By Eswar Prasad and Karim Foda
The global economic recovery remains stuck below takeoff speed, unable to achieve liftoff and facing the risk of stalling. Half-hearted fiscal austerity measures are proving to be a drag on growth and doing little to rebuild investor and consumer confidence.
Monetary policy continues to shoulder the burden of limiting downside risks and has kept financial markets buoyant even in the face of weak growth prospects.
The Brookings-FT Tiger index shows growth momentum remains weak in nearly all major advanced and emerging market economies. The best that can be said about the weak pace of economic activity is that it has bottomed out in some key economies. However, prospects of a strong cyclical pickup in growth are likely to be hampered by continued policy uncertainty and concerns about further financial market turbulence, with the simmering eurozone debt crisis once again coming close to boiling over.
European court ruled that stability mechanism was not contrary to EU law. Image by Getty
By Professor Simon Deakin
Courts don’t often try to decide the direction of economic policy. However, in effect, this is what the European Court has recently done. In its Pringle judgment the court made a number of important decisions on the legality of bail-out policies being pursued by the European Union.
It ruled that the establishment of the European Stability Mechanism – the fund through which financial assistance will in future be channelled to eurozone states facing the possibility of bankruptcy – was not contrary to EU law. By implication, the ruling also supports the recent attempts by the European Central Bank to shore up the euro by buying the government bonds of debtor states on secondary markets (that is, buying them from commercial banks that have first purchased them from governments). Read more
By Kevin P. Gallagher
Negotiators will meet in Singapore this week for yet another round of talks on a Trans-Pacific Partnership – it is the 16th time in just a few years. A TPP would bring together key Pacific-rim countries into a trading bloc that the US hopes would counter China’s growing influence in the region.
Among other sticking points, talks remain stalled because the US insists that its TPP trading partners dismantle regulations for cross-border finance. Many TPP nations will have nothing of it, and for good reason. The US stance stands on the wrong side of country experience, economic theory and guidelines issued by the International Monetary Fund. Read more
By Heleen Mees
With anger directed towards bankers and rating agencies alike, this may be a good time to remember that low interest rates, rather than faulty mortgage products, are the root cause of the financial crisis and ensuing Great Recession.
I once quipped that to understand the origins of the financial crisis and recession, one should not read Michael Lewis’s The Big Short, but economist and Nobel Laureate Arthur Lewis’s Economic Development with Unlimited Supplies of Labor instead.
The Big Short provides an entertaining account of how low-income households in the US were force-fed unaffordable subprime mortgages, for the sole purpose of adding to the fortunes of Wall Street bankers. But if less subprime mortgages had been originated in the 2000s, the bubble (and bust) in the prime US mortgage market would arguably have been more extensive than it was. Read more
By Mthuli Ncube and Michael Fairbanks
Which is more probable: Africa becomes a virtual international province of China, the main source of its sub-soil assets, and the major component of China’s strategy for its own domestic stability; or China becomes a way African nations upgrade their economies and integrate into the global value chain for manufacturing. The answer lies in the demographics of China, and what African nations decide to do next.
The greatest challenges facing China are an ageing population, gender disparity, migration to cities, rural health care and income inequality. Poverty declined from more than 60 per cent to less than 7 per cent since 1978, eradicating more poverty than in the rest of human history. That happened because of China’s “going out” into the world strategy and Africa is, arguably, the most important part of that strategy. Read more
By Catharine B. Hill
The recession continues to create challenges for higher education in the US. Appropriate responses depend on expectations for the economy in the future, and whether the shocks we have experienced are short- or longer-term trends. Moody’s US Higher Education Outlook Negative in 2013 report does little to address these issues.
The optimal response to a cyclical change is to not allow significant changes to the structure of the colleges and universities. But if a change is permanent, adjustments are warranted. Of course, it is difficult to know whether shocks are permanent or temporary – there is a tendency to assume positive shocks are permanent and negative ones temporary, leading to inappropriate policy responses when wrong. This explains some of the problems facing many colleges and universities. Read more
By Dr Miles Livingston
The legendary John Bogle, founder and former chief executive of The Vanguard Group, recently met with the US Securities and Exchange Commission to urge it to propose a rule that would require anyone providing retail investment advice to act as a fiduciary.
