Monthly Archives: July 2014

In a world going mad with war, European and US sanctions against Russia stand out as sane and measured. They will not stop Russia’s assault on Ukraine in its tracks, but they will help Kiev to weather the Russian blows. And by answering violence with economics, they can help to rescue the world from the current epidemic of military delusions.

Vladimir Putin is not alone in believing that military force can solve Russia’s political problems vis-à-vis Ukraine. Western powers wrongly believed that killing Muammer Gaddafi would resolve problems with Libya; that backing an insurgency to overthrow Bashar al-Assad would resolve political problems with Syria; and that toppling Saddam Hussein would create a stable, pro-western Iraq. Now Israel believes that a mass bloodletting in Gaza will make that trapped and desperate population compliant to Israeli might.

 Read more

Despite signs of financial complacency, many investors are yet to formulate a comprehensive game plan to navigate the possibility of a market shakeout. The good news is this is both desirable and feasible, and the costs of doing so are quite low.

While they may differ on the specific magnitudes, the majority of investors would readily admit their portfolios have benefited from the sustained support provided to markets by central bankers. This has done more than bolster prices to levels beyond those strictly warranted by current fundamentals. It has also given the markets the confidence to repeatedly “look through” exogenous shocks, including quite a string of geopolitical tensions. Read more

Richard Lambert, head of the Banking Standards Review, says it will take a long time for new bank leaders to change staff behaviour. He discusses with Sharlene Goff, FT retail banking correspondent, the Lloyds scandal and thinktank ResPublica’s proposal for a bankers’ oath

Until recently, most non-executive directors would have told you that the audit committee is the one they really wish to avoid. The meetings are long, the papers voluminous, and the duties burdensome. So the conclusion of a recent survey by Per Ardua, an executive search company, came as a surprise. Eighty per cent of respondents in the financial sector now say that the risk committee is the one to dodge – even though audit and remuneration committees have so far more often exposed non-executives to public criticism. Read more

Since early March , there has been a debate in Europe as to what Russia’s actions in Ukraine represent. Does its forceful annexation of Crimea and the declaration by Vladimir Putin, Russia’s president, that Moscow has a duty to protect Russian-speaking people everywhere represent a fundamental challenge to the European security order? Or is this a complicated crisis that needs to be resolved through negotiations?

Much of the official rhetoric, with its emphasis on de-escalation, negotiated ceasefires and peaceful resolutions, suggests that most leaders believe this is a crisis that needs to be resolved. While few think it will be easy to come up with a solution, most seem to hope that once one is found, relations with Russia can return to business as usual.

The downing of Malaysian Airlines flight MH17 should put an end to any thought that the situation in Ukraine is a routine crisis that can be resolved through peaceful negotiations. There can be no doubt that the 298 people on board this civilian airliner were killed as a direct result of Russia’s deliberate effort to upend the European security order – an order that rests firmly on the general acceptance of the territorial integrity of states and the rejection of changing the frontiers of European states by force. Read more

China’s recent moves in the East and South China Seas – various military deployments, policy proclamations, provocative naval maneuvers and rhetorical stridency – pose serious challenges for how Sinologists have traditionally perceived China and its foreign policy pursuits.

The conventional wisdom has long been that China is primarily focused on its domestic imperatives, including urgent tasks dealing with corruption, endemic pollution, and restructuring of inefficient state-owned industries. For decades now, it has been widely accepted that a benign international environment is a critical requirement for maintaining a sustained domestic focus. When there have been incidents in the past – such an encounter in 2001, when an American reconnaissance aeroplane was intercepted by an overzealous Chinese fighter pilot – it is often the case that the leadership in Beijing and Washington had to work carefully behind the scenes to untangle the mess created by nationalist and poorly co-ordinated elements in the military or border protection units. Unanticipated accidents and incidents were the worry, not premeditated gambits. Read more

Twenty years after Bill Clinton, former US president, signed the North American Free Trade Agreement, its very name chills the spines of US voters and congressmen alike. Even advocates of new regional trade agreements insist that they are not countenancing “another Nafta”. Yet Nafta-phobia is irrational. None of the terrible things that were, according to its opponents, supposed to result from its implementation have in fact occurred. Members of the free-trade area – Canada, Mexico, and the US – enjoy a large joint market and a common supply chain. Consumers in all three countries have gained.

It is true that America’s less-skilled workers have received an increasingly raw deal since the 1970s. But Nafta is not to blame. To claim otherwise is at best to mistake coincidence for causation. At worst, it is a cynical tactic employed to protect special interests at the expense of the common good. Read more

Many people are worried about shadow banking, finance which exists outside of regulated banks, in China. Fitch, the rating agency, has raised alarms about its growing presence in the country and critics cite countless examples of seemingly risky and irresponsible lending in warning that a financial crisis looms.

