Monthly Archives: January 2010

Martin Wolf is writing for the FT’s Davos blog. Here is a copy of his third entry.

Here are further glimpses of the Davos kaleidoscope.

First, my friend Moises Naim, editor of Foreign Policy, gave me a new acronym on the global recovery. It is LUV. The L is for the L-shaped recovery of the European economies. The U is for the U-shaped recovery of the US economy. The V is for the shape of the recovery of big emerging economies.

This looks depressingly right to me. In particular, the eurozone seems to have decided on an adjustment to its huge internal imbalances that is loaded entirely on the weak countries of the periphery. But the periphery cannot adjust if the core – namely, Germany – does not adjust too, by expanding demand. Neither the ECB nor the German government seems to understand this simple point, though one coalition partner – the FDP – does seem to do so. Read more

Martin’s column – “Volcker’s axe is not enough to cut banks to size” – drew many responses. Here is a selection of them:

Robert Johnson: Read more

Briefly, during the takeover bid for Cadbury by Kraft, I thought the UK might proclaim a “strategic chocolate” doctrine. Fortunately, that did not happen. Less fortunately, if history is any guide, the takeover of Cadbury is quite likely to be a flop. If so, the winners will be the shareholders of Cadbury, the advisers for both sides and those who arranged the loans. The right question, then, is not about chocolate. It is about the market in corporate control itself.

For high priests of Anglo-American capitalism, this question is heresy. They would insist that shareholders own the business and have a right to dispose of their property as they see fit. They would add that an active market in corporate control is an essential element in “shareholder value maximisation”, on which an efficient market economy rests. Yet, after financial markets have gone so spectacularly awry, the question whether companies should be left to the markets is being raised. Read more

Martin Wolf is writing for the FT’s Davos blog. Here is a copy of his second entry.

Another weird day has passed. But all days at Davos are weird. One never knows what is going on, except for the fact that, wherever one is, one would be far better off somewhere else.

The highlight of yesterday evening was the opening address of President Nicolas Sarkozy of France. The speech is so classically French as to be a caricature of itself: bombastic, high-flown and verbose, it addresses a vast range of contemporary challenges, around the grand theme of moralising and containing capitalism. Yet, I have to admit, there is much in it with which I find myself in agreement.

“Purely financial capitalism is a distortion, and we have seen the risks it involves for the world economy. But anti-capitalism is a dead end that is even worse.” Read more

From the FT:
Volcker has the measure of the banks – John Gapper
Why we should expect low growth amid debt – Carmen Reinhart and Kenneth Rogoff
An early warning system for asset bubbles – Charles Roxburgh and Susan Lund
How to make the difference between a bleak future and a bright one – Bill Gates in Davos

From elsewhere:
‘Obama sounded like a good old-fashioned mercantilist’- Economist’s View
Global financial regulatory reform falls apart – Felix Salmon
Dialing back the deflation watch – Free Exchange
A proposal for genuine financial reform – Marshall Auerback via the New America Foundation
Off with their heads – Simon Johnson via Project Syndicate
The Fed’s best man – Alan Blinder via the New York Times

By Roger E.A. Farmer

For the past nine months I have been presenting some new ideas at academic conferences where economists have been grappling with the current financial crisis. Boston, Montreal, Amsterdam, London, Cleveland, Sydney, Atlanta … Only the venues change.  The participants and the papers are always the same. Read more

Martin Wolf is writing for the FT’s Davos blog. Here is a copy of his first entry.

I spent my day being interviewed by other media organisations and preparing my Friday column. So I did not attend any sessions. I rely on the excellent reporting of my colleagues to tell me what is happening in Davos, just like all the other readers of the FT and But I have still managed to learn something from chance encounters here.

So what have I learned so far?

First, my criticism of the “Volcker rule” in banking, subject of my column this morning, is controversial. The desire of many non-bankers to cut the bankers down to size is, even here, quite noticeable. Have I gone soft on bankers? I do hope not. But this new addition to the already pressing weight of uncertainty worries me greatly.

