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
by Eswar Prasad and Karim Foda
In the lead-up to the G20 summit in Los Cabos, the Brookings-FT Tiger index shows that this stop-and-go global recovery has stalled once again.
The engines of world growth are running out of steam while the trailing wagons are going off the rails. Emerging market economies are facing sharp slowdowns in growth while many advanced economies slip into recession.
Political fragmentation and gridlock have hurt confidence and stunted the effectiveness of macroeconomic policies. Financial markets have shed their optimism and investors are clamoring to retreat to safe havens as confidence has tumbled.
The US economy had been a relatively bright spot, although a fragile one, but growth is showing signs of slowing and employment growth has weakened even as the economy gets closer to an impending fiscal crunch. The UK and many of the eurozone economies are in or at the edge of recession. Even the once-mighty German economy seems to have lost its footing while Japan’s economy is stirring but remains mired in weak growth. Read more
Kevin P. Gallagher, Stephany Griffith-Jones, and José Antonio Ocampo
This month the International Monetary Fund (IMF) can make history. The IMF is set to officially change its view on the regulation of cross-border finance. Preliminary work released by the IMF exhibits diligent research and deep soul searching, but falls short of being a comprehensive view on how and when to regulate capital flows. There is still time for the IMF to further sharpen its view.
In recent decades cross-border capital flows have increased massively; international asset positions now outstrip global economic output. Direct investment is essential for growth but some forms of international financial flows (such as short-term debt, carry trade, and related derivatives) have proven to be usually de-stabilizing. Even long-term capital flows are highly, even increasingly pro-cyclical, as IMF research has shown. Read more
Dr Jan Fidrmuc, Department of Economics and Finance and Centre for Economic Development and Institutions, Brunel University
Anti-austerity protestors take to the streets in central Athens earlier this year. Getty Images
Following the rejection of EU imposed austerity measures by the overwhelming majority of Greek voters, eurozone finance ministers have once again come to Brussels to try and save the single currency in what is being described as a ‘crucial 48 hours’.
Two thirds of the Greek electorate voted for parties opposed to the austerity measures required by the European Commission, ECB and IMF as a precondition of a further bailout; despite the outgoing government pledging to adhere to these measures.
Without compromise either by the Greeks accepting austerity measures or the EU offering concessions on the proposed package, another election is inevitable. In this case the bailout package will be suspended, Greece will default on its debt and an exit from the eurozone may follow. None of this will offer much respite for the struggling Greek economy.
In the past the EU offered concessions to voters having rejected EU treaties, however this time there is little political will, and not only in Germany, to offer sweeteners to the Greeks to help them swallow the bitter pill of fiscal adjustment.
Why then are the Greeks fighting against the support from the EU? And should the rest of the EU let them resist or should they be offered a sweeter deal after all? Read more
Hans de Wit, Professor of Internationalisation of Higher Education, Centre for Applied Research in Economics and Management, Amsterdam University of Applied Sciences
Higher education can – and should – be a dynamo to economies. In the UK the HE ‘business’ is estimated to be worth around £59bn and employs more than 1% of the entire workforce, contributing more to GDP than the pharmaceutical and advertising industries combined. But so far its only been rankings of the top institutions which get attention – much less for how national systems of HE are doing, the environment and support they provide to fuel this potential mechanism for growth. Read more
Roger E A Farmer, Distinguished Professor and Chair, UCLA Department of Economics
The US recovery has stalled, the UK has fallen back into recession and most of Europe is mired in a debt quagmire to which there appears to be no quick exit. It is against this background that Charles Evans, president of the Federal Reserve Bank of Chicago, has come out aggressively in favor of additional Fed actions. Read more
Simon J. Evenett, Professor of International Trade and Economic Development and Academic Director of MBA programmes, University of St. Gallen, Switzerland
Christine Lagarde, IMF managing director
On the face of it, the recently agreed expansion of the IMF’s lending capacity suggests that the IMF is back in business. Since the global economic crisis began no UN or other global public agency has had their resources expanded by governments as much as the IMF. The IMF has also been at the centre of several crisis-era surveillance and reporting initiatives. So is the IMF now even better placed to better contribute to the recovery of the global economy? Maybe not. Read more
By Eswar Prasad and Karim Foda
The world economy is showing scattered signs of vigor but remains on life support, mostly provided by accommodative central banks. Concerns about spillover from a worsening of the European debt crisis and slowing growth in key emerging markets are putting a damper on consumer and business confidence. Equity markets are pulling back from a robust performance in the first quarter of this year as the sobering reality of a continued anemic recovery weakens investors’ optimism.
There are some positive signs in the latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER), but also much to worry about as the world economy continues to meander with no clear sense of direction. Read more
By Professor Simon Deakin, Director, Corporate Governance Research Programme, ESRC funded Centre for Business Research, University of Cambridge.
Long-term investment in infrastructure needs a better policy mix
George Osborne’s attempts to encourage British pension funds to invest more in infrastructure projects are to be applauded. Canadian and Australian pension funds have already invested heavily in infrastructure, but UK funds are still reluctant investors. Why?
