Monthly Archives: July 2011

Robin Harding

The recession of 2008-09 keeps getting worse, even now. For the second time, the annual benchmark revisions to the GDP data have shown that the recession was deeper than previously thought. The decline in GDP is now put at 5.1 per cent rather than 4.1 per cent.

By the magic of FRED, here it is in levels (green is before the 2010 revisions, blue before the 2011 revisions, red is today): 

This week, a cacophonous hubbub is overwhelming America’s airwaves. For with the debt ceiling deadline approaching, almost every pundit and politician worth their salt has been expressing views on what could – or should – happen next.

There is, however, one notable exception: the mighty Federal Reserve and Treasury. In recent weeks, senior officials at both institutions have warned in general terms about the risks of failing to raise the debt ceiling. They have also tried to reassure investors that this risk is small.

 

Claire Jones

Credit rating agencies haven’t had a good crisis. But central bankers’ and regulators’ frequent barbs seem a touch hypocritical when one considers how much they rely on them.

Both in determining which assets are eligible as collateral for open-market operations, and the risk weights for regulations, the big-three rating agencies play a fundamental role.

In the United States, that’s set to change. Under Dodd-Frank, the US authorities must remove credit rating references and requirements from their regulations.

The Securities and Exchange Commission has now done so. And on Wednesday, the Federal Reserve’s Mark van der Weide said the central bank was examining three possible alternatives to replace the use of ratings in its risk-based capital rules. 

Claire Jones

A familiar consequence of crises is a flight to quality. This crisis is no exception, with gold soaring to nominal highs and the Swiss franc appreciating against pretty much every other currency on the planet.

However, owing to two decades’ worth of financial globalisation, a trend more pronounced during this crisis than any other was that this shift to safe-haven assets was coupled with a flight of capital across borders. As European Central Bank research, out on Wednesday, notes, investors were not only risk averse, but also fearful of uncertainty. And this so-called “uncertainty aversion” fed home bias.

The capital flight threatened financial stability and hindered economic growth. So what to do? For the ECB, there are two things: better analysis and more regulation.  

Claire Jones

The Bank of England is expected to announce in the coming weeks where it is to house the staff of the new Prudential Regulation Authority.

Though it is far from the only cause of the banking crisis, a lack of communication between banking regulators and those responsible for financial stability was far from ideal. Recognising this, the Bank has been looking for space for the PRA a short walk from Threadneedle Street, rather than out in Canary Wharf, where regulators are now based as part of the Financial Services Authority, which is a 12 minute train ride away.

Whether or not this will lead to regulators and economists spotting the next crisis over the water cooler, it is difficult to say. There were, after all, crises when both were housed in Threadneedle Street. Still you can’t imagine it doing much harm. 

Claire Jones

From a monetary policy perspective, what’s interesting about today’s preliminary GDP figure is that both hawks and doves believe it supports their arguments.

GDP coming in at 0.2 per cent for the second quarter means the UK economy has barely grown over the past nine months, which adds weight to doves’ calls for further easing if the economy does not pick up in the three months to September.

This from Gavyn Davies, writing for the FT:  

Claire Jones

Christine Lagarde

Christine Lagarde. Image by Getty.

The Federal Reserve is too often seen as a panacea for the US’s economic ills. This no doubt owes much to its dual mandate to both maintain price stability and promote employment, despite there being little monetary policy can do to influence structural unemployment.

And so Christine Lagarde’s comments today that there has been a rise in structural unemployment in the US – and that, by implication, fiscal policy should shoulder more of the burden for creating jobs – is to be welcomed. 

Claire Jones

This from the FT’s Rahul Jacob in New Delhi and James Fontanella-Khan in Mumbai:

India’s central bank has raised interest rates by a higher than expected 50 basis points, signalling its determination to battle persistent high inflation

Ralph Atkins

Christian Noyer, Banque de France governor, has created confusion after apparently signalling another European Central Bank interest rate rise is in the pipeline. In an interview published on Tuesday, he told Financial Times Deutschland – the German language newspaper - that the ECB was exercising “strong vigilance” - code used in Frankfurt to signal a rise in official borrowing costs is a month away.

Or did he? Mr Noyer may have been a victim of the eurozone’s linguistic diversity. 

Claire Jones

There are two questions worth asking about Vince Cable’s call for a second round of quantitative easing.

Was it appropriate? And, more to the point, was he right?

The first is easier to answer than the second. It was in no way appropriate for him to make the call. And, as this post on the FT’s Westminster blog notes, it is something of a reverse ferret.

The timing of the comments is cunning.