Monthly Archives: October 2011

Economics is competing with Thomas Malthus as the seventh billion inhabitant of the world arrives. Global population has grown from 2.5bn to 7bn just in my lifetime, so there is plenty to alarm doomsayers. But this landmark arrives at a very different cultural moment to the six billionth baby, twelve years ago.

Population patterns stack up very differently in an increasingly urbanised world of cities with apartment buildings and tightly-packed homes. Although it brings social dislocation and often poverty, the great movement of surplus labour from an inefficient, over-crowded agricultural sector to metropolitan areas makes the former more efficient, and the latter an ever-growing market not just for farmers but for a range of goods and services as the new urbanites step onto the consumer escalator.

The world today is an over-burdened place, but not because there is no room for our seventh billion neighbour. The problem is less about how many of us there are, and more about how we choose to live. Malthus might feel he has not lost the argument yet. Continue reading »

The financial markets have enthusiastically welcomed the agreements reached in Brussels on Thursday, and understandably so – not only for their immediate content but also for what they signal about how far European leaders are willing to go to finally catch up with the realities of the region’s crisis.

But the feel good factor will only last if this is followed quickly by some important steps. Firstly, there is a long list of details that must be specified over the next few weeks to put into practice what was agreed to in Brussels. Second, and critical for long-term sustainability, Europe desperately needs an effective plan to boost employment and promote inclusive economic growth. Without this, it will be virtually impossible to stabilise the region’s sovereign debt markets, and counter fragilities in its banking system. Its politicians also need to decide how they will strengthen the institutional underpinnings of the eurozone. Can they deliver a fiscal union with much greater political integration? Or will they be forced to settle for a eurozone consisting of a smaller number of countries with similar initial conditions?

There is still a lot to do. While policymakers should be commended for the important steps that they took this week, inevitably they will soon find themselves engaged in yet another set of difficult, long, and uncertain negotiations. Continue reading »

The day may yet come when the eurozone finally agrees a comprehensive package to end the crisis, but this was not the day. What policymakers agreed at 4am Brussels time on Thursday came close to what they set out to do. They secured a “voluntary” deal with the banks, and they agreed the outer perimeters of a system to leverage the European financial stability facility up to about €1,000bny. But none of this is going to end the crisis.

Herman van Rompuy, the president of the European Council, made a revealing comment after the meeting when he said that banks have been doing this forever. Why should governments not do so as well?

The reason is simple. Banks can only use leverage because central banks and governments act as ultimate guarantors of the financial system. There exists an implicit insurance of unlimited liability. In the case of the European financial stability facility the very opposite is the case: there is an explicit insurance of limited liability. Germany wants its exposure capped to a maximum of €210bn. I doubt that global investors will rush into the tranches of the special purpose vehicle through which the eurozone wants to leverage the EFSF. I struggle to see how this structure can lead to a significant and sustained fall in bond spreads.

Leveraging can work, but only if the eurozone were willing to provide an unlimited backstop. This would be either in the form of an explicit lender-of-last-resort guarantee by the European Central Bank, or through a eurobond – or ideally both. Now that is something I would consider to be a comprehensive agreement. It may yet happen, but not for a long time. The crisis, meanwhile, continues. Continue reading »

Being stuck in traffic is more bearable if the other lanes are moving. If all lanes are jammed for a long time, tempers flare. And if the police eventually arrive and let a few selected cars get out of their lanes and move through a special path, a riot is likely to ensue. This in short is the sentiment that propels the Occupy Wall St protests, and we should take note.

The traffic jam metaphor for the political consequences of economic mobility was originally proposed by Albert Hirschman, the noted economist, to explain changes in tolerance for income in equality in poor countries. The idea is simple: even a modicum of social mobility – sparked by economic growth – buys patience and political stability in developing countries. As people see their neighbours improve their lot they are willing to wait for their turn.

This idea is now in theory applicable to some of the world’s wealthiest nations – except that the Occupy Wall Street crowds, the protesters in the City of London, or the Italian and Greek protesters are getting out of their “cars”, and clashing with the police not just because they see their “traffic lane” horribly jammed. It’s also because they are moving backwards. As they watch wealthy elite gets richer, they are getting increasingly angry. Continue reading »

Days and nights, Europe’s leaders have discussed the minutiae of private-sector involvement in the Greek debt restructuring. They have immersed themselves in financial engineering with the aim of leveraging the European financial stability facility. This is all necessary, but it’s the job of finance ministers or Treasury officials. What citizens and markets alike expect from the heads of state and government is that they do the job for which they are indispensable, and map out the political choices Europe is now screaming for.