Whether shadow banking really is a worrying danger or merely evidence of a maturing financial system depends on its magnitude and risk profile. Various estimates indicate that the sector has doubled its share of new credit from about 20 per cent in 2008 to 40 per cent by June 2013, at which point it accounted for roughly a quarter of the outstanding credit stock. Read more

The most strident debate among western intelligence agencies is whether the reported thousands of foreign fighters involved in fighting in Syria and Iraq, which include 3,000 Europeans and Americans, are going to return home and bomb their own countries.

A more important question may be whether the war launched by the Islamic State of Iraq and the Levant, or ISIS, and other militant groups is primarily a Sunni extremist campaign against Shias – in other words, a war internal to the Muslim world. In this case, the key players who need to be restrained are not those fighting, but their sponsors Saudi Arabia and Iran. Saudi Arabia in particular has a wider responsibility in the Islamic world to act as a bridge between the sects rather than fuel Sunni extremism. Read more

In a perfect world, investors would turn to economists for predictions on two key issues supporting equity prices at current valuations: productivity trends and the effectiveness of macroprudential policies. In the real world, however, I suspect many investors have yet to grasp the extent to which these arcane topics will influence the next stage of the market cycle; and those that do may get insufficient guidance from economists.

Let’s start with some context. While counterfactuals are tricky, most market analysts would agree on two related market hypotheses: first, that unusually sluggish economic growth has not harmed stock market performance as much as would have been expected from traditional models; second, that hyperactive central banks have boosted asset prices using experimental measures, not as an end in itself but as a means of stimulating higher economic activity through the “asset channel”. The result has been a notable gap between a buoyant Wall Street and a struggling Main Street.
 Read more

The Bundesbank is right to remind us that the unprecedented monetary accommodation in the eurozone has produced undesirable side effects. In particular, the policy has reduced the pressure on politicians to pursue speedy budgetary consolidation and to implement structural reforms. In the summer of 2011, for instance, as soon as the European Central Bank intervened to purchase Italian and Spanish government bonds through the Securities Market Programme and the spread on interest rates decreased, the commitments made earlier by those two governments began to be diluted. The same thing happened two years later, after the announcement of the Outright Monetary Transaction by the ECB contributed to sharply reduced market tensions, but also structural reforms.

It is not clear, however, whether or how central banks should incorporate these effects into their own policy frameworks. In other words, should central banks try to calibrate monetary policy – in particular, by being tighter than would otherwise be the case – with a view to keeping a tight leash on governments and inducing them to play their own part? There may be some good reasons for doing so but on balance it would be a serious mistake. Here are several reasons why. Read more

Since Mark Carney took over from Lord King as governor of the Bank of England a year ago, the members of the Monetary Policy Committee have been unnaturally harmonious. Perhaps it has been a honeymoon period granted the new governor. If so, this has been a rather long honeymoon: the most recent meeting in June was the 12th consecutive time that there has been a unanimous vote by the MPC. Many commentators expect another 9/0 vote at this week’s meeting. By contrast, prior to Mr Carney’s arrival at the BoE, the MPC had a split 6/3 vote in five consecutive months over whether to increase asset purchases. Read more

Today’s report on deep decarbonisation delivered to Ban Ki-moon, the UN Secretary-General, offers a new perspective on how countries can avoid dangerous climate change and achieve sustainable development. The report, produced by the Deep Decarbonisation Pathways Project which is overseen by the UN Sustainable Development Network, describes the joint efforts of independent experts from 15 countries to find national pathways to making economies based on low-carbon energy consistent with the 2-degree Celsius limit on global warming agreed to by governments in 2010. Such low-carbon pathways are feasible, but to achieve them will require a high degree of global cooperation and a novel design of the climate deal to be reached at the Cop 21 meeting in Paris in December 2015.

The internationally agreed 2-degree C limit on warming (compared with the pre-industrial temperature) reflects the warnings of the world’s leading climatologists, ecologists, agronomists and economists. The world would breach 2 degrees C at grave peril. The droughts, floods, heat waves and extreme storms that are already disrupting the world would intensify dangerously. Even worse, warming of more than 2 degrees could trigger natural feedbacks (such as carbon and methane release from the melting permafrost) causing runaway climate disruptions that would overwhelm the world’s capacities to adjust. Read more

For the first time since 2009. a major offensive against Islamic militants in Pakistan’s tribal areas has been launched with close coordination between the military and the elected government of Prime Minister Nawaz Sharif.

The military campaign in North Waziristan, one of the tribal regions where Pakistani and Afghan Taliban and a whole host of foreign jihadis have lived for years, started two weeks ago with a bombing campaign.

This week saw the start of a ground offensive, with troops going house to house in the regional capital of Miranshah. Some 30,000 members of Pakistan’s military have been based in and around the city for years, but they never interfered with the activities of the militants who controlled at least half the town. Read more