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Monthly Archives: June 2014
European leaders must agree strong new energy and climate policies when they meet this week in Brussels.
At their last summit, in March, they remained divided over European Commission proposals to set ambitious goals for cutting greenhouse gas emissions, improving energy efficiency and increasing renewables by 2030.
Although they made a commitment to sort out their differences by October, this period of uncertainty is damaging the confidence of investors and further undermining Europe’s international leadership on climate change.
As policy makers and regulators scan the financial horizon for future systemic risks, they are looking beyond the traditional locus of banks and insurance companies towards the capital markets and large asset managers. This shift is appropriate. Capital markets – and the asset managers operating within them – play a major and growing role in intermediating between savers and borrowers. As Mark Carney, governor of the Bank of England, noted in his recent FT piece on shadow banking , “an effective financial system needs intermediation outside the traditional banking sector.” In this context, it is important to understand the roles of asset managers in facilitating asset ownership and how those managers interact with markets.
Isis has gone further than al-Qaeda in its aim to wipe out Shia. Whatever atrocities it commits will reverberate widely across the Islamic world, where sectarian tensions are already high. Certainly nothing could be worse than the destruction of the holy sites in Karbala and Najaf, a move that could be comparably worse than Genghis Khan’s destruction of Arab cities in the 13th century.
This looming catastrophe calls for a united response from the Muslim world but it is nowhere in sight. Iran, the leading Shia state, and Saudi Arabia, the leading Sunni state, where the Prophet Mohammed is buried, should immediately put aside their squabbles and address the crisis.
Investors have rekindled their romance with the “Great Moderation”, and fallen back in love with “goldilocks”.
These two terms are among the most powerful in the markets lexicon. They encourage many investors to stretch and stretch again for extra returns by levering exposures to a broad range of risk factors. Yet what appears both a reasonable and rational strategy at the individual level, given current conditions, threatens a disruptive fallacy of composition at the macro level down the road.
A century after the British and French foreign ministers sat down to draw the map of the Middle East, the region they created is unravelling by the hour. The potential for prolonged political-religious wars within and across boundaries, involving both local and foreign forces and militias and governments, is great.
There are several explanations for our arrival at this point. The US decision in 2003 to oust the regime of Saddam Hussein in Iraq, followed by policies that reinforced sectarian rather than national identities, is one. This also helped to bring about a region in which Iran was left with few constraints on its ability to back Shia factions in Iraq, up to then its main regional rival, and elsewhere.
Since the rise of the Tea Party, Republican incumbents in the House of Representatives have faced a basic political question. Do they represent safe districts, in which case the threat to their survival comes from rightwing populists challenging them in primaries? Or do they represent swing districts, where the graver danger comes from a moderate Democrat running against them in a general election?
In the former case, which occurs more often, the ideal stance is to be a principled and unreasonable rightwing conservative. Those subject to a Tea Party challenge must not, under any circumstances, cast a vote to raise the debt ceiling, regularise the status of undocumented immigrants or accept the legal existence of the Affordable Care Act.
For the smaller group of House members in swing districts, the situation is the reverse. Compromise, reasonableness and moderation assume their normal place as political virtues.
The problem Eric Cantor faced, and the reason for his unexpected defeat in a Virginia primary last night, is that he was unable to make this choice in either direction. This was not because of any lack of political sophistication on his part but because of his role as House majority leader.
If anything has survived more or less intact in the aftermath of the global financial crisis, it is inflation targeting. This is odd. After all, pre-crisis, many economists and policy makers enthusiastically embraced the “Great Moderation” – the idea that wise monetary policies had not only helped bring inflation to heel but also, as a result, delivered more stable economic activity. “No more boom and bust” was not the boast of politicians alone: it became a core belief of the economics establishment.
Yet the boast was clearly wrong. A narrow focus on price stability ultimately proved extremely damaging. Policy makers ignored other signs of incipient instability, most obviously rapid credit growth and, in the US at least, surging housing activity. Having done so, they gave the green light to excessive risk-taking: with inflation under control, there was no reason for investors to worry about nasty monetary shocks.
The horrifying suicide attack on Karachi airport by Pakistani Taliban will place the government on a direct collision course with both militants and the military – unless it is prepared to change its weak-kneed response to terrorism.
On Sunday night militants blasted their way into the cargo terminal of Pakistan‘s largest airport and fought a five-hour gun battle with security forces, setting alight the terminal and damaging aircraft. At least 29 people were killed, including 10 terrorists. The attack was later claimed by the Pakistani Taliban, which has begun a nationwide offensive against the government. On the same day a Sunni extremist group allied to the Taliban massacred 23 Shia civilians on a bus in Baluchistan province.