British prime minister David Cameron tours Newton Heath rail depot. Getty images
Pension fund trustees have a fiduciary duty to get the best return for scheme members after taking due account of risk. Government cannot and should not dictate how or where and how these funds invest their assets. If government wants pension funds to engage with the long term needs of the UK economy, it must first understand the particular pressures they face as investors. Read more
By Professor Simon Deakin, director, Corporate Governance Research Programme, Centre for Business Research, University of Cambridge
John Kay’s interim report finds that equity markets are failing in their primary tasks, which he identifies as enhancing the long-term growth of listed companies and providing savers with an appropriately high, risk-adjusted return on their investments. The failure lies, he suggests, in the way that market actors are currently incentivised. If asset managers are assessed on a quarterly or biannual basis, it is not surprising that they apply benchmarks based on the short-run performance of the firms they invest in.
Corporate managers, on the other hand, believe that they have a legal duty to maximise short-term shareholder value, and act accordingly. Kay rightly suggests that this view is mistaken as a matter of law but, again, it is no surprise that directors and managers think in these terms, given the way that shareholders are routinely described as the ‘owners’ of the firms they invest in. Disclosure rules add to the problem, in particular those requiring quarterly reporting of corporate results. Lawyers will recognise that shareholders are the owners of their shares, not the company, and that they have no right to manage the firm, having delegated this power to the board, but these subtleties are clearly being lost in translation. Read more
By Kevin Gallagher
In Germany this week Brazilian president Dilma Rousseff rebuked industrialised countries for creating a “liquidity tsunami” of speculative capital that is bubbling currencies, stock and bond markets across emerging markets and the developing world. To stem the tide, her government extended a tax on speculative inflows of capital into Brazil.
A new task force report entitled Regulating Global Capital Flows for Long-Run Development, released this week, argues that regulating flows to tame the liquidity wave are justified more than ever in the wake of the global financial crisis. Countries have more flexibility to deploy such measures given the new consensus in the peer-reviewed academic literature and at the IMF that capital account regulations have been effective tools to prevent and mitigate financial crises. In this new environment Brazil, Indonesia, Taiwan, Peru, Thailand, South Korea, and many others have regulated flows.
Brazil's president Dilma Rousseff
However, the report also expresses serious concern that many countries lack the ability to regulate flows because many of the world’s economic integration clubs and trade and investment treaties have started to mandate capital account liberalisation. Read more
By Olafur Arnarson, Michael Hudson and Gunnar Tomasson
Today, from Greece to Iceland, governments are acting as enforcers or even as collection agents on behalf of the financial sector — and Iceland stands as a dress rehearsal for this power grab.
The problem of bank loans gone bad has thrown into question just what should be a “fair value” for these debt obligations. The answer will depend largely on the degree to which governments back the claims of creditors. The legal definition of how much can be squeezed out is becoming a political issue pulling national governments, the IMF, ECB and financial agencies into a conflict, pitting banks, vulture funds and debt-strapped populations against each other. Read more
By Kevin P. Gallagher
Rio de Janeiro, Brazil. AFP/Getty Images
Emerging markets have fallen victim to unstable capital flows in the wake of the financial crisis. In an attempt to mitigate the accompanying asset bubbles and exchange rate pressures that come with such volatility, a number of emerging markets resorted to capital controls. Although these actions have largely been supported by the International Monetary Fund, some policy-makers and economists have decried capital controls as protectionist measures that can cause spillovers that unduly harm other nations.
Recently-published research shows that these claims are unfounded. According to the new welfare economics of capital controls, unstable capital flows to emerging markets can be viewed as negative externalities on recipient countries. Therefore regulations on cross-border capital flows are tools to correct for market failures that can make markets work better and enhance growth, not worsen it. Read more
By Domenico Lombardi and Sarah Puritz Milsom
Following the unprecedented downgrade of the European Financial Stability Facility and nine eurozone sovereigns by Standard & Poor’s, there is a renewed impetus for the International Monetary Fund to step up its involvement in the deepening euro area crisis. In an executive board meeting earlier this week, managing director Christine Lagarde requested that the membership step up the fund’s own war chest in an effort to better equip the institution to adequately confront the growing global threat. The move follows an earlier reshuffle at the helm of the European department of the IMF, signalling that the fund has been quietly preparing itself for the gloomiest scenario in which the situation in Europe develops into a full-blown systemic crisis.
Credit: Hannelore Foerster/Bloomberg
Currently, the IMF is unable to ring-fence the euro area and contain any spillovers to the global financial system unless its global membership agrees to provide a significant boost to its resources. As it stands, the organisation has some $385bn in its forward commitment capacity, including the activation of the contingent facility — the new arrangements to borrow — that can be used “to cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of that system.” Read more
By Thomas I. Palley
In his novel, The Jungle, the American muckraking author Upton Sinclair wrote about the horrendous work and sanitary conditions in the Chicago meat packing industry of the early 20th century. It is sometimes said Sinclair aimed for the heart but hit the stomach. That is because he aimed for progressive social and economic change, but instead his work prompted the founding of the Food and Drug Administration.
The same problem of missing the target confounds current discussions of the eurozone’s problems. What the euro lacks is a government banker, not a lender of last resort as is widely claimed. Read more
By Carlo Jaeger
“The facts, ma’am, just the facts”: these words, attributed to the detective Joe Friday in the American 1950s crime series Dragnet, resonate in today’s eurozone crisis. Will anybody help Angela Merkel, German chancellor and a trained physicist with a sharp analytical mind, to get hold of the facts blurred by this misguided eurozone debate? Or must we wait for François Hollande, Socialist challenger for the French presidency, a European with hyper-sober realism, to grasp the facts his country’s president, Nicolas Sarkozy, has so far ignored? Read more