By Jon Danielsson

Iceland’s president refused last month to sign a parliamentary bill authorising settlement of the Icesave dispute with the UK and the Netherlands. This does not mean a rejection of his country’s obligations. On the contrary, Icelanders have already agreed to compensate the UK and Netherlands. The decision by President Grímsson stems instead from the fact that over 70 per cent of Icelanders find the terms of the current deal unreasonable. Continue reading "Icesave: A potential solution?"

From the FT:
A good stimulus should put cash in poor pockets - Roger Altman
Europe needs to show it has a crisis endgame - Wolfgang Munchau
How to make a bank raise equity - Oliver Hart and Luigi Zingales
China’s metropoli bubble fear - Izabella Kasminska, FT Alphaville

From elsewhere:
Europe risks another global depression - Simon Johnson, The Baseline Scenario
Citi reinvents end-of-the-world insurance - Felix Salmon
Monetary policy: What’s the real worry? - Free Exchange blog, The Economist
The mystery of Chinese savings - Shang-Jin Wei, Vox

From the FT:
Britain has been hit harder than you think - Samuel Brittan
Warning to Toyota: speeding can kill - Editorial comment
India: Potholes in the road - James Lamont
The race is on for Greece before the ECB exits - Gillian Tett

From elsewhere:
Chanos bullish on Cisco, bearish on China, Greece - CNBC video
Goldman Sachs and the Republicans - Simon Johnson, The Baseline Scenario
Mystery men of the financial crisis - William D Cohan, Opinionator

By James Park

In October 2008, the flow of money stopped. As Lehman Brothers teetered on bankruptcy, the US financial system went into septic shock - from toxic assets representing worthless derivatives and collateralised debt obligations. To capture the gravity of the situation, the media latched onto metaphors.  Warren Buffett called that October the economic equivalent of a Pearl Harbor.

While Buffet’s martial analogy serves to highlight the fall in the inter-institutional lending, a more apropos analogy is that the financial system found itself in the intensive care unit with the diagnosis of septic shock.

Continue reading "The financial crisis: Of Lasix and liquidity"

From the FT:
Another housing market bubble? - Simone Baribeau, Money Supply
It is the poor that pay for the weak renminbi - Arvind Subramanian
Greeks in bondage - Editorial comment

From elsewhere:
Can Greece avoid the lions? - Kenneth Rogoff, Project Syndicate
Torry fiscal policy: The axeman reconsidereth - Bagehot’s Notebook

By Michael Pomerleano

The Basel II accord has done more harm than good for stability. In a previous post last month on the failure of financial regulation, I pointed out that Basel II has glaring deficiencies that virtually provide a navigational map to creating off-balance sheet instruments.

The regulatory incentives regarding capital requirements in Basel II contributed to the subprime crisis. It gave banks incentives to:

• “originate and distribute” as opposed to originate and hold
• securitise every asset and buy it back without changing the credit risk profile
• use credit default swaps to reduce capital requirements even further
• stuff toxic securities into structured investment vehicles       

Continue reading "The Basel II concept leads to a false sense of security"

From the FT:
Medicine for Europe’s sinking south - Nouriel Roubini and Arnab Das
Why ‘too big to fail’ insurance is the world of all worlds - John Kay
Toyota: sorry is the hardest word to say - Dan Bogler
Central bank DeathMatch - Neil Hume, FT Alphaville

From elsewhere:
Are sovereign wealth fund investments politically motivated? -Roland Avendano and Javier Santiso, Vox
Deflation - Economist’s View
How China won and Russia lost - Paul R Gregory amd Kate Zhou, Hoover Institute
Never short of country with $2 trillion in reserves? - Michael Pettis, China Financial Markets

So what did I make of this year’s annual meeting of the World Economic Forum at Davos? It felt like sitting at the bedside of somebody who had survived a heart attack but was unsure how long it would take to recover full vigour, if, indeed, he would at all. The mood of “Davos men” (yes, they mostly still are) was, as my colleague, Gideon Rachman, has pointed out, one of anxiety. Meanwhile, the participants in a still predominantly western meeting looked at the youthful vigour of emerging economies with admiration, envy and even fear.

For me, the highlight of the programme was the economic outlook session on Saturday.* This is not only because I was moderator. The starting point for the discussion was an obvious one: the policy interventions of late 2008 and 2009 have been a resounding success. The outcome has been a far briefer and shallower recession than most participants imagined a year ago. That is obvious from the successive consensus of forecasts for 2010. For almost every significant economy, the forecast for growth this year is higher than it was a year or even six months ago (see charts). The world economy survived the heart attack in the financial system.

The remainder of this article can be read here. Please post comments below.