A key reason why the eurozone is under challenge is that markets have become conscious of a fundamental weaknesses in its design. It relies on three hardly-compatible principles: national banking systems, which both finance the sovereign and rely on it as a potential backstop; states that are supposed to be solely responsible for their own debt, so that they cannot rely on partners when in trouble; and a central bank that has not been given the mandate to be a lender of last resort.

There are several, partially compatible ways out of this. Provided it is implemented consistently, any of these responses would be recognised by markets as a watershed. Each has advantages and drawbacks. Each has broader implications for Europe. Each involves risks. But a way has to be chosen. As the Pierre Mendès-France, the late French prime minister, used to say, “gouverner, c’est choisir”. Continue reading »

1) Member states of the eurozone agree on the need for a new treaty creating a common treasury in due course. They appeal to European Central Bank to co-operate with the European financial stability facility in dealing with the financial crisis in the interim – the ECB to provide liquidity; the EFSF to accept the solvency risks.

2) Accordingly, the EFSF takes over the Greek bonds held by the ECB and the International Monetary Fund. This will re-establish co-operation between the ECB and eurozone governments and allow a meaningful voluntary reduction in the Greek debt with EFSF participation.

3) The EFSF is then used to guarantee the banking system, not government bonds. Recapitalisation is postponed but it will still be on a national basis when it occurs. This is in accordance with the German position and more helpful to France than immediate recapitalisation. Continue reading »

The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending. Most policy failures in the US stem from a failure to appreciate this truism and therefore to take steps that would have been productive pre-crisis but are counterproductive now with the economy severely constrained by lack of confidence and demand.

Thus even as the gap between the economy’s production and its capacity increases, fiscal policy turns contractionary, financial regulation focuses on discouraging risk-taking and monetary policy is constrained by concerns about excess liquidity. Most significantly US housing policies especially with regard to Fannie Mae and Freddie Mac, institutions whose purpose is to mitigate cyclicality, have become a case of disastrous procyclical policy.

In retrospect it would have been better if financial institutions and those involved in regulating them, especially the Federal Housing Finance Agency, recognised that house prices can go down as well as up, if more rigour had been applied in providing credit, if the government-sponsored enterprises had been more careful in monitoring those originating and servicing loans, and if there had been more vigilance about fraudulent behaviour.

The question now is what should be done to address the housing market given the drag it represents on the economy. With virtually all mortgages in the US provided by the federal government or guaranteed by the GSEs, this is inevitably a matter of government policy. Continue reading »

The humiliating death of Muammer Gaddafi, gunned down and apparently dragged through the streets of his home town Sirte, would seem at first sight to be a final punctuation point in the tumultuous change of power in Libya. Finally, Libyans can breathe easier knowing this monstrous and unpredictable figure is gone from their lives.

But his shadow will only be truly lifted if the new Libyan leadership draws the right lessons, not the wrong ones, from his demise. The right lesson is that it is a cathartic moment that clears the ground for Libyan politics to move forward. The wrong one would be to assume that with the death of Gaddafi all those supporters, whose reasons for so tenaciously defending Sirte are now clearer, will fall in line behind the new government in Tripoli.

If the manner of his going is interpreted by part of the country or the region as a crude revenge – as a summary execution not a combat death, let alone the result of a proper justice process – then it could revive, even in death, Col Gaddafi’s power to divide. Martyrs cast long shadows.  Continue reading »

Concerns about a hard landing resurfaced earlier this week as China reported a lower-than-expected growth rate in the third quarter.

The fundamentals of the country’s economy, however, remain robust. In spite of the problems surrounding small businesses in the south, industrial growth only moderately eased. Consumption growth has remained strong.

Yet in spite of the years spent calling for structural adjustments, the Chinese economy still relies heavily on the export sector to generate growth. The slowdown in global demand should now be a loud wake-up call for China to take real action to rebalance its economic structure. The robust growth of the domestic sectors amid the global weaknesses is an encouraging sign that healthy growth can be maintained by the country’s economy. Continue reading »

That China’s third quarter growth rate of 9.1 per cent, just marginally below forecasts, would spark a sell-off in the markets says a lot about the gloomy state of the global economy. Analysts have not yet decided whether a rate below expectations is good or bad, given the concerns about inflation.