Mr Bogle and two other representatives of The Institute for the Fiduciary Standard argued that investment advisers at large mutual fund companies and other financial institutions often operate with conflicts of interest and do what is best for themselves rather than their shareholders. The Investment Company Act of 1940 requires that mutual funds be organised and managed in the interest of shareholders, rather than their managers or directors, but Mr Bogle pointed out that in practice, the spirit of the law is violated. Read more
By Professor Simon Deakin
Under the government’s current proposals for employment law reform, employees will be able to give up rights concerning unfair dismissal, redundancy pay, flexible working and time off for training in return for receiving shares in the company that employs them, gains on which will be exempt from capital gains tax.
It is right for the government to be encouraging worker ownership in companies; there is abundant evidence suggesting this improves labour productivity. What is completely unnecessary and counterproductive is to link this to the loss of employment protection rights. Read more
By Heleen Mees
The fourth largest bank in the Netherlands, SNS Reaal NV, finds itself in trouble. The banking and insurance group, with €134bn worth of assets on its balance sheet as of the end of June 2012, has suffered €2.3bn in losses on its foreign – mostly Spanish – property investments. SNS Reaal’s capital reserves have fallen below levels allowed under international banking rules, while it still owes the Dutch treasury €750m from a government bailout it received in 2008.
SNS Reaal has been designated a systematically important financial institution, and therefore deemed not allowed to fail, by the Dutch government, mostly because the Dutch financial sector is already overly concentrated. That is also the reason why the European Commission in January apparently thwarted a rescue plan in which Rabobank, ING and ABN Amro would buy SNS Reaal. Read more
Latest US spending programme could tip country into a recession. Getty Images
By John H. Makin and Daniel Hanson
An abrupt spending sequester at a rate of about $110bn per year ($1.1tn over 10 years) scheduled to begin March 1 could cause a US recession, coming as it does on top of tax increases worth about 1.5 per cent of GDP enacted in January. The April deadline for a continuing resolution to fund federal spending could lead to a fight that shuts down the government, placing a further drag on growth.
These ad hoc measures, aimed at creation of an artificial crisis, will fail to produce prompt, sustainable progress towards reduction of “unsustainable” deficits because deficits have been, and will continue to be for some time, eminently sustainable. The Chicken Little “sky is falling” approach to frightening Congress into significant deficit reduction has failed because the sky has not fallen. Interest rates have not soared as promised and, in fact, interest costs for the federal government have remained steady at a tiny 1.5 per cent of gross domestic product since 2002, having fallen to that level from a 3 per cent average during the decade prior to 1997. Read more
The collpse of Lehman was similiar to a stroke causing neuronal hubs to die. Getty Images
By James Park
With the start of QE3 and indefinite bond buying by the Fed, the financial crisis continues to morph. This idea was promulgated by El-Erian of Pimco who claims that a crisis of bank balance sheets may evolve into a crisis of sovereign balance sheets.
We already see an outline of what a sovereign balance sheet crisis may look like in Greece. Previously, we discussed the metaphor of septic shock and the need for emergent resuscitation with liquidity as a temporary salve, as covered in the first piece – Of Lasix and liquidity. In the last of this three-part series, we look at how a complement metaphor in the form of epileptic activity may forewarn and outline steps to minimize the chances or aftermath of the next possible financial convulsion. Read more
By Heleen Mees
There is a fierce debate over the origins of the disappointing economic growth seen in advanced economies. On one side there is former world chess champion and political activist Garry Kasparov and internet entrepreneur Peter Thiel, while on the other, there is Kenneth Rogoff, a Harvard economist.
Mr Rogoff, who authored This Time is Different: Eight Centuries of Financial Folly (2009) with Carmen Reinhart, argues that the systemic financial crisis is the root cause of the prolonged economic slump in the western world. In their research, Mr Rogoff and Ms Reinhart found economic growth following a systemic financial crisis to be about a full percentage point below trend growth.
