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
By Eswar Prasad and Karim Foda
The global economic recovery is on the ropes, battered by political conflicts within and across countries, lack of decisive policy actions, and governments’ inability to tackle deep-seated problems such as unsustainable public finances that are stifling growth. Growth in global trade has weakened and the spectre of currency wars, with countries looking to maintain export competitiveness by keeping their currencies weak, has returned to the fore.
The Brookings-FT Tiger index shows growth momentum has dissipated in nearly all major advanced and emerging market economies. Central banks of the major advanced economies have responded with a range of conventional and unconventional policy monetary policy actions. These measures have put a floor on short-term financial market risks but have been unable to reverse declining growth momentum. As a result, financial markets continue to go through short-term cycles of angst and euphoria even as indicators of real economic activity remain mired in weakness. Read more
By Kevin P. Gallagher
Ben Bernanke, chairman of the US Federal Reserve, should be applauded for boldly putting employment over price stability in his latest move to keep interest rates low and to purchase mortgage-backed securities. Bernanke’s critics (and Bernanke himself) have rightly said that monetary policy is not enough, however. To truly generate employment-led growth in the US, those critics say more fiscal policy is needed.
There is also a need for stronger financial regulation in order to ensure that financial institutions do not steer newfound liquidity into currency and commodity speculation in emerging markets and developing countries—speculation that can wreak havoc on developing countries’ financial systems and growth prospects. Such was the case during previous rounds of interest rate declines and quantitative easing in the US, and could occur again. Read more
By A. Edward Gottesman
It’s only money, for heaven’s sake! The euro is a great convenience for trade and travel, and it is a powerful symbol of unified purpose for countries that have been at each other’s throats for 1000 years. But it doesn’t cure cancer or the common cold. In October, Angela Merkel, German chancellor, said: “If the euro collapses, then Europe collapses.” This hyperbole may have worked as scare politics, but it was bad economics. Keynes identified as long ago as 1923 what we can now call the Merkel mistake:
“Conservative bankers regard it as more consonant with their cloth, and also as economising thought, to shift public discussion of financial topics off the logical on to an alleged ‘moral’ plane, which means a realm of thought where vested interest can be triumphant over the common good without further debate.”
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