Ostensibly, Beijing’s goal is to manage a “soft landing”. But even at home, many have not fully accepted the premise of the current five-year plan that slower, but higher quality growth, averaging seven per cent, is better. Making a credible case for slower means challenging the traditional objectives that have preoccupied China’s leaders during the post-Mao reform era. Two targets have been sacrosanct – price stability and employment generation – with the understanding that rapid economic growth makes them more achievable.

But times have changed. China’s needs now are very different to what they were a generation ago. Beijing and the rest of the world need to be more relaxed about China’s declining growth rates provided that the process is managed well – which, of course, is a big if. Continue reading »

As this weekend’s eurozone summit looms into view, the key question for markets is whether the new financing deal will be sufficient to handle three separate problems: the necessary writedown of Greek debt; the recapitalisation of eurozone banks; and the restoration of private funding for Italian and Spanish budget deficits.

It has been clear for a long while that the €440bn currently available to the European financial stability facility is far from sufficient to do the job. Consequently, it seems that the summit will agree to “leverage” the bail-out fund to give it much greater scale. This has triggered optimistic talk about a “big bazooka”, but achieving the right order of magnitude still looks to be a very tall order. Continue reading »

Predictions and prescriptions for a eurozone break-up are skyrocketing – but there is no chance of the eurozone dissolving. Peripheral countries such as Greece will stay put. Germany will never leave.

Germany accounts for little more than one per cent of the world’s population – and nearly nine per cent of its exports. A common currency ties Germany’s strength to the eurozone’s relative weakness. The shared single currency is significantly weaker than the standalone German currency would be. This subsidises German exports, making them more affordable internationally.

When Germany joined the eurozone, it came with a price: abandoning the D-Mark for the euro. Happily, it turned out the price was a prize. The political benefits of the current situation are clear – Germany can shape fiscal integration on its terms, even if it comes with a steep price tag. Explaining this to the German public will not be easy, and it will be a long and winding road to European fiscal health. But this road goes through the eurozone – and Germany will pay top dollar for the driver’s seat. Continue reading »

The economic policy debate in Washington has come down to a boxing match between two opposing remedies – ‘stimulus’ in one corner and ‘austerity’ in the other. Unfortunately, considering each so-called solution in isolation has hampered both analysis and decision-making. The proponents of stimulus argue that the losses in aggregate demand following the global financial crisis must be reversed. Their opponents say that austerity is needed to restore fiscal sustainability. But to understand how elements of each fit together, a different approach is needed, one that integrates the sets of economic logic and data employed by the two sides.

There are three tangible steps to boost growth. First, fundamental tax reform is essential, as is a viable plan for medium and long-term fiscal consolidation. Lastly, policy actions must make it easier for households and businesses to respond positively to fiscal stimulus or to low interest rates.

These seemingly disparate steps come into focus as one connects the dots in the causes of sluggish US economic growth. Taken together, they could improve growth sufficiently to bring the unemployment rate back to pre-crisis levels within four years. Otherwise, the debate we are having about stimulus versus austerity risks being as futile as rearranging the deck chairs on the Titanic. Continue reading »

You cannot remove the fragilities in Europe’s banking system without solving the sovereign debt crisis… and you cannot solve the debt crisis without stabilising the banks. This much has finally been recognised by the Group of 20 finance ministers at their meetings in Paris over the weekend. They must now move on to addressing the underlying issues at next week’s European summit and the meeting of the G20 heads of state in November.

The bank-debt dynamics that grip the eurozone have all the elements of a destabilising feedback loop. As such, the longer they persist, the harder they are to overcome and the greater the economic and social costs. It is encouraging to see policymakers searching for a holistic policy, after months of ad hoc decisions. But for this to be reflected in more than just comforting rhetoric, they must quickly overcome disagreements on key issues. To make things yet more interesting, they must tackle these problems while countering the detrimental impact on economic growth, limiting the drain on public finances, and safeguarding the integrity of the monetary institutions.

Greater clarity on whether the medium-term stabilisation of the eurozone involves a fiscal union for the current configuration or among a smaller set of countries with similar initial profiles is vital also. Make no mistake about it; there is no escaping these issues. Hopefully, the next few weeks will see elected leaders address them from a position of leadership. If they do not, they will find it even harder to deal with a crisis that is consistently progressing from one bad outcome to an even worse one. Continue reading »

At a recent gathering in Egypt, I met pious and secular, with headscarves and without, young men and women debating and training together. They believe in pluralist Islamic democracy – drawing strength from Islam while respecting personal choice. Yet the meeting was electrified by the fear expressed by a woman in a white headscarf: “The question we are asking is what happens if the majority do not share our vision of the future.”

