -- more than the Middle East -- and is a leading source of alternative fuels. Some 18 million Latin American migrants -- both documented and not -- now live in the United States. Latin America is one of the United States’ fastest growing regional trading partners. It is also its largest source of illegal drugs. With the hemisphere far more integrated than most appreciate, U.S.-Latin American relations demand special attention. As co-chairs of a comprehensive effort convened by the Council on Foreign Relations to address the U.S.-Latin American relationship, we assessed U.S. policy toward its Southern neighbors and suggesting a new direction for policy to reinvigorate, bolster and support the full range of interests in the region. The longstanding focus of U.S. policy toward Latin America -- trade, democracy and drugs -- no longer maximizes the interests of either partner. Rather, it is clear that our domestic and international policy agendas are deeply intertwined and that fundamental challenges for the region pose equally significant challenges for the United States. Therefore, U.S. policy priorities should be reframed around four critical areas of current concern: poverty and inequality, public security, migration and energy security. Endemic poverty, economic inequality and public insecurity limit Latin America’s growth, allow illegal activities and organized crime to flourish amid weak institutional capacity and threaten the state and democracy. Energy and migration represent not just new policy challenges but also opportunities for all countries concerned. The United States can play a positive role in the development of Latin America’s energy markets, enhancing U.S. energy security in the process, while a true reform of immigration policy would bring economic and security benefits for the United States and Latin America alike. Efforts to target the four areas must be coordinated, first and foremost, with Latin American governments themselves, multilateral institutions and civil society organizations. With this in mind, policy initiatives should focus foremost on helping to strengthen Latin America’s public institutions and economies. This means fully funding programs like the Millennium Challenge Account, pushing for increased micro and small enterprise funding from multilateral institutions and supporting homegrown efforts to reform police, judiciary and tax systems. Alongside these policies, the United States should ratify trade agreements with Colombia and Panama and work with Brazil to revive the Doha Round trade negotiations. The United States should also build on the real successes of Plan Colombia -- which strengthened the Colombian state and its ability to enforce the rule of law -- when designing new security aid for Mexico and the Central American countries. The United States should focus on what it can do from its side of the border to reduce drug use and violence. Re-envisioning policy toward Latin America means working toward a new immigration policy that provides better security, fairness and a more-realistic approach to the pressures of labor supply and demand. A new direction also includes supporting traditional and new energy source development. Finally, a new policy must include working to normalize relations with all countries in the hemisphere, including Cuba. Greater openness and exchange with friends as well as rivals will enhance U.S. leadership there. To be sure, Latin America’s future rests in the hands of its elected leaders and its people. But the United States can play a more-positive role in the region -- and better promote U.S. and Latin American interests -- by concentrating on the issues that are at the core of our mutual challenges, defining those activities in which U.S. involvement can make a difference, then fulfilling those commitments. Latin America has been on the back bench of U.S. foreign policy at a time of greatest need for all partners. American attention and capacity must be directed anew to the South, as our future is inexorably tied to theirs. Former U.S. Trade Representative Charlene Barshefsky and former Commander of U.S. Southern Command James T. Hill are chairs of a new CFR-sponsored report,U.S.-Latin America Relations: A New Direction for a New Reality.

After taking a 3 plus month maternity hiatus, I am back and will be posting regularly again. To kick things off, here is a link to a new Independent Task Force report from the Council on Foreign Relations, titled U.S.-Latin America Relations: A New Direction for a New Reality. The Council brought together 19 individuals of various interest and expertise under the chairmanship of Charlene Barshefsky and General James T. Hill. As director of the project, I can attest to the long hours of intense and at times spirited discussion among its members. The group decided that U.S. policy should focus on four critical areas: poverty and inequality, public security, migration, and energy integration. The main recommendations are the following: Poverty and Inequality: U.S. should expand targeted assistance for poverty alleviation and institution building by fully funding the Millennium Challenge Account and developing new initiatives to reach the poor regions of the larger middle income countries. These programs should reflect the priorities of Latin American governments and also involve restructuring and integrating the programs of various U.S. government bureaucracies and multilateral institutions. Alongside aid, the United States should approve pending free trade agreements with Colombia and Panama and extend trade preferences to Bolivia and Ecuador to encourage productive relations with these complex countries. Public Security: The United States should assist Latin American countries in strengthening their law enforcement and judicial systems. Only through strong institutions can criminal networks and drug traffickers be controlled in the long term. The United States should also focus more on the demand side of the drug equation, working closely with other large drug consuming nations, specifically those in the European Union. Migration: Push through a comprehensive reform in 2009. This must deal with border security, employer responsibility, some sort of regularization of the 12 million unauthorized workers here today, and a flexible guest worker program to deal with future labor demands. Energy Security: The United States should provide FDI incentives to help build energy infrastructure i the region. It should also sponsor regional and subregional working groups to forward best practices. Finally, the task force touches briefly on 4 bilateral relations. It recommends deepening U.S. relations with Brazil to promote global trade negotiations and manage energy demands; strengthening cooperation with Mexico to stop narcotics trafficking, increase U.S. investment in energy production, and reform immigration policies; using multilateral institutions to address foreign and domestic policies of Venezuela; and opening informal and formal channels of communication with Cuba, with the eventual goal of lifting the embargo.

Energy is not just an important domestic policy issue in Brazil, but has also been a key element of its foreign policy. While Brazil has an admirable mix of energy sources - including hydroelectric, natural gas, oil, and ethanol - it has struggled and continues to struggle with potential energy shortages. These limits led to energy rationing in 2001, hitting the Cardoso government hard in the polls and providing Lula with an effective campaign issue in the 2002 Presidential race. During the 1990s these energy needs spurred an active foreign policy promoting energy integration with South America. In particular, Petrobras invested heavily in Bolivia to increase its supply of natural gas. It also reached out to Argentina and others, increasing both commercial and political ties through energy interdependence. Yet now in 2007, energy-based integration is dying. Despite rhetoric to the contrary by South American leaders, the time for deepening energy ties has passed. Argentina has shut out Chile in these last few months from its gas sources, encouraging the Chilean government to look abroad. Peru has decided that it will sell any surplus gas to Mexico and the United States, rather than its local neighbors. And for Brazil, recent events in Bolivia have pushed both Petrobras and the government away from diversifying regionally. Instead, the country has turned to developing its own natural gas supplies, as well as bringing in liquid natural gas - LNG - from sources other than Latin America. This changing energy plan will likely significantly influence Brazil’s foreign policy. Brazil’s stated South-South diplomacy focus is faltering, due in no small part to the limitations in the area of energy security. These domestic economic realities are pushing the government to engage with a broader set of nations - including the United States and European nations. While currently led by Lula himself (and his March agreement with President Bush on ethanol), these economic needs will pressure the famously independent Foreign Ministry as well in the months to come. This trend bodes well for Brazil, which should be able to diversify its energy sources and provide for the future. It bodes poorly for Bolivia, as its largest energy investor and client turns outward. And it means that the studies for a regional gas pipeline spanning South America will remain just that, limiting yet again integration in the region.