Second, the US administration is effectively absent, though Larry Summers will be here later in the week, representing the White House. Whether this absence is because of the State of the Union, Congressional hearings (as in the case of poor Tim Geithner) or a reluctance to be seen junketing with the world’s financial and business elite, I do not know. I suspect the latter. Read more

From the FT:
Why trade war is very likely to break out this year – Michael Pettis
Lessons for the American housing market – Robert Pozen
A very small mercy – Editorial comment
Recovery at risk if contradictory forces collide – Ben Funnell
Short View: Axis of worry shifts to Asia – John Authers

From elsewhere:
The US ‘spending freeze’ in context – Free Exchange
IMF revises up its global economic forecast – IMF Direct
The myth of China’s blithe consensus- Michael Pettis
Meryvn King calls for structural overhaul to banking industry – Naked Capitalism

Ferguson illustration

Today, the people see in the financial sector not the skilful hands of erstwhile masters of the universe, but the grabbing hands of greedy ingrates. It is little wonder, then, that a desperate President Obama, battered by the voters in Massachusetts, has turned upon a group even less popular than his party. He has duly added the axe of Paul Volcker, 82-year-old former chairman of the Federal Reserve, to the regulatory scalpel offered by his Treasury secretary, Tim Geithner. Read more

By Michael Pomerleano and Andrew Sheng

As the Financial Crisis Inquiry Commission begins looking at the causes of the recent financial crisis, we need to consider that crisis is a failure of governance. Lucian Bebchuk from Harvard Law School has written extensively on the failure of private sector governance: boards that failed to make informed judgments or control the risks incurred by their institutions, self-serving management that lost control over reckless risk taking and compensation systems that invited speculation by traders. Although Sheila Bair, chair of the Federal Deposit Insurance Corporation (FDIC), has openly expressed her discontent with the governance of the banks and the FDIC is considering tying premiums to compensation, we are likely to witness the largest bonus season the industry has ever seen. Read more

From the FT:
Bernanke’s battle – Editorial comment
How to bypass populism and tackle banking – Arthur Levitt
A better way to reduce financial sector risk – Raghuram Rajan
Where the Walker Review stops short – Hugo Banziger

From elsewhere:
The second Clinton? – The Baseline Scenario
A road not taken – Economic Principals
The economic case against Bernanke – Naked Capitalism
Is the ‘Volcker rule’ more than a marketing slogan? – Realtime economic issues watch
Too interconnected to fail = too big to fail: What is in a leverage ratio? – VoxEU
The Bernanke conundrum – Paul Krugman for the New York Times

By Vernon L. Smith and Steven Gjerstad

Financial and economic collapses in 2007-2008 and 1929-1930 followed unprecedented residential mortgage credit expansions. Both generated household balance sheet crises that were transmitted to banks as asset prices collapsed against fixed debts. Industry suffered from declining expenditures on housing and durable goods, and income fell when production and employment declined.  Irving Fisher (1933) described this spiral in “The debt-deflation theory of great depressions.”

These developments impacted major categories of US expenditures. The chart shows percentage changes in expenditures on consumer non-durables and services (C), GDP, consumer durables (D), non-residential fixed investment (I), and housing (H). The change for each category is computed relative to its level at the start of the recession in Q4 2007.  Read more

As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. The last entry focuses on China, read the entries from the other countries below.

By Michael Pettis

Given the speed of its economic transformation, its sky-high bank-stock valuations, the unprecedented size of its accumulated reserves, and its much-advertised desire to change the global monetary system; it is tempting to assume that China will radically transform the world’s capital markets and financial systems with the same ruthless speed with which it has transformed export markets.

But this won’t happen.  Beijing is skeptical of arguments supporting rapid financial and monetary deregulation, and policymakers continue to measure the usefulness of the financial system mainly to the extent that it serves the needs of rapid growth in manufacturing and infrastructure. This means continued heavy-handed control of the capital allocation process and the level of interest rates, the relinquishing of which are the two key measures of real financial sector liberalisation.

China’s main impact on the global financial system will continue, for the foreseeable future, to be limited to its massive accumulation of reserves. And because the US is still the only economy large and flexible enough to accommodate the high trade surpluses that the Chinese economy relies on, it will continue to accumulate dollars. Read more

As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. Today’s entry focuses on India, check back throughout this week for entries from the other countries.

By Suhel Seth

Much has been made of India’s brisk economic march and that in the global comity of economic superpowers, India is inching towards the high table but the fact is that there are two Indias and both shall remain for a long time to come. One which still experiences the ravages of poverty and poor infrastructure while the other that sees luxury brands tempting the now-rich-and-arrived Indian. But brands in India, more than the politician ironically, have understood the power that both these Indias possess in their own unique way.

Much of what happened in 2009 in the world economy escaped India only because while one part had become dysfunctional (no de-coupling here), the other was happily untouched by the global meltdown, which is what continued to propel India’s almost 8 per cent GDP growth.

But the real story of India and the brands within is in effect the story of the quintessential Indian consumer and the DNA which remains largely unaltered. So while on the one hand, 185 Bentleys were sold in 2009 in India, the country also witnessed the launch, and then the delivery of the Nano: a $2500 car from the house of Tatas. From October, 2009 to January 2010, the Tatas have already sold more than 16,500 Nanos: in a country, which also boasts of the world’s largest two-wheeler population. Read more

As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. Today’s entry focuses on Russia, check back throughout this week for entries from the other countries.