Little did we know that the next day the stark immediacy of this concern would be tragically exposed an hour and a half away in Cairo. The attacks on members of the Christian Copt minority, and the killing of 25 of them, encapsulate concerns in Egypt and the wider world about the direction of the revolution. In essence, the question is simple: when can Egyptians trust democracy? The answer should be the sooner the better, and the fuller the democracy the better. I say this not out of some naive faith in the kindness of human nature, but rather as a calculated and principled response to the challenges facing the most important Arab state.

The greatest boost to the Islamist vote would be a sense of victimisation by the west. We should never appease views we hold to be objectionable. We should explain our differences. There is ample ammunition to challenge exclusive and sectarian definitions of Islam. But we should not fall into a rejectionist trap. Continue reading »

The financial markets are now anxiously waiting for the eurozone leaders’ next move. The leaders do appear to have finally understood that they cannot go on delaying making critical decisions. In any case, the potential to do so has been blocked by the German constitutional court which has found the law establishing the European financial stability fund constitutional, but declared that no further transfers are allowed without the Bundestag’s authorisation. The leaders also seem to have understood that it is not enough to ensure that governments can finance their debt at reasonable interest rates, they must also do something about the banking system.

I am afraid, however, that they are contemplating some inappropriate steps. The talk is about recapitalising the region’s banks, rather than guaranteeing them, when the banking system needs to be guaranteed now and recapitalised later. The national governments cannot afford to recapitalise the banks now. It would leave them with insufficient funds to deal with the sovereign debt problem.

In the longer term, however, the eurozone needs a convincing growth strategy. During the current emergency period, fiscal retrenchment and austerity are unavoidable. But the debt burden will become unsustainable without growth in the long term – and so will the European Union itself. This opens up a whole new set of difficult, but not insurmountable, problems. Continue reading »

The world wants the eurozone to act, to do something that impresses the financial markets, a “big bazooka”, as David Cameron puts it. Among the recommendations generally given are an increase in the size of the European financial stability facility; a primary market debt-monetisation programme by the European Central Bank; standby arrangements by the International Monetary Fund; bank recapitalisation, and a once-and-for-all resolution to the Greek debt problem. No matter what you do, do it now, and do it big, eurozone leaders have been told.

This is unhelpful advice, and if followed, it would make the crisis worse. A big bazooka, without a simultaneous commitment to a fiscal union in the distant future, could turn out to be extremely destabilising.

It is apparent that we have reached the end of the line with the present system of a monetary union that refuses to be a fiscal union. We are right at the edge of what is legally, politically and financially possible under the current legal and political structures. That is why the Europeans are tinkering, and not firing.

It was always likely that the eurozone would eventually reach a bifurcation point when it will have to decide whether to adopt a fiscal union or break up. We are getting closer to this point. A big bazooka, not backed by any credible commitment to fiscal union, sounds like a great idea, but it would end up accelerating the break-up. If you want to preserve global financial stability, the message you should send to Angela Merkel and Nicolas Sarkozy is adopt joint and several liability, rather than encourage them to search for another elusive quick fix. Continue reading »

The financial crisis struck the US harder and more quickly than it did Europe. The complete freezing of credit markets required an immediate and overwhelming intervention – and the American fiscal and monetary authorities delivered it. Between the Federal Reserve, Treasury and the FDIC, approximately $13,000bn of credit support was arranged for financial institutions in late 2008 and 2009. There was no alternative to this massive reaction, and it worked. US credit markets are now healthy, and the recapitalised banking system is stable. History will look favourably on the boldness of America’s response.

In contrast, the European Union has had much more time to strengthen its financial institutions but hasn’t developed any of the necessary tools. As a result, the world has watched a steadily deepening sovereign debt problem metastasise into a full blown banking crisis. Global markets fear big losses on bank holdings of sovereign debt. And, total liabilities of eurozone banks are now estimated to exceed 300 per cent of the region’s gross domestic product. That’s exponentially higher than the comparable US ratio at the worst moment in 2008.

Germany and France recently committed to producing a bank rescue plan by November 3 but have provided no details. This is a golden chance to redeem the fading credibility of Europe’s leaders. Especially if they apply the lessons of America’s banking intervention. Both what went right and what went wrong. Continue reading »

Less than three weeks before the next G20 meeting in France, the eyes of the world are firmly fixed on Europe. President Nicolas Sarkozy seems to share the desire of many of his predecessors for grand global meetings. Well, this one is going to be just as, if not more, important than many such meetings of the past. The power of the G20 meetings in the spring of 2009 in London, the success of the Plaza September 1985 gathering and the Louvre Accord 1987 will need to be matched, if not exceeded, if we are to get past the current eurozone crisis.