Mr Kasparov and Mr Thiel, on the other side, disavow Mr Rogoff’s claim that the collapse of advanced-country growth is the result of the financial crisis. In their view, the flailing western economies reflect stagnating technological development and innovation, and without radical changes in innovation policy, advanced economies are unlikely to see any prolonged pickup in productivity growth. Read more
Last week both the ECB’s governing council and the Fed’s rate setting committee FOMC convened. Since the problems in the eurozone are of a different nature than those in the United States, there is no reason for the ECB and the Fed to employ the same instruments. Read more
The Federal Reserve has now openly adopted a two percent inflation target, with both Chairman Bernanke and the Federal Open Market Committee publicly committing to holding inflation at that level. Though not a problem today, this two per cent target represents a policy trap that will undercut the possibility of future wage increases despite on-going productivity growth. That promises to aggravate existing problems of income inequality and demand shortage. Read more
Last year’s Occupy movement has influenced public opinion of the World Trade Organisation (WTO) for the worse, but as Russia’s imminent accession shows, the WTO remains a firm force for global economic good.
Russia’s accession in August represents a remarkable achievement in the country’s economic development and a significant opportunity for exporters and investors around the world. Changes brought by conformity to WTO rules will move the Russian economy toward an open trade and investment model of economic growth, shedding its old system of inefficient import-substitution and heavily subsidized industrialization. The World Bank estimates that Russia will gain between $53 and $177bn per year because of WTO membership, reducing poverty and raising the living standards of millions. Read more
Andrew Adonis on John Kay’s review of the UK equity markets and long-term decision-making
John Kay’s review of “long-termism” in UK plc is elegant but short of beef.
The critique enlarged my vocabulary and understanding of recent corporate disasters. “Some of those we interviewed attributed almost magical powers to ‘the market’,” writes Professor Kay. “Anthropomorphisation of ‘the market’ in phrases such as ‘markets think’ or ‘the view of the market’ is common usage. It should hardly need saying that the market does not think.”
But the recommendations are underwhelming.
Of the 17 proposals, only four have much by way of substance.
Kay argues convincingly that there are far too many mergers and takeovers as a result of the “financialisation” (another new word to me) of UK plc. So what should be done? Read more
There’s a developing consensus on the need to expand public investment in theUK. Private sector expenditure is depressed in the aftermath of the financial crisis of 2008. The prospects of export growth were never strong, and have been damaged by the problems in the eurozone. The UK prime minister and the CBI have joined Paul Krugman, Jonathan Portes, Martin Wolf and others in seeking a good old-fashioned stimulus from public investment to fill the gap.
However, the PM seems keen that the public investment should be privately financed (“the upfront investment in infrastructure should be ripe for a non-governmental approach” was one of the less ringing phrases in his March speech), and the CBI is reported to be lobbying ministers to underwrite the private funding of public infrastructure projects. Read more
Kevin P. Gallagher
The development process can quickly unravel when a herd of speculative investors steers into a country. Brazil boldly attempted to regulate such speculation in 2010 and 2011. Their efforts were a modest success, but developing countries can’t bear the full burden of regulating cross-border capital flows.
“Hot money” in the form of short-term debt, currency trading, stock market, real estate speculation, all stampeded into emerging market developing countries in 2010 and 2011. Low interest rates in the developed world and higher rates in emerging markets triggered such financial flows. The fact that developing countries were growing faster than crisis-plagued industrial nations played a role as well. Via the carry trade, investors borrow dollars and buy Brazilian real. Then they short the dollar and go long on the real. Depend on the leverage factor an investor can make, well, a killing. Read more
By Eric Lonergan
Despite running a large budget deficit in each of the past three years, the net debt of the UK government has barely risen.
The distinction between gross and net debt is central to any consideration of a government’s solvency. Gross debt usually refers to the total stock of current non-contingent financial liabilities of government, principally bonds outstanding, and net debt subtracts liquid financial assets held by government departments, such as foreign exchange reserves or holdings of government bonds.
Net debt is the basis for any calculation of fiscal solvency, as long as the assets held by government are highly liquid. If departments within the government hold gilts, it makes sense to net them off the stock of debt, because the government is making interest and principal payments to itself. Read more
Stephany Griffith-Jones and Matthias Kollatz-Ahnen
Strategies to overcome the European crisis only focused on collective austerity are not working; they are bad arithmetic, worse economics and ignore the lessons of history. A key missing ingredient is the urgent restoration of growth, which European citizens demand and several leaders are increasingly stressing. However, meaningful actions on a sufficient scale have not yet been taken. Read more