By Anders Aslund

Uniquely Brics (Brazil, Russia, India and China) has become a political grouping after having been invented by Jim O’Neill at Goldman Sachs. In June 2009, Russia organised the first BRIC summit, but will it hold?

The emerging economies will soon account for most of the world economy. We are at a crossroads of world history, as Oswald Spengler caught in his pessimistic 1918 book Der Untergang des Abendlandes or Paul Kennedy in his 1988 book The Rise and Fall of the Great Powers.

The relative decline of the west is all too evident, but this is the victory of capitalism. Modern neoclassical growth theory suggests that with converging economic resources open capitalist economies should converge. Then, the most populous countries would become the leading economies.

But are the Brics the most relevant representation of the emerging economies? Read more

The Greek government has promised to slash its fiscal deficit from an estimated 12.7 per cent of gross domestic product last year to 3 per cent in 2012. Is it plausible that this will happen? Not very. But Greece is merely the canary in the fiscal coal mine. Other eurozone members are also under pressure to slash fiscal deficits. What might such pressure do to vulnerable members, to the eurozone and to the world economy?

Having falsified its figures for years, violating the trust of its partners, Greece is in the doghouse. Yet, even if it bears much of the blame, the task it is undertaking is huge. In particular, unlike most countries with massive fiscal deficits – the UK, for example – Greece cannot offset the impact of fiscal tightening by loosening monetary policy or depreciating its currency. Read more

As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. Today’s entry focuses on Brazil, check back throughout this week for entries from the other countries.

By Arminio Fraga

Brazil is thought to be the most western of the Brics—a democracy full of life, an open society, porous to global fads and tastes.

One feature that supports this view is that Brazil’s consumer seems to be totally American, and I mean this neither as an insult nor as compliment, even after the global economic mess we are still digesting. Brazilian households like to buy the newest gadget and prefer to spend on items that will enhance their short-term wellbeing rather than save for a rainy day. This partly explains Brazil’s low saving rate – which has fluctuated around 17 per cent of GDP over the last decade, a number that contrasts sharply with China’s 45-50 per cent.

This massive discrepancy is also driven by the difference between the social safety nets in the two nations: Brazil’s being extensive in coverage (universal health care, education and social security) and extravagant (early retirement with full pay, for example), whereas China’s is very modest. Read more

The invention of the Brics by Jim O’Neill of Goldman Sachs was a stroke of marketing genius. But does it have analytical relevance? My answer is: no and yes.

No, because the four countries have next to nothing in common, apart from the fact that none is a high-income country. Read more

By Michael Pomerleano

In Growth in a Time of Debt, presented at the AEA 2010 Annual Meetings in Atlanta ( Carmen Reinhart and Kenneth Rogoff study the link between different levels of debt and countries’ economic growth over the last two centuries. The paper reviews 200 years of economic data from 44 nations and reaches the conclusion that countries that are as highly indebted as the UK and US will, at the end of the crisis, grow at sub-par rates. While there is a discontinuity in the data (growth is affected only over a certain debt threshold) the findings are ominous. One explanation is fairly straight forward: more resources are diverted away from the private sector. Governments do not create, but consume wealth.

A second, more subtle explanation focuses on the massive transfer of private debt onto government balance sheets. The message is fairly simple. The nationalisation of private debt injects considerable inefficiency into the economic system, inhibiting Schumpeter’s process of Creative Destruction that is essential in a market economy and needed to maintain the private sector. In short, the recent massive bailouts by national authorities of their financial systems in some countries amount to nationalising private sector debt with fiscal resources. In countries without fiscal headroom and lacking reserve currencies, such as Hungary, Romania and Ukraine, the IMF jumped to the rescue with sovereign lending that has basically nationalised the losses of the private sector – what Joe Stiglitz calls ‘Ersatz Capitalism’: the privatising of gains and the socialising of losses. Read more

From the FT:
Obama demands Wall St payback – Krishna Guha
Politicians must set out their plans for the deficit – Nick Clegg
Europe cannot afford to let Greece default – Simon Tilford

From elsewhere:
Bankers without a clue – Paul Krugman for the New York Times
Should the Fed have a large role in bank regulation? – Economist’s View
Eurozone monetary policy in uncharted waters – VoxEU
The bank tax is just an increase in cost of funds – Felix Salmon
Thoughts on the bank tax – Baseline Scenario
Obama’s “get tough on banks” again tries to play the public for fools – Naked Capitalism
So what are banks for, anyway? – New Deal 2.0