A number of key policymakers from outside of the eurozone, including Tim Geithner and George Osborne, have highlighted the November 3 meetings as critical in setting global financial markets on a better footing. On Sunday Mr Cameron urged European leaders to take a “big bazooka” approach to resolving the crisis, warning they have just a matter of weeks to avert economic disaster. Unsurprisingly, expectations have been raised. The credibility of the Europeans’ stance will be crucial, possibly in a way that it hasn’t been at any global leaders’ gathering yet.

Unfortunately, eurozone’s policymakers seem to be fond of the “muddle through” approach to policymaking. This has been a feature of European solutions to issues arising from the European Monetary Union since its creation in 1999, through dealing with challenges such as the adjustment of the Growth and Stability Pact and, of course, repeatedly since the Greek debt crisis exploded last spring. Yet it seems as though muddling through is no longer enough to keep financial markets at bay. If no credible “big bang” is unveiled next month, consequences are likely to be severe. Continue reading »

Last week resolved the remaining questions about which Republicans are running for president. Chris Christie, the outspoken governor of New Jersey, and Sarah Palin, the misspoken conservative celebrity, will not. The field is set and pointed towards a surprising outcome. In the most conservative moment in the US in decades, a party dominated by Tea Party radicalism is on course to nominate the mild and moderate Mitt Romney.

In the interminable debates that punctuate the primaries, Mr Romney stands aloft from a quarrelling chorus of patriotic anarchists. The Republican nomination is now Mr Romney’s to lose, and there is no reason why he should.

The greatest risk he faces in the primaries and as a potential nominee is becoming a Republican John Kerry. He does not suffer from Mr Kerry’s pomposity or tin ear, but courts mockery by sounding too much like the product of focus-group testing. He lacks humour and spontaneity. Few detest him, but no one outside of his equally flawless family can be said to love him. Continue reading »

The eurozone is confronted with a crisis of not just labour costs and prices – but culture. Between 1999 and the first quarter of 2011, there has been a continuous net transfer of goods and services shipped from the north to the south. Northern Europe in effect has been subsidising southern European consumption from the onset of the euro on January 1 1999. It is not a recent phenomenon.

I recall that in the early years of the eurozone there was a general notion in the markets that the Greeks were behaving like the Germans. But there is scant evidence that on embracing the euro southern members significantly altered their behaviour – behaviour that precipitated chronically depreciating exchange rates against the D-Mark.

Euro-north has historically been characterised by high saving rates and low inflation, the metrics of a culture that emphasises longer-term investments rather than immediate consumption. In contrast, negative saving rates – excess consumption – have been a common feature of Greece and Portugal since 2003.

If the euro is to remain a viable currency across the eurozone, members must behave in the responsible manner contemplated in the Maastricht treaty. But it is not clear that culture, so integral to a nation’s personality, can be easily altered.  Continue reading »

Charles Schumer is stirring up tensions between the US and China again. It is the fourth time the Democratic senator from New York has proposed legislation aimed at imposing high tariffs on “currency manipulators”, a pseudonym for China. But this bill is unlikely to fare any better than the previous incarnations because it shoots America in the foot.

The US would not have a smaller trade deficit if the Chinese renminbi appreciated against the dollar. And a strengthened renminbi would not reduce Chinese exports to the US as much as many expect. In part, this is because Chinese exporters are able to absorb the costs of moderate appreciation. But another reason is that China’s trade surplus has been entirely created by processing trade, where imported components are assembled at factories in the country. This is less sensitive to the appreciation of the currency than ordinary trade because companies can save on the imports, even while exports suffer.

Instead of pressing for the renminbi’s appreciation, it would be much wiser for Mr Schumer to work to persuade both governments to enter a free trade agreement. A trade deal would not add any burden to the US, while a revaluation may force American consumers to pay higher prices. The Chinese authorities would also love the idea, not so much because it corrects the country’s trade imbalances, but rather because it symbolises America’s acknowledgement of China as a country of its rank. Continue reading »

Once again US Congress is finding it more convenient to play the China currency card as the panacea for America’s economic woes, rather than deal with the difficult issues in President Barack Obama’s recent employment bill.