With the popularity of Thomas Piketty’s book, Capital in the 21st Century, inequality has become central to the public debate over economic policy. Piketty, and much of this discussion, focuses on the sharp increases in the share of income and wealth going to the top 1 per cent, 0.1 per cent and 0.01 per cent of the population.
This is indeed a critical issue. Whatever the resolution of arguments over particular numbers, it is almost certain that the share of personal income going to the top 1 per cent of the population has risen by 10 percentage points over the past generation, and that the share of the bottom 90 per cent has fallen by a comparable amount.
He gave the markets what they wanted but did the markets want enough? Mario Draghi has already succeeded in rescuing the euro from imminent collapse by promising to do “whatever it takes”. Will the latest set of monetary measures be enough, however, to rescue the eurozone from imminent deflation?
Earlier this week, Barack Obama travelled to Poland to reassure Nato, and particularly the newer members of the transatlantic alliance in central and eastern Europe, of America’s unwavering commitment to their defence. He announced a request of Congress to appropriate a $1bn reassurance fund that would allow for increased rotation of US forces to Europe, improvements in basing and infrastructure, the possible forward positioning of equipment and enhanced training and exercises, notably on the territory of the newer allies.
Given the recent Russian military actions in Ukraine and along Nato’s borders, these are much-needed steps of reassurance. But they leave two questions unanswered. First, to what extent are other Nato allies willing and able to follow the American example of demonstrating their unwavering commitment to the territorial integrity and defence of all Nato territory? Second, will the US and other Nato members consider deploying their ground and air forces on a more permanent basis to bolster collective defence in eastern Europe?
The European Central Bank clearly will announce some package of expansionary measures on Thursday – as well it should, given sustained below target inflation in the eurozone, and forecasts of further falls. The most important and promising policy it will announce is the one with the longest lead time: fostering a market in securitised lending in Europe, primarily for loans to small and medium-sized enterprises, through direct purchases of such asset-backed securities. This is absolutely the right initiative for the ECB to take because it is not only going to be effective (unlike limited interest rate cuts or very long-term refinancing of bank loans, also likely to be announced), but will address the right problems and do so with lasting structural benefits.
World leaders gather in Warsaw today to celebrate Poland’s return to democracy 25 years ago on this day, and the country’s astounding economic and political development since then. Today Poland is a prosperous, dynamic and democratic society. Yet the leaders will make the most of their visit if they understand the deeper lessons of Poland’s remarkable recovery after 1989 and apply those lessons elsewhere, including vis-à-vis Ukraine and Russia.
In America’s coal country – centred in Appalachia and stretches of the Mountain West – Barack Obama has come to represent federal tyranny. With this week’s announcement of new regulations intended to close eventually many or most of the nation’s 600 coal-burning power plants, those regions are sure to resent him even more.
Democrats campaigning in West Virginia and Kentucky were quickest to denounce the president’s carbon emissions plan, but this is unlikely to do many of them much good in the midterm elections later this year. The new rules increase the odds that the Republicans will win control of the Senate in November, that Congressional deadlock will get worse, and that the president’s final quarter will be marred by subpoenas and investigations.
There are no signs that China’s slowdown has bottomed out. A turnround would require some combination of a pickup in investment, exports or consumption in the midst of current efforts to deleverage and this is unlikely to happen soon. More than a decade ago during the Asian financial crisis, China was able to revive growth despite a similarly severe debt problem by tapping buoyant global markets facilitated by its accession to the World Trade Organisation.
But circumstances this time are different. The recovery in the US and Europe continues to be tepid with both parties needing to generate stronger trade balances to support their recoveries. Thus any bounce in exports is likely to be modest and China will face continuing pressures to scale back its trade surpluses with negative consequences for industrial production.
There has been considerable commentary of late questioning the seriousness and sustainability of the so-called American pivot or rebalance to Asia. Mush of this breathless handwringing is overwrought, but the public questioning reflects growing anxieties across an increasingly uncertain region and should be taken seriously. There are challenges almost everywhere one looks along with a clear appetite for a sustained and coherent US approach to Asia. The Obama team is intimately aware of these swirling concerns and Barack Obama’s recent visit to Japan, South Korea, the Philippines and Malaysia reflects a manifest effort to translate more the rhetoric of the pivot into concrete reality.
Still, more can be done to reassure the region and signal a subtle, sustained, and integrated American approach to Asia. But how?
For a country of 200m, with a modern economy, an elected democratic government, nuclear weapons and one of the largest armies in the world, today’s defining image of Pakistan is that of the principal global incubator of polio – a disease that disables children and was on the verge of being wiped out before Pakistan’s lack of governance got in the way.
The World Health Organisation’s declaration of a global emergency, and its stipulation that all Pakistanis travelling abroad after June 1 must show they have been vaccinated against polio is considered by many a disgrace to the nation.