Many within China thought that given recent developments, criticisms of its exchange rate policies would become more muted. After all, it has continued its policy of gradual appreciation of five to six per cent annually. With the euro crisis and strengthening US dollar, the renminbi has been the exception in appreciating, while other major currencies have depreciated. And although reserves continue to pile up, this is seen as having more to do with capital inflows seeking higher returns – encouraged by expansionary US monetary policies – than by misaligned exchange rates.

While a full-blown trade war is not in China’s interests, its leadership will not let any perceived negative action go unchecked. If Congress gets its way, the net impact will not be more American jobs, but reduced global demand and higher prices for US consumers. America should worry more about maintaining its position at the upper end of the technology spectrum than futile currency wars. Continue reading »

The absence of political leadership in addressing the crisis of the euro is not surprising, given the fact that whatever is done – or not done – will lead to some redistribution of wealth and income.
Until four simple truths are explained to, and accepted by, Europe’s electorates, it will be impossible to move forward.

What cannot happen, in the short term, is for one or more countries leave the euro. Leaving a currency that will continue to exist elsewhere, within a single financial market, is highly problematic. Pressing the ejector button now could send the whole aircraft tumbling earthwards.

What leaders must explain is that, firstly, over the medium term there is no alternative to some form of federal fiscal arrangements. Second, that in the period before longer term fiscal transfer arrangements can be put in place, some euro area governments will need debt relief. And lastly, that the European Central Bank will need support, from governments and their taxpayers, to provide indefinite liquidity to maintain the machinery of day-to-day economic activity. This need not affect its operational independence.

Until the eurozone’s leaders have explained these four unavoidable facts we will all be going up blind alleys, when time is of the essence in averting potential economic and social disaster.
 Continue reading »

Europeans, and with them the rest of the world, are discovering what all doctors know – a persistently misdiagnosed and incorrectly treated infection can eventually threaten even the healthiest part of the body, thus requiring more drastic medical intervention whose effectiveness is less assured. This is what is happening in Europe today. A debt and growth crisis in the outer periphery of the eurozone has been allowed to destabilise the inner periphery and the outer core. In addition, signs of dislocations are now visible in the inner core – both through the banking system and directly.

In one case, that of Dexia, European governments are being forced to counter worrisome fragility. Spreads on German credit default swap have quietly widened to around 120 basis points in the last few days. And the stress is no longer limited to the continent. Reflecting the high interconnectivity of global banking, some American institutions have also come under pressure.

Many around the world have witnessed the deepening crisis with a mix of astonishment, concern and, now, fear. Those who already rang the alarm in the hope of spurring effective policy actions are being joined by others who previously refrained from doing so. The priority now is to contain a crisis that risks seriously undermining global economic growth, jobs, financial stability and social cohesion. Continue reading »

Whether or not laws were broken in the lead up to the 2008 financial crisis, the lack of discipline and inadequate controls around many lending and risk taking practices certainly merit some version of the vigorous rethink of the regulatory apparatus that is now in process. That said, however, it’s still possible to feel Jamie Dimon’s pain as he vented his frustration over new regulatory proposals at Mark Carney, Bank of Canada governor – while perhaps not always loving his tonality.

As the chief executive of JPMorgan, Mr Dimon presides over a bank that both emerged least scathed from the meltdown and arguably conducted itself more responsibly than most of its peers. For its trouble, JPMorgan is now at the short end of the stick: potentially penalised for being American and penalised again by elements of the proposed Basel III rules. That may be unfair but it’s not totally surprising. As New York was at the epicentre of the debacle, it’s only logical that Washington would take a stronger hand in reworking the rules and the oversight.

Yet what is much more urgently needed – but sadly nowhere on the horizon – is a comprehensive, worldwide system of regulation and supervision for a financial system that constitutes a sort of global circulatory system. While Mr Dimon may not agree with all the rules that would emerge from such an arrangement, at least all lenders would be competing on a level playing field. Continue reading »

The end of 2012 will mark a once in twenty year overlap of a presidential election in the US with a leadership transition in China. France chooses its president in the spring of next year, Germany its chancellor later in 2013. Unfortunately, election year pressures threaten to complicate an already very difficult and unpredictable policy dynamic, particularly as the European crisis goes from bad to worse.

The US, Europe and China all have huge decisions to take over how their economies and societies are to be shaped in the future. If existing or new leaders emerge from the upcoming elections with a clear mandate, perhaps we will see the kind of structural reform that will help growth and stability over the longer term. But if the overhang of elections exacerbates paralysis around difficult policy decisions, it will create huge potential for amplification at the worst possible time. Even under the best scenario, 2012 promises to be a year of even great politically induced volatility than 2011. Continue reading »